I-T to Check FDI from Mauritius for Black Taint

Move follows charges that black money is being brought back into India via
island nation

DEEPSHIKHA SIKARWAR NEW DELHI

    The government has decided to increase vigil on all foreign direct investment (FDI) flows
from Mauritius amid growing concern that black money stashed abroad by Indians is being
routed back into the country through the island nation.
“Scrutiny of investment from Mauritius is being enhanced,” a finance ministry official told ET.
Mauritius accounts for more than 40% of all foreign direct investment flows into the country.
The income-tax department has deputed an official in Mauritius to coordinate with the
government and the revenue authorities there to ascertain details of funds that have been invested
in India, the official said.
The department is keen to scrutinise all FDI proposals from the island nation that go to the
Foreign Investment Promotion Board for clearance.
Sectors such as real estate will particularly be under the lens.
The income-tax department will also intensify scrutiny and conduct special audit in cases where
a corporate entity in a sector, which is on an automatic FDI approval route, has received funds
from Mauritius.
“Mauritius is the biggest problem for India,” said SK Jha, advocate and former chief
commissioner, income-tax. “It is to be seen that the money that is coming is not generated in
Mauritius. It is important for the government to ascertain as to what is the source of these funds,
if these are Indian funds coming back or other funds,” said Jha, who along with Azadi Bachao
Andolan had filed a public interest litigation challenging the India-Mauritius Double Taxation
Avoidance Agreement.
Mauritius is a favourite with those looking to invest in India as the tax treaty between the two
countries provides that capital gains arising in India from the sale of securities can be taxed only
in Mauritius.
Since Mauritius does not tax capital gains, this means zero taxation on such gains.
“It would be important to go for establishing audit trail to check evasion,” said Sudhir Kapadia,
tax market leader at consultancy Ernst & Young. Checks in Place, Says Mauritius
Mauritius has said it has put in necessary checks to ensure that black money does not flow back
into India via the island nation. The country has tightened residency certificate norms by making
it mandatory for companies to hold board meetings and route banking transactions though an
account in Mauritius. But New Delhi or the international community do not consider these
measures enough.
In a report released on January 28, the Organisation for Economic Co-operation and
Development (OECD) said Mauritius has missing elements in the legal framework such as
accounting information on some of the offshore companies. “The assessment of the practice in
Mauritius shows that there is room for improvement, in particular as regards the access to bank
information by the tax authorities,” the report said.
Indian tax authorities have been particularly keen to amend the treaty with Mauritius after the
high-profile Vodafone-Hutch deal in which the transaction was carried out through subsidiaries
domiciled in Mauritius and Cayman Islands. The case involves a tax demand of about $1.7
billion. But the political leadership has been reluctant to tighten measures in the treaty with
Mauritius because of diplomatic considerations and the legacy of India-Mauritius ties. It is
hoping that greater international pressure will help it track source of funds better. India is a
member of the OECD’s Steering Group of the Global Forum on Transparency and Exchange of
Information for Tax Purposes and vice-chair of the peer review group that carried out this
assessment.
“This will ensure that there is enough global pressure on tax jurisdictions to act and provide
information needed by countries on tax evasion,” the finance ministry official quoted earlier said.
Black money has taken the centre stage politically with the main opposition BJP launching a
scathing attack on the UPA government for allegedly shielding those having bank accounts in tax
havens and Switzerland. The attack has intensified since the Supreme Court adopted a tough
posture in response to a PIL filed by lawyer Ram Jethmalani criticising the government for its
reluctance to reveal the names of Indians who held European bank accounts between 2002 and
2006 terming it “plunder of the nation”.
Haven On Earth
By one estimate, between 1948 and 2008, $462 billion of unaccounted wealth has
been sneaked out of India and into tax havens. As political and institutional
pressure mounts on the government to bring it back, John Samuel Raja D maps
out the money-laundering trail

What is black money?

