The RBI, the department of industrial policy and promotion and the foreign investment promotion board are in consultations to make regulations on overseas investments more stringent, media reports suggest. The move comes just days after the world, led by the G-20, decided to come down heavily on tax havens across the globe.
The central board of direct taxes is also learnt to have set up a special task force to suggest ways to prevent abuse of double taxation avoidance agreements The task force would look at the prevalent global best practices adopted by the U.S. and others to see how they can be replicated here and ensure India's tax treaties are transparent and promote information-sharing.
The recently concluded G-20 summit on global financial crisis in London had raised the pitch on scrapping double taxation avoidance agreements (DTAA). These are tax treaty agreements between two countries that ensure that the same income is not taxed twice. The G20 developed and emerging countries also considered imposing additional taxes on companies that operate in non-cooperative countries, and demanded tougher disclosure requirements for individuals and business that use shelters.
We should endorse sharing information and bringing tax havens and non-cooperating jurisdictions under closer scrutiny, Indian Prime Minister Manmohan Singh had said at the G-20 dinner.
Senior BJP leader LK Advani and Communist Party of India (Marxist) Politburo member Sitaram Yechury have also raised the pitch against black money stashed away in tax havens abroad. The BJP's election manifesto said the unaccounted money kept by Indians in tax havens abroad is up to USD 1.5 trillion, while the CPI put it at $1.4 trillion.
Both the parties have demanded that the UPA government should get from Swiss banks and from banks in tax havens details of accounts of Indians. It is not only a case of tax evasion but also of funds being illegally stashed abroad, or used for money laundering, it was pointed out.
India has bilateral tax agreements with more than 70 nations, of which, 29 are classified by the Organization for Economic Co-operation and Development (OECD) as jurisdictions that have substantially complied with international tax standards.
Tax havens such as Mauritius and Cyprus, which thrive on secrecy and zero or nominal tax rates, account for nearly half of India's foreign direct investment (FDI) and portfolio flows. During April-November 2008, while Mauritius remained the largest source of foreign investment with Rs.35, 000 crore in FDI, investments from Cyprus were Rs.4, 486 crore. Cyprus is now the eighth largest FDI source for India ahead of countries such as France and Germany.
According to reports, subsidiaries of Indian companies in tax havens will be required to have business operations in those countries to be eligible to make investments in India. The government may also scrutinize books of overseas subsidiaries that have been set up with a very low capital base to check suspected round-tripping of funds that takes place as a result of the DTAA.
Round-tripping is the routing of money back into the country through a subsidiary based in tax havens like the British Virgin Islands and Mauritius. India is losing an estimated more than $600 million every year in revenues on account of the DTAA with Mauritius.
Treaty shopping is another area where the government is losing considerable revenue when a resident of a third country routes his investments through Mauritius due to the low tax rate in the island nation.
While tightening norms on existing double taxation avoidance agreements (DTAAs) could be difficult, reports suggest that the government may incorporate watertight provisions in fresh DTAAs to curtail tax evasion. India's attempts to amend the treaty with Mauritius have so far met with tremendous diplomatic resistance from the island nation. The government may renegotiate its treaty with Mauritius, if it agrees for a one-time compensation payment.
As there is now some consensus among all political parties to impose sanctions on tax havens, the new political establishment that will form after the general elections may bring some provisions in the tax laws in the forthcoming budget. However, bona fide investments from genuine companies taking advantage of tax treaties will not be disturbed. India has already amended its tax treaty with the United Arab Emirates.
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