CA Gautam Gupta
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?
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:-
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
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.
(Author can be reached at firstname.lastname@example.org / 99-999-354-71 for any queries)