Tax Evasion through DTAA

India has comprehensive Double Taxation Avoidance Agreement(DTAA ) with 79 countries. What it means is that there are agreed rate of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country. India gives relief to both kind of taxpayers, those who reside in the country which has DTAA agreement with India and those who dont have the agreement.

A classic example of exploitation of this treaty is the sale of Hutchison to Vodaphone. No tax was paid to India for this transaction.

A large number of Foreign Institutional Investors who trade on the Indian stock markets operate from Mauritius. According to the latest report over 41% of the FDI comes from this country. According to the DTAA between India and Mauritius, Capital Gains arising from the sale of shares is taxable in the country of residence of the shareholder and not in the country of residence of the Company whose shares have been sold. Therefore, a company resident in Mauritius selling shares of an Indian company will not pay tax in India. Since there is no Capital gains tax in Mauritius, the gain will escape tax completely.

India has been trying to renegotiate its treaty with Mauritius for the past few years on account of suspected "round-tripping" of funds that takes place as a result of the DTAA. To this end, the Indian government even offered incentives in terms of a one-time compensation payment. Mauritius, however, is not willing to do so.

Round-tripping refers to taking the tax-evaded money from India and rerouting it back through a tax-friendly location like Mauritius. It's tough to get information on round-tripping.

The other way of evading tax is treaty shopping, under which firms headquartered in other countries like US, route their investments through Mauritius because of the low tax rate in that country.

Related posts:

Swiss Bank Robbery

--