For many years, incidence of Indians routing their illicit money back into the country though tax haven Mauritius has been a concern for the tax authorities. Now, such round-tripping of money through Singapore and Dubai is on their radar.
According to official sources, the international wing of the income tax department has found many cases where Indian firms are using the Singapore and Dubai routes to bring back the non-tax-paid funds originally generated in India and is planning a crackdown.
A finance ministry official said that tax benefits provided by these countries are being misused by investors for re-routing funds. ?We have found many instances of round tripping through Singapore and Dubai and we will have to deal with the people involved on a case by case basis,? the official said.
The double taxation avoidance agreement (DTAA) between India and Singapore are misused by investors to claim capital gains tax waiver for their India investments. Recently, both the countries have signed a protocol to amend their DTAA, a move that will help them to exchange banking and tax-related information more effectively. Besides, Dubai offers an attractive tax regime, which encourage the companies to invest there and bring back the the funds into India.
The official further said that the Dubai route is being used for re-export of investments into India and the UAE has become one of the largest re-export partners. ?India is already tracking the frequent flyers to Dubai to get more details about persons visiting Dubai so that many more cases could be unveiled,? the official added.
The government in under pressure on the issue of black money of Indians stashed abroad. This has led the tax department to be more vigilant and prevent any misuse of tax treaties, which lead to generation of such illicit funds.
Tax experts say India need to be cautious in drawing inference about round-tripping as there is no definition of it in the tax treaties. At the same time, flight of capital from India to tax havens and routing back into the country should be stopped.
?The companies get benefit of tax breaks when the investment is routed from Singapore. But distinction should be made between genuine companies and those which are misusing the tax treaty. In Dubai, individuals don?t have to pay taxes while the taxes levied on companies are very low,? Deloitte tax partner KR Sekar said. However, he warned that distinction should be cautiously drawn about round-tripping as it could hurt investors? sentiment.
According to Ernst & Young Tax Partner Sudhir Kapadia, efforts should be made by the government to prevent flight of capital from India, which later might come in the form of black money.
The income tax department is already keeping a close eye on foreign investors from third countries who are misusing the tax pact between India and Mauritius. It has identified scores of entities which don?t have a substantive presence in Mauritius but are using the treaty to claim capital gains tax waiver for their India investments. These entities would be asked to pay tax according to the Indian law. Besides, both the countries have started discussion to renegotiate the tax treaty.
Recently, the tax department has forced an Indian company to pay capital gains tax, which was trying to avoid paying such levies, citing DTAA with Mauritius.
