Hiding places where Indian black money is concealed
Aparajita Basak, the manager, of research analytics, innovation and knowledge centre at Frost & Sullivan, talks about the use of tax havens across the world for Indian black money.
What kind of role do tax havens play in black money in terms of Indian companies and individuals?
Across the world, there are more than 40 countries that position themselves as tax havens and offer benefits including anonymity, negligible taxes and confidentiality of account ownership. Traditionally, the top destinations for Indian black money have been Mauritius, Switzerland, Liechtenstein and the British Virgin Islands. Although India has a competitive tax structure, the lure of avoiding taxes on money earned, legally or illegally, drives many companies and individuals to route their money out of the country through sophistical channels such as luxury purchases, hawala [third parties] and shell companies. Moreover, such money is often re-routed back into the country through official channels into the organised sector. In such instances, all subsequent earnings also escape taxation due to the existence of double taxation avoidance agreement, wherein most prefer being taxed at the tax haven at a minimal rate. This results in perpetual evasion of taxes in the country where the income is earned.
Can you give an example?
For instance, under the India-Mauritius double taxation avoidance treaty, there are no taxes on Mauritius-based FIIs [foreign institutional investors] investing in India. Consequently, over half of foreign direct investment in India comes through the island nation resulting in huge losses of tax revenues.
What needs to be done to solve these problems?
In terms of black money parked abroad, India needs to methodically examine the data shared so far by tax havens to find the real entities and present a watertight case to foreign authorities. In particular, the treaty with Switzerland wherein the latter has agreed to provide administrative assistance in tax cases as well as its willingness to set up a regulatory system to identify the beneficial owners should help. Meanwhile, the report submitted by the special investigation team in August this year has many suggestions. An effective administrative framework that scrutinises bulky imports for over-invoicing is one. A simpler tax law with lower uniform rates and higher penalties is another. Revisiting the existing double taxation avoidance agreements to ensure better sharing of information as well as signing agreements of revenue sharing with governments in tax havens is another suggestion.
