TAX HAVEN: - VIRTUALITY OR REALITY TO INDIAN ECONOMY
INTRODUCTION:-
“Just as one man’s terrorist is another man’s freedom fighter, a tax haven is one country’s red carpet for investors, and a red rag for taxmen in another.”[1]
As the name reflects itself, ‘Tax haven’ is a place/jurisdiction/territory which act as a room of haven to tax payers or investors. The basic criteria which makes it a tax haven is that, they offer a very low or no rate of tax, and maintains a high amount of secrecy with respect to tax and their assesse. It has both positive as well negative effect to the economy of one country while comparing it to world economy.
· Factors which helps in determining Tax Haven:-
Various factors which helps in taking decision whether a country in question is tax haven or not are as follows:-
1. Zero or low tax Rate: In these type of country there is no or low tax on income.
2. No Exchange of Information: Country is basically not involved in any type of exchange of information.
3. Lack of Transparency: Since they doesn’t provide information easily it lead to lack of transparency in matter to tax and their accounting.
4. Limited Regulatory supervision: Due to free trade with respect to tax they impose very low amount of law to make process easy and worthy[2].
· The OECD has outlined three parameters to consider whether a jurisdiction is tax haven or not.
1. Rate of tax applicable.
2. Withholding personal financial information.
3. Lack of transparency.
Because of the relative nature of the advantages provided, every country may be a tax haven to some degree. “Any country might be a tax haven to a certain extent, as there are many instances where high tax countries provide opportunities or devise policies to attract economic activities of certain types or in certain locations”[3].
Transparency plays a vital role as it is the basic reason which maintains various industry whether to be legal or illegal as per different countries. Transparency ensures that there is an open and consistent application of tax laws among similarly situated taxpayers and that information needed by tax authorities to determine a taxpayer’s correct tax liability is available (e.g., accounting records and underlying documentation), but tax haven doesn’t have such type of transparency,which can increase terrorist activities and can lead to distortion of states.
· Offshore Financial Centre (OFC’s):-
Sometimes, tax haven are misunderstood with offshore financial center (OFC’s). In reality they are closely related but not similar in all situation. OFC’s are more specific in nature which attracts investment by way of good and balanced financial structure while tax haven can be referred to whole country which can lead to tax evasion. OFC’s is normally used for a country or a jurisdiction with financial centers embracing financial institutions that deal primarily with non-residents and/or in foreign currency on a scale out of proportion to the size of the host economy. While this is a brief description of a typical financial center, there is no consensus among scholars and practitioners on what actually constitutes an OFC even though various attempts have been made to define OFCs. In the year 2000, IMF issued a background paper, where an OFC has been defined “as a center where the bulk of financial sector activity is offshore on both sides of the balance sheet, (that is the counterparties of the majority of financial institutions liabilities and assets are non-residents), where the transactions are initiated elsewhere, and where the majority of the institutions involved are controlled by non-residents”[4].
HISTORY:-
The history of tax havens is riddled with myths and legends. It is difficult to determine the precise origins of the tax haven.Tax haven is not limited to countries rather it can be traced even from the implied act of various countries through their tax structure. The basic concept of tax haven can be traced from time immemorial, when Ancient Rome who was professional in using tax free areas. First instance related to this was in the 2nd century BC when Rome decided to have zero tax port on the island of Delos forming part of Greek Island. Rome use tax rate and its structure to reward friends and punish enemies as well by changing he rate.
Tax structure has a direct effect over the economy and trade of the company. Due to which many countries start reducing their tax rates to attract more people and to increase trade. As per the various research done by economists ‘True’ form of tax haven is followed by Switzerland, followed by Liechtenstein. Previously Switzerland industry was known as ‘capital haven’.
Early 1900 to 1930 was regarded as a boom to industrialization which is attracted by various counties by declining their tax rate to attract more and more foreign capital. World War I also plays an active role in evolution of tax haven as during war Europe increases their tax rate to fulfill the needs of war which gives an opportunity to other countries to take a step.
During these decades various states, led by Switzerland, began to develop as tax haven territories as an intentional developmental strategy. Seeing the results and positive side of tax haven, various other counties also evolve as tax haven during 1970s and upwards[5].
With a conclusive report given by OECD in late 1990’s almost 31 jurisdiction make commitments towards the transparency and exchange of information disclosure, which forms the basic essential of tax haven. With evolution of time various countries become the part of tax haven by implied acts as such.
One of the fascinating aspects of the development of the tax haven strategy is that it developed piece by piece and in different locations, often for reasons that had little to do with ultimate use.
