TITLE: THIN DIVIDING LINE-India, Mauritius And Global Illicit Financial Flows
AUTHORS: PARANJOY GUHA THAKURTA with SHINZANI JAIN
PUBLISHER: PENGUIN PORTFOLIO, RANDOM HOUSE INDIA, 2017
The World of Hawala, Tax-Havens, Round-Tripping, Anonymous P Notes & The Vexed Question of Tax Competitiveness
There are a plethora of almost no- questions asked “Tax Havens” both onshore and offshore, across the world. Many have been there for a century or more. Much of the money flowing through them is not necessarily ill-gotten, but seek to take advantage of the tax avoidance opportunities proffered. This naturally to the detriment of the taxation authorities in the country of actual residence.
However, global as the issue is today, what tickles and tantalizes people in India, are estimates that $62.9 billion or Rs. 400,000 crores is secretly stashed by Indians abroad by way of illicit funds.
This book is something of a companion primer to a documentary of the same name, concentrated quite largely on Mauritius. The authorities in Mauritius have framed their laws and practices in a way that there is no wrong doing as far as they go. Nevertheless, the “Mauritius Route”, with a double tax avoidance treaty, has been controversial since 1982, when Indira Gandhi was Prime Minister. The treaty lay dormant for almost a socialist decade, and was only operationalised with the advent of India’s liberalization in 1991. PV Narasimha Rao was Prime Minister –assisted, of course, by his economist Finance Minister, Dr. Manmohan Singh.
Soon, 40% of all foreign investment into India, now in many billions of dollars and mostly into the equity market, came in via Mauritius. How much of it is really Indian money turning white from black? All of it has been 100% exempted from capital gains tax for decades.
A clarification was issued to the Central Board Of Direct Taxes (CBDT), by the Finance Ministry when it was inspired to interpret the terms of the treaty differently in 2000.
The CBDT in its wisdom, tried to tax the capital gains of Foreign Institutional Investors (FIIs), High Net Worth individuals (HNIs) etc. despite the Double Tax Avoidance Treaty with retrospective effect. That is, for all the years the FIIs and others using the route were active in India! This naturally raised a hue and cry and the then Finance Minister Yashwant Sinha was forced to intervene. The clarification issued during the Vajpayee government, said that if an FII was able to establish its “tax residency” in Mauritius, (which anyway did not have any capital gain s tax itself), then the CBDT could not tax it in India.
But all along the line, there had been criticism of the Mauritius treaty by large domestic institutional investors (DIIs), for creating an uneven playing field albeit to attract foreign investment. This view was echoed by Left-leaning economists, bureaucrats, lawyers, and politicians. It was seen by them to favour FIIs using the debatable argument of “tax competiveness” vis a vis other countries.
This too changed after the global economic crisis of 2008, when the prevailing sentiment underwent a sea- change. Now most developed countries began to call for an end to “tax havens”, because of their allegedly deleterious effect on their domestic economies.
India too decided to go in for a change under the Modi government which has mounted a fairly serious effort against black money, hawala, round-tripping using tax havens and so on.
It has gone ahead and renegotiated various avoidance of double taxation treaties, starting with Mauritius in May 2016. India imposed a withholding tax of 7.5% of capital gains for those using the Mauritius Route for the two years till 1st April 2019, when the full tax rate of 15% will be applied on foreign investors on par with domestic ones. That is, from financial year (FY) 2020.
For the moment, India’s level of taxation is most competitive, and the move has been generally well-received, mainly because most developed countries have imposed a 10% tax on capital gains presently. After this, India went on to amend its tax treaty with Singapore which was also on similar lines.
However, many FIIs claim that the currency exchange rate risks of operating in a emerging market of about $ 2 trillion market capitalisatiion with the rupee constantly depreciating, puts them at an additional disadvantage.
It is difficult to say whether round-tripping of massive hawala funds is really all that bad. Despite the obvious money-laundering, the alternative is that all the money sent out of the country via hawala, fraudulent invoicing and other means, never comes back at all!
This thought might be behind the government’s reluctance to ban anonymous participatory notes (P Notes), that are accommodated by the registered FIIs. Efforts to regulate and tighten the regulations concerning them have been tried in 2004, without much evident success.
The question of tax residency however has been made redundant. And companies using the Mauritius Route henceforth have to put in Rs. 27 lakhs into the equity of the Mauritius companies they set up. This puts paid to operating via the erstwhile “shell companies”.
The alleged abuses that have involved this infamous route are a morass of legal conjecture, litigation, arbitration, and elevation to the International Court of Justice (ICJ). That clumsy attempts at tax realization from Vodafone and Cairn Energy, some of it retrospectively, has damaged India’s reputation is undeniable.
Author Paranjoy Guha Thakurta is a prominent media person and educator. He has sharply-honed journalistic and investigative abilities. Guha Thakurta’s prose is lucid as he tackles a somewhat dry subject despite its cops and robbers undertone. He also has a proper grasp of the economics and evolving regulatory framework involved. This is, of course, not his first joust with the world of fast-and-loose Capitalism in book form.
His young collaborator on this book, Shinzani Jain, comes in for fulsome praise from Guha Thakurta himself . Again, Jain, who is studying for a Master’s Degree in Sociology, writes articles for a number of print and digital media offerings, and has co-authored another book on the related subject area of black money, cronyism and the damage it is doing to the Indian economy.
For: The Sunday Pioneer BOOKS
June 9, 2018