FinMin probes overseas deals for tax evasion

The finance ministry has begun its maiden investigation into over 100 offshore “financial structuring deals”, undertaken by Indian business entities in foreign tax havens to allegedly evade the taxman’s net.

The multi-pronged probe has been undertaken by the international taxation wing of the Income Tax department and the foreign taxation unit in the Central Board of Direct Taxes (CBDT).

A number of investments and deals to the tune of hundreds of crores of rupees have already been executed in tax havens like the Mauritius, Isle of Man, Cyprus, British Virgin Islands and Bermuda, among others.

These deals will be scrutinised by the investigators, who are also travelling to some of these countries to collect additional information.

The exercise, dubbed “Lifting Corporate Veil”, will look into the overseas deals, including some big-ticket ventures, to investigate whether “a chain of overseas takeovers may be part of an exercise for an elaborate treaty shopping or tax evasion exercise”.

According to sources privy to the investigations, the I-T department has identified about 700,000 companies that are possible front companies for such investments in the British Virgin Island alone.

Certain Indian entities allegedly invested in companies set up in these offshore tax havens to avoid taxes or pay close to zero tax under the guise of financial restructuring.

“Privacy and confidentiality and freedom from all taxes in these havens are guaranteed. Company structures are flexible and the process of incorporation is fast and efficient while doing financial structuring in these places,” a source said.

The probe was to check the investments ‘made’ abroad and investments ‘made from’ abroad through a chain of tax haven countries without paying taxes in either country and causing loss of revenue to the national exchequer, sources said.

They said such probes were also expected to throw up some leads related to violation of foreign exchange rules and money laundering to fund illegal ventures, which would be referred to other investigative and enforcement agencies like the Central Bureau of Investigation (CBI) and Enforcement Directorate (ED) for follow-up action.

The finance ministry is already working to finalise Tax Information Exchange Agreements (TIEAs) with countries like the UAE, Kuwait, Oman, Saudi Arabia, Qatar, Jordan, Syria, China, Indonesia, Israel, Japan, Malaysia, Mongolia, South Korea and Vietnam.

Furthermore, Double Taxation Avoidance Agreements (DTAAs) with more than 70 countries are being finetuned.

The I-T department is also looking into evasion of Tax Deducted at Source (TDS) by some companies while making payments to purchase overseas shares, but sources declined to name the entities involved.

The government recently announced in the winter session of Parliament that it was probing a few more cross-border merger and acquisition cases for possible tax evasion, shortly after slapping a Rs 11,000-crore tax notice on Vodafone for its buyout of Hutchison’s stake in telecom JV Hutchison-Essar.

“A few cases relating to cross-border merger and acquisition deals have been identified for further examination by the (Income Tax) department. These deals are being examined for possible tax implications,” Finance Minister Pranab Mukherjee had said.