TAX HAVEN VIS-À-VIS INDIA:-
Tax haven is not limited to country only. It is a concept which can be seen even in a non-tax haven country with respect to its tax structure. India also support the concept of tax haven in various ways to promote and to safe that area. Various instances from where tax haven can be traced are:-
1. As per section 10(1) of Income tax Act 1961, agricultural income earned by the taxpayer in India is exempt from tax. Agricultural income[6]. To promote and to safeguard the interest of families having income from agriculture government exempt them from direct taxation. This type of act gives a positive impact to poor families but gives an advantage to rich families who are earning a huge amount from agriculture only.
2. If we have a straight talk any exemption specified under section 10 acts somewhat like tax haven only as they separate those tax payers or that area from the ambit of direct tax.
3. With some government acts also we can trace tax haven as, When Narendra Modi offers Tata a tax credit for putting up the Nano factory in Gujarat, in such a way he is offering a sales tax haven for the project for some years.
If we see tax haven in this perspective, than they can be treated as an instrument through which states which would never have less or no capital are using the bait of tax advantage to develop themselves by attracting more and more investors.
Through all these concerns another question came into picture that why India can’t be a tax haven territory. The best answer to that question can be pictured out from the various reports as to India’s population holding approximately 132.42 crore, and considering it to be a developing country requires a huge amount of economic structure and better governing. Tax is a major source of revenue for Indian government, approx. Rs. 1239954 crore in year 2014-2015[7] comes from direct and indirect tax combined together. Comparing it with population only 53665293 people are paying tax as per data of 2014-15[8], which is a very low number for such a vast population.
Let’s evaluate this data with a situation, approx. 53665293 people pays tax which generate approx. INR 1239954 crore tax what if, ¼ th of total Indian population starts giving tax then total revenue generation from tax will be increased by 6 times as INR 1239954*6=74lac crore approx. You can imagine the situation and development which India will gain leaving again the all political aspect. Moreover such a high revenue will finally result into lower the tax rate for a balance of revenue. Other reason due to which we can’t be tax haven state is our constitution which provides equality before law with equals as per article 14 and anything which violates it will be void. Tax haven creates opportunity in a positive way but not for poor person, but for rich person as they want to have large income in their hand and in India we basically follow the principal as if you are earning more you should help more in form of tax. This is the basic way followed by our tax structure which has different slab for different income and surcharge as income is increased.
We don’t need tax haven, they are a red carpet to increase the opportunity or to increase trade but we should not follow it as a rule of law. It can’t be prohibited on basis of domestic law rather it requires the indulgent of bigger players in market tighter with various international treaties and organizations. IMF and World Bank can play a vital role in this respect.
Various domestic legislature effecting tax haven are:-
· Money laundering act:-
Money laundering can be broken down into three stages i.e. Placement as an initial entry of illicit money into the financial system followed by layering, dealing with the process of separating the funds from their source, often using anonymous shell companies and at last Integration through which is returned to the economy from legitimate-looking source. Economies with growing or developing financial centers, but inadequate controls are particularly vulnerable to money laundering, as against the established financial center countries, which implement comprehensive anti-money laundering regimes. To curb all these illegal activities in legal sense government ended money laundering act 2002. The act provides for establishing various adjudicating authority and penalties remedies for various act as prescribed in the act.
· DTAA(Double Tax Avoidance Agreement):-
The problem of double taxation arises if the income of a person is taxed in one country on the basis of residence and on the basis of residency in another country or on the basis of both. This can be major issue for business having wide market or person having office in various jurisdiction. DTAA (Double Tax Avoidance Agreement) helps in removing this ambiguity with as referred ion section 90-92 of income tax act. DTAA is a kind of bilateral treaty or agreement, between Government of India and any other foreign country or specified territory outside India. Such treaty or agreement is permissible in terms of Article 253 of the Constitution of India.
· Even if some of specified law are unable to tackle the problem our remedies under constitution can came into picture to provide a better and fair justification to all.
India protects its legislation from any type of direct and indirect tax haven for better administration.
Various countries under the ambit of tax haven are, Anguilla, Aruba, Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Curacao, Cyprus Delaware (US), Dominica, Gibraltar,Guernsey, Guyana, Hong Kong, Ireland, Isle of Man, Jersey, Liberia, Lichtenstein, Luxembourg, Macao Malta, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, Netherlands, Nevada (US), Samoa, San Marina, Seychelles Singapore, St. Kitts and Nevis St. Vincent & Grenadines, Switzerland, Taiwan, Turks and Caicos Islands, US Virgin Islands, Wyoming (US)[9].
Question may arise that if these tax haven are not so good then why they exist the best answer can be that, it is the country sovereignty in which no one can’t interfere in normal scenario. It is their tax or revenue structure by way of which they want to run the country. If you want information you can ask, as India usually do with Swiss bank regarding money info of Indians. In practical tax haven use to provide information of their tax structure due to various tax haven exchange information agreement and various other norms, but it stands fail due to some political issue or long procedures.
