Mumbai (Maharashtra) [India], November 5 (ANI): India's financial institutions could face severe withholding tax penalties, while persistent lapses in international tax reporting could pose risks to the country's sovereign credit rating, a senior Income Tax Department official warned on Thursday.

Speaking to the media on the sidelines of the 'Summit on Global Financial Compliance (FATCA & CRS)' in Mumbai, Debjyoti Das, Principal Director General of Income Tax (Intelligence & Criminal Investigation), highlighted the growing risks associated with non-compliance in cross-border financial reporting.

'It can have certain adverse consequences if we do not address them on time or completely. We can end up with a downward rating for the country,' Das said, adding that non-compliant financial institutions with US clients could also face punitive withholding taxes under the Foreign Account Tax Compliance Act (FATCA).

Highlighting the scale of reporting discrepancies, the Income Tax Department said that missing, incorrectly formatted or mismatched Tax Identification Numbers (TINs) account for approximately 97 to 98 per cent of all flagged defects, while a smaller proportion of errors relates to discrepancies in dates of birth.

Das attributed these inaccuracies to inadequate data collection during customer onboarding, non-resident Indians (NRIs) failing to update their Know Your Customer (KYC) details after relocating overseas, and a sharp increase in reporting volumes driven by foreign residents investing in India.

'The data collection point makes all the difference. If you don't have a robust data collection mechanism, reporting automatically suffers,' he said.

To address these systemic gaps, the department is launching a nationwide capacity-building initiative for relationship managers and compliance officers across major financial centres, including Mumbai, Delhi, Bengaluru and Kochi.

Emphasising a collaborative approach to enforcement, Das said the department would prioritise cooperation and corrective measures over immediate penalties.

'We would like to be more collaborative, and penalties should be the exception, not the rule,' he said, clarifying that penalties would be reserved for cases involving deliberate non-compliance.

The Income Tax Department also plans to consult key financial regulators, including the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI), to streamline account-opening procedures and align KYC requirements with international tax reporting standards.

Meanwhile, international tax transparency measures are expected to expand further, with crypto-asset transactions set to be integrated into the Automatic Exchange of Information (AEOI) framework from next year.

The outreach programme brought together senior representatives from banks, mutual funds and insurance companies to strengthen compliance with FATCA, which governs reporting of specified US-linked financial accounts, and the Common Reporting Standard (CRS), an international framework for the automatic exchange of financial account information among participating jurisdictions. (ANI)