BOOK
REVIEW
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
PRICE:Rs.
599/-
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
(976
words)
June
9, 2018
Gautam
Mukherjee
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