TAX HAVEN AND INDIAN ECONOMY:-
India is not a tax haven territory in its strict sense as concluded from above mentioned discussion. But still other tax haven territory has a direct impact over Indian economy. Some major players whether it to be political or commercial plays a vital role in effecting the overall GDP and other measuring factor of a country. It is a human tendency to pay less tax,saying that we are earning it for ourselves not for others. This tendency requires them to pay less tax due to which these tax haven territory attracts such type of people creating a type of inequality among world economy. This can lead to decline in trade in one country and increase in other.
Double Tax Avoidance Agreement effects the economy of other country if such agreement is with a tax haven country. The Indo-Mauritius DTAA was first signed in 1983. The main provision was that no resident of Mauritius would be taxed in India on capital gains arising out of transaction of securities in India. The treaty gives capital gains exemption for investments if routed via Mauritius.[10]Mauritius has since abolished capital gains tax so that effectively there are no taxes on Mauritius based foreign institutional investors (FIIs) investing in India. India allows the Mauritius-based firms to pay taxes on their India income as per Mauritius laws. Thus, the Mauritius entities end up paying nearly zero tax on income from Indian operations. Which causes a great damage to Indian economy.
Currently India has DTAA with these tax haven countries are[11]:-
· Mauritius Dated 06.12.1983 Amended In 10.08.2016
· Cyprus Dated 18.11.2016 Amended By 10.01.2017
· Ireland Dated 20-2-2002
· Malta Dated 22.11.1995
· Netherland Dated 30.08.1999
· Singapore Dated 08.08.1994 Amended By 23.03.2017
Currently India has Tax Information Exchange Information (TIEA) with these tax haven countries are:-
· Bahamas dated 13.05.2011
· Bermuda dated 02.01.2011
· Belize dated 07.01.2014
· Liberia dated 17.08.2012
Every tax haven is linked to world and are regulated with world policy in one or other way but due to their sovereignty we can’t interfere in their internal matter. In same way Section 90 of income tax provides us with DTAA agreement to avoid double taxation on same income. Like in the case of Mauritius, with respect to its agreement India use to follow Mauritius law and doesn’t levy tax on income already taxed and later on Mauritius adopted no tax on capital gain which creates an exemption for FII in India also.
This impact by tax haven are not limited to Mauritius only even Swiss bank a place in Singapore is also used to park Indian money. AS per SNB data Money parked by Indians in Swiss banks rose over 50% to Swiss Francs (CHF) 1.01 billion (₹7,000 crore) in 2017, reversing a three-year downward trend amid India’s clampdown on suspected black money stashed there[12]. This amount so parked or trashed in outer jurisdiction directly impact Indian economy being a developing country.
Sr.No.
Features
State
1
The income and capital gains are not taxed. They are known as zero havens or pure havens‘.
The islands of Bermuda, Bahamas, Bahrain, Nauru, Cayman, Turks, Caicos, Saint Vincent, The Republic of Vanuatu and Monaco;
2
The tax rates have a low value as they are
approved by the state or as a result of the
application of the quota reductions, due to the
implementation of tax agreements between
different states concerning double taxation;
The British Virgin Islands, Liechtenstein, Switzerland, Netherlands Antilles, Man Islands, Guernsey and Jersey Islands, The Republic of Ireland;
3
The taxation of income or benefits is determined
Locally base. The taxpayers from these states are
exempt from taxation of profits made by trading
across borders;
Liberia, Costa Rica, The
Philippines, Venezuela,
Malaysia, Panama;
4
Countries with preferential treatment for
offshore and holding companies;
Hungary, Austria, Netherlands, Luxemburg, Thailand, Singapore;
5
Offers tax exemptions for industries that have
been made for the development of exports;
Ireland for the companies
created before 1 January 1981,
Madeira;
6
Provides financial benefits for international
business companies, that are focused on investment or not, but instead are classified as
offshore finance companies with certain
privileges;
The Islands of Bahamas,
Antigua, Bermuda, The British Virgin Islands, Montserrat and
Nevis Islands in the
Caribbean;
7
Provides specific tax advantages to other
banking companies or other financial
institutions with offshore activities;
Antigua, Island-British
territory in the Caribbean,
Anguilla, Grenada, Barbados
Islands and Jamaica;
A tabular analysis of state wise features of different tax haven[13]:-
CONCLUSION:
This articled has reviewed tax haven in various perspective somewhat related to India. In supposition of above mentioned points, tax haven plays an important as well as a dangerous role in Indian Economy. Disproportionate use of anything blindly can cause problem not only to individual but to public as well. The general solution is to increase the transparency of the official reports of taxhavens (from their governments and financial entities) to collaborate against fiscalcrimes and money laundering around the world. As it is commonly understood, ifyou and your State know where your neighbor hides his money, your fiscal authoritiescan reduce his benefits when he does not contribute to common expenses in way of taxes.Tax havens may not receive as much money from taxpayers as expected, if the transparencyof official reports increases, but there will be an overall improvement whenlocal taxes decrease. Financial balance and stability will improve. To curb and to ban/close these tax haven can’t help in right way as it involves circulation of money in different ways, if you prohibit one type of money other type of illegal/legal money in various forms like digital money can be regulated. The proper way is to accept them but with worldwide monitoring body to regulate and amend laws (if necessary) with changing environment.
