Thursday, August 27, 2009


Few corporations are making fortune with India’s tax money

Over the years the white beaches of Mauritius have always been a paradise for both newlywed couples and the corporations, obviously for different reasons. The former is enamoured by the natural beauty of this dot of a nation, and the latter besotted by its tax policies. But whatever might be the reason, Mauritius stands to gain from both!

Mauritius ranks first among all countries in Foreign Direct Investments (FDIs) inflows to India, with inflows amounting to nothing less than $11 billion. While its national income is just $8.7 billion, its investment in banking sector is over $1.5 billion! Mauritius is home to more than 9,000 off shore corporate entities, many of them have business relations with India. The scope of tax evasion increases due to the tax treaty between India and Mauritius (Indo-Mauritius treaty), which allows a company resident in Mauritius to sell shares of an Indian company to escape taxes in India. Since there is no policy of capital gains tax (CGT) in Mauritius, the gain thus escapes tax altogether. Thanks to the existing very low tax-rates on individual incomes and profits earned by corporate entities – Mauritius and likes, attracts and encourages non-residents to escape taxes in their own countries.

This is not about Mauritius alone. All thanks to differential taxation, last financial year, around $3,600 million was routed to Singapore and around $2,200 million to Cyprus from India. So much so that even the Canadian High Commissioner to India acknowledged (in April, 2009) that against the official Canadian investment into India estimated to be around $239 million, the actual figure would not be less than $10 billion. Almost 60 per cent of international investments ($10 billion of $16 billion) by Indian companies (last fiscal) were done en-route tax havens’ countries. India loses nothing less than a trifling $1.5 billion collectively, mainly due to individuals trying to dodge taxes back home.

In most of the cases, Indian entities illegally channelise funds into tax havens and then later bring them back as FDIs and other forms of investments. India's Double Taxation Avoidance Agreements (DTAAs) have actually been a delight for investors and despair for the domestic fiscal base. What could be height of generosity than having similar treaties with over 65 countries, including at least 16 treaties that are almost a replica of the Mauritius’ DTAAs. Understandably so, lot many enterprises have exploited this agreement to the hilt. Many deceitful promoters of Indian companies exploit firms located in tax havens to illegally augment their share prices using participatory notes a.k.a P-notes (instruments issued to overseas investors, who wish to invest in the Indian stock markets without registering themselves with the market regulator) issued by international fund managers.

Merely obtaining records of the citizens that utilise tax havens to evade taxes or getting such money back would serve just a fraction of the problem. India urgently needs to rationalise its generosity and review its DTAAs. Further to this initiative, we need to re-frame our tax policies and make them at par with international rates. In a country like India, corporate tax plays a huge role in refurbishment of country’s dented social and infrastructural development. In this light, tax evasion not only robs development but also hampers nations’ budget. It is so unfortunate that the money (as tax) which is meant for us eventually benefits some other nations. Our policy makers need to forego addressing corporate interest and hold these evaders left , right and centre. Until then the honeymoon seems unstoppable.


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