Crackdown on tax havens not to yield much for India

India has bilateral tax agreements with more than 70 nations.

Last week’s G20 agreement to tighten norms for “non-cooperative” tax havens is unlikely to yield higher tax revenues for India or more stringent tax inspections for companies that route their investments through these havens. This is because the majority of investment flows from the locations identified in the communique issued last Friday are those with which India has signed bilateral tax agreements.

India has Double Taxation Avoidance Agreements (DTAAs) with more than 70 nations. Twenty-nine of these are classified by the Organisation for Economic Co-operation and Development (OECD) as jurisdictions that have substantially complied with international tax standards.

Of these 70 countries, Mauritius and Cyprus account for nearly half of India’s foreign direct investment (FDI) and portfolio flows. Between April 2000 and January 2009, the two countries accounted for nearly 46 per cent of FDI flows into the country. Both countries are on the OECD’s compliance list.
 

HAVEN-SENT OPPORTUNITIES April 2000 - January 2009
	In Rs crore	In US$	% of total FDI
Mauritius	152,768	35.18	43
Cyprus	8,805	2.02	3
Others	214,200	49.00	54
Total	375,773	86.20	100

“The government is unlikely to take any hostile action against these two countries,” said a senior finance ministry official requesting anonymity.

Of the remaining 41, only one — the Philippines — figures on the OECD blacklist. The remaining 40 are either not considered “tax havens” or are in the “grey list” — that is countries that have agreed to implement tax standards. Austria and Belgium are two “grey list” financial centres with which India has DTAAs.

Finance ministry officials said tightening norms on existing agreements was not possible. Only fresh DTAAs could incorporate watertight provisions to curtail tax evasion, the official added.

India has been trying to renegotiate its treaty with Mauritius for the past few years on account of suspected “round-tripping” of funds that takes place as a result of the DTAA. To this end, the Indian government even offered incentives in terms of a one-time compensation payment. The former British colony, however, is not willing to do so. “Mauritius is a friendly country and the government is unwilling to take any unilateral action,” said the finance ministry official.

Round-tripping refers to taking the tax-evaded money from India and rerouting it back through a tax-friendly location like Mauritius. “It’s tough to get information on round-tripping,” said Rahul Garg, executive director of PricewaterhouseCoopers.

The other way of revenue loss to the Indian government is called “treaty shopping”, under which firms headquartered in, say, US or Europe, route their investments through Mauritius because of the low tax rate in the island nation.

However, an estimate of revenue loss due to DTAAs could not be obtained.