There would be loud protests if one were to state that India is a tax haven. Let us have a look at the ground reality. The effective tax rate on corporate profits since 2005-2006 varied between 19 per cent and 24 per cent against the statutory rate of a little over 33 per cent (see Budget papers of various years). Since 1997, there is no personal income tax on dividend. The tax on long-term capital gains on shares has been abolished since 2004. By all standards, India qualifies to be called a low-tax country.
The domestic situation is topped by the India-Mauritius Double Taxation Avoidance Agreement that provides for capital gains arising in India to be taxed in Mauritius. Conveniently, Mauritius has no tax on capital gains. The icing on the cake is instruction No 789 dated April 13, 2000, issued by the previous government. It prohibits the Income Tax Department from making any enquiry into the flow of funds from Mauritius. In effect, with this instruction the government of India has officially found a partner in Mauritius to encourage the flow of funds into India without any tax consequence. Possibly no sovereign state has ever permitted such an arrangement. That India is a tax haven has not gone unnoticed by foreign investors. The flow of funds through the Mauritius route is about 40 per cent. Not content with one route, the subsequent government has entered into another agreement with Singapore with a slight modification.
Any doubt regarding the Indian position in the context of recent legislation has been thoroughly demolished by the Parthasarathi Shome Committee report. The General Anti-Avoidance Rules (GAAR), touted as part of the Direct Tax Code and tax reforms, has been proposed to be consigned to cold storage on dubious and flimsy grounds. Specific mention for protecting the circular and double taxation avoidance agreement with Mauritius and Singapore has been made. The draft has been widely cheered as being reformist. The only refreshing and sensible voice was your edit “Don’t delay GAAR” (September 4).
The direct tax collection in India hovers at five to 6.6 per cent of the GDP. After 60 years of planned development and more than two decades of economic reforms this is a pitiable figure of tax collection. What is of immediate and serious concern is the fact that tax buoyancy since 2008-2009 is less than one (see the Comptroller and Auditor General’s report on Direct Taxes for 2010-2011). Will our policy makers sit up and take note, and allow real reforms to be operational?
Former Chief Commissioner of Income Tax, Mumbai
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