According to the amended provisions
of Section 285BA(1)(k)of the Income Tax Act, 1961, some prescribed reporting
financial institutions need to furnish a statement of financial transaction or
reportable account (previously called as ‘Annual Information Return (AIR)) in
connection with some specified financial transactions done by them during the
financial year to the income tax department.
Who is Reporting Financial
Institution?
Rule 114G (1) of Income tax rule,
1962 casts an obligation on “Reporting Financial Institutions” to maintain and
report certain information in respect of each “Reportable Account”. “Reporting
Financial Institution” is defined in Rule 114F (7) to mean
(a) a financial institution (other
than a non-reporting financial institution) which is resident in India, but
excludes any branch of such institution that is located outside India; and
(b) any branch of a financial
institution (other than a non-reporting financial institution) which is not
resident in India, if that branch is located in India.
Following Steps may be followed to
determine whether a person is a Reporting Financial Institution (RFI) and thus
has reporting obligations:
- Step 1: Is it an Entity?
- Step 2: Is the Entity a Financial Institution?
- Step 3: Is the Financial Institution in India?
- Step 4: Is the Financial Institution a Non-Reporting Financial Institution?
Step 1: Is it an Entity?
Only Entities can be RFIs. The term
“Entity” would include legal persons and legal arrangements, such as
corporations, partnerships, trusts, and foundations. Individuals, including
sole proprietorships, are therefore not RFIs.
Step 2: Is the Entity a Financial
Institution?
The definition of Financial
Institution is very wide and includes custodial institutions, depository
institutions, investment entities and specified insurance companies.
• Custodial Institution
Explanation (a) to Rule 114F (3)
defines a “custodial institution” to mean any entity that holds, as a
substantial portion of its business, financial assets for the account of
others.
An Entity holds Financial Assets for
the account of others as a substantial portion of its business if
Its “income attributable to
the holding of financial assets and related financial services” equals
or exceeds 20% of its gross income of
a. the three financial years
preceding the year in which determination is made or
b. the period during which the entity
has been in existence,
whichever is less.
“Income attributable to holding
Financial Assets and related financial services” means custody, account maintenance,
and transfer fees; commissions and fees earned from executing and pricing
securities transactions with respect to Financial Assets held in custody;
income earned from extending credit to customers with respect to Financial
Assets held in custody (or acquired through such extension of credit); income
earned on the bid-ask spread of Financial Assets held in custody; and fees for
providing financial advice with respect to Financial Assets held in (or
potentially to be held in) custody by the entity; and for clearance and
settlement services.
Entities that safe keep Financial
Assets for the account of others, such as custodian banks, brokers and central
securities depositories, would generally be considered Custodial Institutions.
Entities that do not hold Financial Assets for the account of others, such as
insurance brokers, will not be Custodial Institutions.
• Depository Institution
Explanation (b) to Rule 114F (3)
defines a “depository institution” to mean any entity that
accepts deposits in the ordinary course of a banking or similar business.
An Entity is considered to be engaged
in a “banking or similar business” if, in the ordinary course
of its business with customers, the Entity accepts deposits or other similar
investments of funds and regularly engages in one or more of the following
activities:
(a) makes personal,
mortgage, industrial, or other loans or provides other
extensions of credit;
(b) purchases, sells, discounts, or
negotiates accounts receivable, installment obligations, notes, drafts, checks,
bills of exchange, acceptances, or other evidences of indebtedness;
(c) issues letters of credit and
negotiates drafts drawn thereunder;
(d)provides trust or fiduciary
services;
(e) finances foreign exchange
transactions; or
(f) enters into, purchases, or
disposes of finance leases or leased assets. Savings banks, commercial banks,
savings and loan associations, and credit unions would generally be considered
Depository Institutions.
An Entity is not considered to be engaged in a banking or
similar business if the Entity solely accepts deposits from
persons as a collateral or security pursuant to a sale or lease of property or
pursuant to a similar financing arrangement between such Entity and the person
holding the deposit with the Entity.
Savings banks, commercial banks,
savings and loan associations, and credit unions would generally be considered
Depository Institutions. However, whether an Entity conducts banking or similar
business is determined based upon the character of the actual activities of
such Entity.
