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A simple step to bring back unaccounted Indian money

Indian government only needs to muster enough political courage to get the unaccounted money back into country

For a layperson, when one thinks of tax havens, the names that immediately spring to mind are Cayman Islands, St. Kitts, Bermuda and other offshore financial centres(OFCs) in Caribbean that are used for money laundering. The Bhartiya Janata Party(BJP) on its campaign trail in 2014 had made bringing back the unaccounted money as one of the key promises. Even the previous governments have tried only superficially to address this problem. Financial journalist Nicholas Shaxson, in his book Treasure Islands: Tax havens and the Men who Stole the World has given a brilliant account of how business elites across the world avoid tax, including the much respected western countries. He also suggests measures to tighten the system.

The Organization for Economic Cooperation and Development(OECD) leads a project called as Base Erosion and Profit Shifting(BEPS)—which refers to to the erosion of a nation’s tax base due to accounting jugglery adopted by multi national enterprises (MNEs). In its 2015 report, BEPS gave a laundry list of 15 action points that can curb abusive tax avoidance by the MNEs.  In the case of India, one of the most favoured foreign destinations happens to be Mauritius. In an article in The Hindua dated 21st January, 2016, G.Sampath quotes Shaxson who has explained the process of tax avoidance as “round tripping.” Mauritius is one of the most popular hubs in the financial world for round tripping. India has a Double Taxation Avoidance Agreement(DTAA) with Mauritius, which is at the core of tax avoidance by companies. The BEPs report says that Mauritius accounted for 34 per cent of India’s equity inflows from 2000 to 2015. In round-tripping, an Indian businessman sends his money to Mauritius, where it is dressed up in a structure (in the form of registered companies). It is then disguised as foreign direct investment, before returning to India. The sender of the money thus avoids Indian tax on local earnings. Therefore, this becomes a government sponsored loophole for MNEs for tax avoidance by channelling profits and investments through offshore destinations.

The DTAA was signed with Mauritius in 1983. Even China had a similar treaty with Mauritius which it renegotiated and now forces its investors to pay 10 per cent capital gains tax in China. This is the simplest method to arrest the illegal outflow of money. But this is easier said than done in India. The government’s Special Investigation Team(SIT) on had given a list of eight recommendations in September 2015. One of them was Know Your Customer(KYC) norms disclosure of Participatory notes (P-notes) to Securities and Exchange Board of India(SEBI). P-notes are instruments issued by foreign institutional investors(FIIs) to overseas investors for investing in the Indian stock market without registering themselves with SEBI. The top five countries of P-notes investment in India are the Cayman Islands, UK, US, Mauritius, and Bermuda.

The simple step will be to bring offshore money onshore. The example of US which set up its International Banking Facilities(IBFs), Japan (Japan Offshore Market), Singapore (Asian Currency Market) etc. These were mechanisms to become an OFC and get the money back. For now, it looks like wishful thinking to put the money launderers in jail like Iceland(which was forced to take this step after its entire banking system collapsed in 2008). India certainly will not like to walk down that road. It is time that Modi government acted on the tall election promise that the party made on unaccounted money.


Guru Aiyar is a research scholar with Takshashila Institution and tweets @guruaiyar

Featured image: Money by Nick Ares, licensed from creative commons.org

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