Sunday, March 3, 2013

POLICY LEAD: DTAA

Having lost billions in treaty shopping while honouring the clauses of the DTAA signed with other nations, India is now on a renegotiation spree. But as the government signs new treaties with other tax havens it must ascertain that the clauses are foolproof so that shell companies are prevented from taking undue advantage of the tax provisions. by Gyanendra Kumar Kashyap

Primarily tax havens do not impose capital gains tax on its residents and with India exempting the capital gains under DTAA, the provision for sure has been used and abused by a select few who have formed conduit companies in these tax havens taking advantage of the sweet tax deals on the pretext of avoiding paying tax in India. In fact, the loss to the exchequer on account of lost capital gains tax is humungous. In the last decade alone the loss on this account has been a whopping `281.39 billion while on an average the annual loss to the government coffer amounts to `23 billion. Even the most pessimistic estimates are suggestive of the fact that the extent of the lost revenue could have easily come to the rescue of companies such as Balco, VSNL, IPCL and several others which were sold to private parties at dirt cheap prices. This poses a question as to whether, the clauses in the agreement need to be revisited.

Finance ministers till recent past were vociferous in their support of the controversial agreements citing the oft touted logic that changing the clauses would lead to capital flight, slowing down of foreign investment and thereby stock market crash. In fact, former finance minister P. Chidamabram (May 2006) went to the extent saying that he didn't want to review the subject given the “ larger economic, political and diplomatic considerations.” The fallout concern is totally logical given the fact that out of the $117.9 billion of foreign direct investment that has come to India since April 2000, the estimates of the Department of Industrial Policy & Promotion, DIPP, suggests that $47.8 billion (a whopping 42.53% of the total amount) was routed through Mauritius. However, what is worth noting is the fact that these investors are not necessarily based in Mauritius. It's the billions of dollars that are stashed in tax havens like Mauritius (by Indians themselves) and a large part of this black money is channelled back as FDI or FII apparently through the legitimate path provided by the likes of Indo-Mauritian DTAA. Sudhir Kapadia, Market Leader, Ernst & Young is of the belief that Indian MNCs float holding companies or special purpose vehicles in tax havens for acquiring companies in US and Europe.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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