Income on which tax is evaded is black money. For example, when a seller of property receives
part of the sale proceeds in cash, and doesn’t show it in its tax accounts. Or, when a company
shows fictitious expenses to pay less taxes. All this is illegal, unaccounted wealth.
How is it created?
There are ways and ways. Two are mentioned above. Here are two common tax and accounting
tricks employed by businesses -- the most prolific creators of black money.
UNDER-INVOICING OF SALES:
Company X sells Rs 100 worth of goods to Dealer Y. Company X invoices Rs 80 to the dealer,
the remaining Rs 20 it takes in cash and siphons it off. Dealer Y sells goods to a customer for Rs
120 in cash; shows Rs 100 in his books, but conceals Rs 20.
FICTITIOUS VENDORS:
Promoter of Company X floats Vendor Y. Except Vendor Y exists only on paper. Company X
shows it is paying the vendor for goods supplied. Money goes to promoter via vendor.
How much of it is there and where is it?
Given the secrecy behind such transactions, it is next to impossible to estimate the quantum of
black money with any degree of accuracy. By one estimate, half of India’s economy was the
shade of black. In 2008, that would be $640 billion. Also, Dev Kar, lead economist with Global
Financial Integrity, a programme of a think-tank, estimates that about $462 billion of black
money has moved out of India between 1948 and 2008, much of which has gone into tax havens.
What are tax havens?
These are territories that provide ‘an easy and safe’ environment for money. Easy because they
have very liberal tax rates, which incentivises the world’s biggest corporations and richest
individuals to host their wealth and direct their investments from there. Safe because such
territories neither ask depositors questions on where their money came from nor do they easily
share account information with other countries, which is a big draw for black money. In 2000,
the Organisation for Economic Co-operation and Development (OECD), a 34 member group
consisting mainly of developed nations, classified 37 territories as tax havens. This was based on
its four-point definition of a tax haven: a No or nominal taxes b No effective exchange of
information with other countries c Lack of transparency d No substantial economic
    activities OECD has since pared down the list of 37 to nil -- there are no tax havens now! That
reading of OECD draws from a technical definition rather than an operational one. In 2002, to
combat illicit capital flows to tax havens, OECD released a tax standard, endorsed by the United
Nations and G20, on exchange of information. Its crux was that, under certain conditions, if a
government seeks specific information from these territories on a depositor, they should provide
it. All 37 locations have agreed to share information and are on a signing spree with countries.
India has signed 10 such agreements. However, the information sharing is not a blanket one. So,
India cannot ask, say, Mauritius for all information on accounts held by Indian depositors. What
it can ask for is information on a particular individual, that too after establishing to the
authorities in Mauritius that it has good reason to ask -- for example, a tax evasion probe against
the person. The limited scope of information sharing means the locations remain a tax shelter,
both for accounted and unaccounted wealth. How does black money go from India to tax
havens?
Again, there are ways and ways. Here are two -- one internal and another external. First, the
internal route. Say, a promoter has siphoned off Rs 10 crore from his company. He sets up
several shell companies and opens many bank accounts in their names. He starts depositing cash
in these accounts; the size of the deposits is small enough to escape regulatory attention. These
are then wired to accounts in the tax havens. Then, the external route, which is also called the
hawala route. A parallel foreign exchange market works to enable such conversions. The
promoter gives Rs 10 crore to a hawala operator in India. Through his links with operators in
other countries and a series of transactions, foreign currency gets deposited into the promoter’s
bank account in a tax haven. The hawala operator charges 2-3% of the transaction amount as his
fee; more if the transaction is complex. How does it come back To India?
The money lodged in tax havens is invested in India, either in stocks, real estate, business or
other assets. The circle is complete. Black has become white, without paying a penny in tax
(otherwise, they would have paid the peak rate of 30% for individuals and 35% for companies).
Even on subsequent earnings, this money won’t pay any tax. That’s because most of these tax
havens have a double tax avoidance agreement (DTAA) with India – their income can be taxed
only in one country. So, this money doesn’t pay tax on its earnings in India. It is accounted for in
its resident tax haven, where the tax rate is, typically, zero. So, in the worst case, that sum of
money evades the 30-35% tax in India on its creation (black) and avoids the 10-35% tax in India
on investment (white). Now that they money is white, it can be freely repatriated. Sub-accounts
of participatory notes (PNs), created by foreign institutional investors (FIIs), are said to be
rampant carriers of black money. In a paper, titled, ‘tax havens can destabilise our financial
markets’, R Vaidyanathan, professor of finance, Indian Institute of Management, Bangalore,
wrote: “The sub-accounts created by FIIs for nameless entities are fraught with dangerous
consequences and security risk. The sources of these funds are unknown; the investors are
nameless; and billions of dollars invested through PNs are address-less.” Last year, FIIs invested
$35 billion in India. What is the government doing?
It’s doing things here and there, but the results are hardly a reflection of the magnitude of the
black money menace. India amended the Prevention of Money Laundering Act (PMLA) in 2009,
which criminalises money laundering, and allows enforcement authorities to seize funds obtained
from illegal activities. So far, the government says, it has recovered Rs 15,000 crore from India.
Outside India is a different story. The government was handed details of 20-odd accounts held by
Indians in Liechtenstein, in Europe. This happened when Germany bribed an official in LGT
Bank in Liechtenstein to reveal details of account holders. India lobbied with Germany to access
details of the Indians in that list. The matter is stuck there. After OECD put an
informationsharing standard in place, countries have signed about 500 tax agreements. India has
prioritised the signing of tax information exchange agreements with 22 tax havens; 10
agreements have been signed and four more are under negotiation. According to an OECD
presentation in December, subsequent to signing information exchange agreements, Italy has
collected 5 billion euros and Germany 4 billion euros. These are just two instances. The onus is
on governments, including India’s, to make a case and demand information from the tax havens.
India To Ask ‘Havens’ to Recover Tax Dues
Centre will keep tabs on those frequenting such jurisdictions