• Investment Entity
Explanation (c) to Rule 114F (3)
defines an “investment entity” includes two type of entities
♠ Entities which primarily conduct as
a business one or more of the following activities or operations for or on
behalf of a customer, namely:-
- trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc.); foreign exchange; exchange, interest rate and index instruments; transferable securities; or commodity futures trading; or
- individual and collective portfolio management; or
- otherwise investing, administering, or managing financial assets or money on behalf of other persons;
Such activities or operations do not
include rendering non-binding investment advice to a customer.
♠ Entities whose gross income
is primarily attributable to investing, reinvesting, or trading in financial
assets, if the said entity is managed by another entity that is a depository
institution, a custodial institution, an investment entity or a specified
insurance company.
If the entity’s gross income
attributable to above mention activities equal or exceeds 50 % of entity’s
gross income during shorter of:
a. the three-year period ending on 31
December of the year preceding the year in which the determination is made; or
b. The period during which the Entity
has been in existence.
An Entity would generally be
considered an Investment Entity if it functions or holds
itself out as a collective investment vehicle, mutual fund, exchange
traded fund, private equity fund, hedge fund, venture capital fund, leveraged
buy-out fund or any similar investment vehicle established with an
investment strategy of investing, reinvesting, or trading in Financial Assets.
An Entity that primarily conducts as a business investing, administering, or
managing non-debt, direct interests in real property on behalf of other
persons, such as a type of real estate investment trust, will not be an
Investment Entity.
• Specified Insurance Company
Explanation (d) to Rule 114F(3)
defines “specified insurance company” to mean any entity that
is an insurance company (or the holding company of an insurance company) that
issues, or is obligated to make payments with respect to, a Cash Value
Insurance Contract or an Annuity Contract.
An “insurance company” is an Entity
a. that is regulated as an insurance
business under the laws, regulations, or practices of any jurisdiction in which
the Entity does business;
b. the gross income of which (for
example, gross premiums and gross investment income) arising from insurance,
reinsurance, and Annuity Contracts for the immediately preceding calendar year
exceeds 50% of total gross income for such year; or
c. The aggregate value of the assets
of which associated with insurance, reinsurance, and Annuity Contracts at any
time during the immediately preceding calendar year exceeds 50% of total assets
at any time during such year.
Most life insurance companies would
generally be considered Specified Insurance Companies. Entities that do not issue Cash
Value Insurance Contracts or Annuity Contracts nor are obligated to make
payments with respect to them, such as most non-life insurance companies, most
holding companies of insurance companies, and insurance brokers, will not be
Specified Insurance Companies.
A “cash value insurance
contract” is defined in Explanation (f) of Rule 114F(1) is defined to
mean an insurance contract (other than an indemnity
reinsurance contract between two insurance companies) that has a cash
value and in case of a U.S. reportable account such value is greater
than an amount equivalent to US$ 50,000. A single premium life
insurance contract which does not permit an amount to be paid on surrender or
termination of the contract and which does not allow amounts to be borrowed
under or with regard to the contract, shall not constitute a cash value
insurance contract.
Step 3: Is the Financial Institution
in India?
The Financial Institutions resident
in India, their branches located in India and branches of Foreign Financial
Institutions that are located in India are the Reporting Financial Institutions
while Foreign Financial Institutions, their foreign branches and foreign
branches of Indian Financial Institutions are not. In the case of Trusts, the
reporting requirement is on the Trustees resident in India, unless the required
information is being reported elsewhere because the trust is treated as
resident there.
Step 4: Is the Financial Institution
a Non-Reporting Financial Institution?
