Business Economics & Services Team
Sunset for Double Taxation Agreement Treaties?
Every successive government in India promises that they would look into the operation of Double Taxation Avoidance Treaties signed with more than 60 countries to enable the underlying assets to be taxed only in one country. That is fair and equitable, to say the least. Why then we have to have a re - look at those treaties? Here comes the catch. They are enablers to dodge taxes, through a process called round tripping. In plain language for money laundering. Billions of dollars are routed through tax havens like Mauritius, Cyprus, Malta etc. where tax exemptions are allowed liberally for investment in other countries, particularly India. The company wanting to take advantage of the facilities of tax advantage offered by these countries will have an office (mostly a post box address) and channelize millions dollars meant for investment in a third country through these tax havens. The capital gains tax in these countries are pegged at zero or at a very nominal rate , which is charged once the money invested by the FII is withdrawn from the host country. Since the money is taxed only in one country, the investors want their investment to come under the tax regime of the havens. That way they escape the tax.
How much money is saved by the investor in this matter? Let the facts speak for itself. In December 2012, the total investment of FIIs in India through Mauritius was a whopping Rs 3,51,356 crore. Assuming that these investments in the stock market were withdrawn in 2013, the total capital gains tax payable in India will be the 30 percent of the profit made on the investment. In ordinary situation, the FIIs at the time of withdrawal will make a profit of 30 to 40 percent on their capital. That means that they have to pay 30 percent tax on the appreciated amount. But they end up in paying zero taxes since they indicate their option to be taxed in Mauritius, where the tax rate is zero.
Who is a loser in the game. It is the Indian revenue department. The Mauritius is only a conduit for chanlizing investment. No wealth is created there. Rather they stand to benefit since the entire economy revolves around the revenue they generate from the upstream and downstream processes of round tripping. These include registration fee for the shell companies incorporated, make shift offices set up in that country to establish their credentials, heavy travels into that country, bank charges, employment of the locals, rentals of the office premises, hotel bookings, other hospitality services like taxis, entertainment and what have you.
All tax havens have their own reservations about streamlining their processes and bringing in transparencies in their operations. That is understandable because they have great stakes in such operations. Their economies may collapse once they are forced to toe in line. But why the Indian government is following a switch on switch off policy? Are they serious about implementing what they preach. Many have doubts about the government reaching the bottom of the case. Across the party lines, there is a strong nexus among politicians, business tycoons and bureaucrats. That is a strong nexus. It may take several years with the active involvement of upright politicians and officialdom to break that nexus. Sooner we do that, the better since the public is aware of these skeletons in cupboard and there is a limit for their tolerance.
For details: Email:jthac1234@gmail.com,jthac1234@yahoo.com
Sunset for Double Taxation Agreement Treaties?
Every successive government in India promises that they would look into the operation of Double Taxation Avoidance Treaties signed with more than 60 countries to enable the underlying assets to be taxed only in one country. That is fair and equitable, to say the least. Why then we have to have a re - look at those treaties? Here comes the catch. They are enablers to dodge taxes, through a process called round tripping. In plain language for money laundering. Billions of dollars are routed through tax havens like Mauritius, Cyprus, Malta etc. where tax exemptions are allowed liberally for investment in other countries, particularly India. The company wanting to take advantage of the facilities of tax advantage offered by these countries will have an office (mostly a post box address) and channelize millions dollars meant for investment in a third country through these tax havens. The capital gains tax in these countries are pegged at zero or at a very nominal rate , which is charged once the money invested by the FII is withdrawn from the host country. Since the money is taxed only in one country, the investors want their investment to come under the tax regime of the havens. That way they escape the tax.
How much money is saved by the investor in this matter? Let the facts speak for itself. In December 2012, the total investment of FIIs in India through Mauritius was a whopping Rs 3,51,356 crore. Assuming that these investments in the stock market were withdrawn in 2013, the total capital gains tax payable in India will be the 30 percent of the profit made on the investment. In ordinary situation, the FIIs at the time of withdrawal will make a profit of 30 to 40 percent on their capital. That means that they have to pay 30 percent tax on the appreciated amount. But they end up in paying zero taxes since they indicate their option to be taxed in Mauritius, where the tax rate is zero.
Who is a loser in the game. It is the Indian revenue department. The Mauritius is only a conduit for chanlizing investment. No wealth is created there. Rather they stand to benefit since the entire economy revolves around the revenue they generate from the upstream and downstream processes of round tripping. These include registration fee for the shell companies incorporated, make shift offices set up in that country to establish their credentials, heavy travels into that country, bank charges, employment of the locals, rentals of the office premises, hotel bookings, other hospitality services like taxis, entertainment and what have you.
All tax havens have their own reservations about streamlining their processes and bringing in transparencies in their operations. That is understandable because they have great stakes in such operations. Their economies may collapse once they are forced to toe in line. But why the Indian government is following a switch on switch off policy? Are they serious about implementing what they preach. Many have doubts about the government reaching the bottom of the case. Across the party lines, there is a strong nexus among politicians, business tycoons and bureaucrats. That is a strong nexus. It may take several years with the active involvement of upright politicians and officialdom to break that nexus. Sooner we do that, the better since the public is aware of these skeletons in cupboard and there is a limit for their tolerance.
For details: Email:jthac1234@gmail.com,jthac1234@yahoo.com