DEEPSHIKHA SIKARWAR NEW DELHI

The government will ask tax havens to recover taxes from Indian nationals who have stashed
undeclared income there as it intensifies efforts to tackle the menace of black money. It is also
keeping tabs on those frequenting such tax jurisdictions.
“We can ask these countries to recover taxes,” a finance ministry official said.
The tax information exchange agreements and revised double taxation avoidance agreements
(DTAAs) entered into with some of these jurisdictions have a provision for providing assistance
in recovery and the income-tax department plans to use this provision.
The Central Board of Direct Taxes has opened overseas income-tax units in some of these
jurisdictions to facilitate information exchange and coordinate recovery of taxes.
Two such income-tax units have been set up within Indian missions in Singapore and Mauritius
and one each is proposed to be set up in the US, the UK, the Netherlands, Japan, Cyprus,
Germany, France and the UAE. Further, income tax officials are also being posted in some of the
tax havens.
India recently signed tax information exchange agreements with Bahamas, Bermuda, British
Virgin Islands and Isle of Man for access to information on bank accounts of Indian nationals
there.
Based on the information received, the department will step up the recovery process here. Those
found to have evaded taxes will have to pay 100% interest on the tax and penalty up to 300%.
Back home, the department is keeping a close watch on visits by Indian nationals to tax havens
and those suspected to have bank accounts there.
Investigation directorates have collected data from agents and officials of foreign banks offering
services and soliciting opening of foreign banks accounts. It is also receiving data from the
financial intelligence unit in India that has begun to receive data from other FIUs.
As part of the drive against black money, the income-tax department had recently issued show-
cause notices to some of the foreign account holders besides the list given by Lichenstein.
Black money has taken political centre stage with the BJP launching a scathing attack on the
UPA and the Supreme Court calling the menace a "plunder of the nation".
Different estimates like the one by a BJP task force pegged the amount of black money between
$500 billion and $1.4 trillion while another international estimate placed such flows at $462
billion.