Analysis. India closing its doors on tax evaders

Tax evasion is not a modern concept. A tax haven is basically an independent domain with low or nil tax rates acting as a safe locker for all the evaded money. These territories started draining away billions of money from the various countries and have become popular as a safe parking place for all the illgotten wealth accumulated globally. Recent measures taken will help plug these loopholes.

When India opened the doors of its economy to foreign investment in 1991, tax havens such as Mauritius, Singapore, Cyprus, and the likes became favourite jurisdictions for channelling investments into India. Though the tax officers did not appreciate the prospect of perceived letter box companies in these jurisdictions claiming the tax exemptions, the fear of losing foreign investment kept India from taking stern action against these tax havens by amending the tax treaties.

Lately, however, with widespread resentment against companies failing to pay their fair share of taxes and the Organisation for Economic Cooperation and Development (OECD’s) action plan on Base Erosion and Profit Shifting (BEPS), the Indian government got the final push to re-initiate the process of renegotiating its tax treaties.

Cyprus, Mauritius and Singapore are the three countries that had a double taxation avoidance agreement (DTAA) with India. The right to levy capital gains was not with India and the capital gains tax in these countries is nil. Thus, investors routing their investments into India through these nations don’t have to pay tax anywhere in the world, and that is the issue India has finally addressed by amending its treaties with Mauritius, Singapore and most recently Cyprus.

Capital gains tax is just one part of the problem; exchange of information is the other issue at the core of India’s agenda of bringing back the black money stashed abroad. The government has plugged all the loopholes in these treaties and brought Mauritius, Singapore and Cyprus at par with other countries by strengthening the exchange of information clause. Now foreign investors don’t have any incentive to route their business with India through these countries.

This is also in line with the Government’s agenda of tax rationalisation as well as simplification and moderation of tax rates while phasing out tax exemptions. Interestingly, this development also blunts the impact of the much condemned General Anti Avoidance Rule (GAAR), which would have conflicted with the capital gains exemptions under the Mauritius, Singapore and Cyprus treaties.

Also influenced by the Foreign Account Tax Compliance Act (FATCA) being declared as a “hit show”, the nations have signed a multilateral pact amongst themselves pertaining to information exchange, known as the Automatic Exchange of Information (AEOI).

With FATCA and AEOI in place, tax evaders are going to experience a hard time in seeking means to take money out of the nation it belongs to, without the exposure of the same being reported back to Indian tax authorities.

For those who say that the larger fight is against the domestic black money, it has been duly addressed with initiatives such as Demonetisation and Prohibition of Benami Transactions Act, giving last chances to those wishing to come clean in the form of Income declaration scheme (IDS) and Pradhan Mantri Garib Kalyan Yojna (PMGKY).

These efforts and implementation will definitely plug the loopholes of money outflow.

The writer is Managing Partner, Nangia & Co