Rule 114F(5) specifies a number of
entities as non-reporting financial institutions and these entities are not
required to maintain or report the information, except in case of “financial
institution with a local client base” in certain specified situations. These
non-reporting financial institutions are as under:
(a) a Governmental entity,
International Organization or Central Bank;
(b)a Treaty Qualified Retirement
Fund; a Broad Participation Retirement Fund; a Narrow Participation Retirement
Fund; or a Pension Fund of a Governmental entity, International Organization or
Central Bank;
(c) a non-public fund of the armed
forces, Employees’ State Insurance Fund, a gratuity fund or a provident fund;
(d)an entity that is an Indian
financial institution only because it is an investment entity, provided that
each direct holder of an equity interest in the entity is a financial
institution referred to in sub-clauses (a) to (c);
(e) a qualified credit card issuer;
(f) an investment entity established
in India that is a financial institution only because it
- renders investment advice to, and acts on behalf of; or
- manages portfolios for, and acts on behalf of; or
- executes trades on behalf of,
A customer for the purposes of
investing, managing, or administering funds or securities deposited in the name
of the customer with a financial institution other than a non-participating
financial institution;
(g)an exempt collective investment
vehicle;
(h)a trust established under any law
for the time being in force to the extent that the trustee of the trust is a
reporting financial institution and reports all information required to be
reported under Rule 114G with respect to all reportable accounts of the trust;
(i) a financial institution with a
local client base;
(j) a local bank;
(k)a financial institution with only
low-value accounts;
(l) sponsored investment entity and
controlled foreign corporation, in case of any U.S. reportable account;
(m) sponsored closely held investment
vehicle, in case of any U.S. reportable account.
Explanation to Rule 114F (5) provide
further explanation of the above categories of non-reporting financial
institutions.
Registration of Reporting Financial
Institutions and Form 61B Submission Procedure u/s 285BA of Income Tax Act,
1961
As per notification no. 3/2015 dated 27/08/2015, CBDT has issued
procedure for registration and submission of report as per clause (k) of sub
section (1) of section 285BA of income tax act, 1961 read with sub rule (7) of
rule 114G of income tax rule, 1962 :
As per sub rule 9(a) of rule 114G of
income tax rule, 1962, the statement which is furnished under sub rule (7)
shall be furnished through online to NSDL under digital signature and as per
the data format specified by Principal Director General of Income Tax (system).
As per sub rule 9(b) of rule 114G of
income tax rule, 1962 Principal Director General of Income Tax (Systems) shall
specify the procedures, data structures and standards for ensuring secure
capture and transmission of data, evolving and implementing appropriate
security, archival and retrieval policies.
In exercise of the powers delegated
by Central Board of Direct Taxes (‘Board’) under Sub rule (9) (a) and 9(b) of
Rule 114G of the Income tax Rules 1962, the Principal Director General of
Income tax (Systems) lays down the procedures, data structure and standards for
ensuring secure capture and transmission of data, evolving and implementing
appropriate security, archival and retrieval policies as under:
(a) Registration of the
reporting financial institution: The reporting financial institution
is required to get registered with income tax department by logging in to
e-filling website with using same logging ID and password which is used by
reporting financial institution for filling of income tax return. After logging
in, a link to registered reporting financial institution has been provided
under ‘My Account’. The reporting financial institution now
required to submit registration details on screen. The reporting financial
institution may submit different registration information under different
reporting financial institution.
(b) Submission of Form 61B:
Once the reporting financial institution is gets registered successfully, it is
required to submit the form 61B or nil statement under e- file menu. The scheme
for form 61B can be downloaded from e-filling website. The reporting financial
institution is required to submit reporting entity category and calendar year
for which report to be submitted. The reporting financial institution will then
be provided the option to upload the form 61B. The form is required to be
submitted using a Digital Signature Certificate.
(c) Submission of NIL
statement: In case nil statement has to be submitted by reporting
financial institution, the option to submit nil statement is required to be
selected and will then required to submit declaration with respect to
pre-existing accounts and new accounts. The declaration is required to be
submitted using a digital signature certificate.
(d) Digital Signature
Certificate: In case if Designated director is same as the person
authorized to verify the return of income of reporting financial institution as
per provisions of section 140 of income tax act, 1961, the Form 61B or Nil
statement is required to be submitted with the digital signature certificate of
the person authorized to sign the return of income of the reporting financial
institution. In other cases, the procedure will be notified separately.
- See more
at: http://taxguru.in/income-tax/income-tax-reporting-financial-institution-registration-submission-form-61b.html#sthash.MvwWpBNu.dpuf
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