Tax havens are not only directly related to taxes, but also to financing. It involves financial structure of various countries, it affects world at large. Nothing is bad in its strict sense but excessive of anything can harm the society. Taxes related to trade are basic revenue for countries and they always want to attract more of it for better administration.
The phrase ‘tax haven’ often conjures up images of a balmy palm tree-studded island nation with an ‘anything goes’ attitude to accepting financial deposits and a distinct distaste for foreign authorities—“sunny places for shady people,” as author Nicholas Shaxson calls them.
There are various tax haven which still have low amount of companies for trade and they adopt such type of tax structure for attracting more of such trade. It is good for them but bad for some people with different mind.
It can be drawn from all of the above and conclude that tax havens have a marked detriment to the level of social welfare and the economy of all countries, particularly those in the process of development and, therefore, countries that have more influence should make an effort to make it possible to remedy this situation. As long as the existing fiscal and financial conditions does not change, the chances of tax havens waning are very slim.
Recommendations:-
OECD in May 1998 issued a report on Harmful Tax Competition and has made nineteen specific recommendations[14]. Some of these are:
1. Adopt Controlled Foreign Corporation (CFC) or equivalent rules.
2. Consider Foreign Information Reporting rules.
3. Enter into Tax Information Exchange Agreement (TIEA).
4. Apply the provisions of withholding tax when payments are made to offshore recipients.
5. Curbing treaty shopping term nation of existing treaties with tax havens like Mauritius.
6. Mutual assistance of tax authorities in the recovery of cross border tax claims etc.
7. More international co-operation by establishing forums to avoid harmful tax practice etc.
Recommendation in Indian perspective:-
1. Creating more awareness through education system.
2. Making tax structure more efficient for easy access and less evasion.
3. Better regulatory system to monitor tax and its implication.
4. Amend FEMA and FDI guidelines not to prohibit international transaction but to regulate to attract more FDI for betterment of Indian market.
5. Must review its DTAA and analyze their impact in various situations.
6. Should take a step towards nationalization and harmonization of various taxes on international basis.
[1]R Jagannathan, Why tax havens exist; and how India has its own tax havens, Firstpost (July01 2018 05:24), https://www.firstpost.com/business/why-tax-havens-exist-and-how-india-has-its-own-tax-havens-685571.html
[2]Institute of Company Secretary of India, Tax laws and practice, 633-34 (study material, 2017)
[3] Roy Rohatgi, Basic International Taxation, Kluwer Law International; 1st Edition (December 21, 2001).
[4] Monetary and Exchange Affairs Department, International Monetary Fund ‘Offshore Financial Centers – IMF Background paper’ (June 23, 2000).
[5]Ronen Palan, History of Tax haven, History & Policy (July 06, 2018 07:28) http://www.historyandpolicy.org/policy-papers/papers/history-of-tax-havens visited on 05.07.2018
[6] Income-tax (Amendment) Act, 1961, Acts of Parliament, 1961 (India).
[7]Ministry Of Statistic and Programme Implementation, Direct And Indirect Taxes - Statistical Year Book India 2017, (July 05 2018 10:23) http://www.mospi.gov.in/statistical-year-book-india/2017/175, table 6.3
[8] Id table 6.6
[9]Ethical Consumer's list of tax havens, Ethical Concumers (July 10, 2018 12:45) http://www.ethicalconsumer.org/ethicalcampaigns/taxjusticecampaign/taxhavenlist.aspx
[10]DhammikaDharmapala, What Problems and Opportunities are created by Tax Havens, Oxford Review of Economic Policy Vol. 24 No. 4, winter 2008.
[11]List Of agreement, Income Tax Department (July 21, 2018 03:44) https://www.incometaxindia.gov.in/pages/international-taxation/dtaa.aspx.
[12]Money parked by Indians in Swiss banks rose over 50% to ₹7000 crore in 2017, (July 29th, 2018 07:45), https://www.thehindu.com/business/Economy/indian-money-in-swiss-banks-rise-50-to-over-7000crore/article24280381.ece
[13]SorinaBotiş,Features And Advantages OfUsing Tax Havens, TransilvaniaUniversity Of Braşov Vol. 7 (56) No. 2 – 2014.
[14]Recommendation of the Council on Counteracting Harmful Tax Competition, OECD, (July 25th, 2018 11:21) https://legalinstruments.oecd.org/public/doc/92/92.en.pdf.
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