India amends tax-agreement with Singapore preventing rerouting of illegal money

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According to media reports, Singapore has amended a tax agreement with India which had allowed Indian businesses to exploit a loophole which provided a way for money illegally obtained to be rerouted into India from Singapore via legal means.

India’s Foreign Minister Arun Jaitley announced the amendment to the Double Taxation Avoidance Agreement (DTAA) with Singapore, which will come into force from 1 April 2017.

The unamended tax treaty mandated that investments emanating from companies which have a presence both in India as well as in Singapore will only be taxed once, either in India or in the originating country, to avoid double taxation. This is the loophole that individuals and companies use to avoid paying taxes in India.

Since Singapore does not have capital gains tax, all a company has to do to avoid paying taxes in India is to produce a certificate proving it is domiciled in either of these tax jurisdictions – automatically triggering the DTAA provision that stipulates that if you have paid your taxes there you don’t need to pay in India.

Critics of the unamended agreement between Singapore and India allege that what is being shown as legitimate investment is actually untaxed monies being round-tripped into India. Government figures suggest that the argument has merit.

India’s Finance Minister had earlier pointed his fingers at Singapore for being used by unscrupulous individuals and organisations to avoid paying taxes to the Indian government (http://theindependent.sg/indias-foreign-minister-points-finger-at-singapore-for-being-used-for-tax-avoidance).

Mr Jaitley said the agreement with Singapore was the third such agreement signed this year with countries to close avenues for monies not declared in India for tax purposes to be spirited out of the country and brought back via international channels, through a process called “round-tripping”.

This is how round-tripping works: undeclared money in India is spirited out through trade misinvoicing or informal value transfer channels, into tax havens overseas. From there the money is routed through the international shadow banking system so that tax authorities cannot trace the money trail. The money finally makes its way back into the host country via the tax haven countries, disguised as Foreign Domestic Investment (and hence legitimate money) and invested in financial markets.

Statistics from the Department of Industrial Policy and Promotion show that Singapore and Mauritius are the top two nations for inward bound FDI equity inflows into India. The two countries accounted for 50% of inflows between 2000 and 2016.

Last month, Mr Jaitley unveiled a scheme to give Indian tax dodgers a chance to come clean. Under the scheme, a person making the declaration would have to pay 50 percent in taxes and surcharges. The person would also have to park a quarter of the total sum in a non-interest bearing deposit for four years.

The Indian government believes that this scheme would bring billions of dollars worth of undeclared income into the mainstream economy.

The move followed Indian Prime Minister Narendra Modi’s decision to scrap 500-rupee and 1,000-rupee banknotes in a a demonetisation effort to curb corruption.