Hawala havens
23 Nov 2014 9:48 PM GMT
The Modi government and the media houses are going into a frenzy over the black money issue. While our Prime Minister Narendra Modi has managed to garner enough support from G20 countries to transform India’s ‘political’ fight against black money into a global war, the special investigation team at home has expressed its concerns over the absence of tax treaties between India and many nations which is turning out to be a big impediment in initiating measures to bring back illicit money amassed abroad.
Black money or unaccounted money in a parallel economy travels to foreign countries through Hawala (clandestine) routes, thus escaping the fiscal authorities of the country in which the money is generated depriving the nation and its citizens of the money which could have been used for betterment of society. ‘Black money which occurs via illegitimate measures causes revenue losses to a country. The money which could have been used for development purposes can get invested in various nefarious activities like financing terrorist organisations. There are many sectors where this money is invested like real estate, stock markets etc causing market distortions and destabilisation in economy. If black money is being invested in real estate market, the speculation it results in, can distort the market function of demand and supply creating bubble in the market,’ says Fitch India Ratings Director - Public Finance and Principal Economist Sunil Kumar Sinha.
‘It is very difficult for a country to curb this menace, but a prohibitive tax structure in an economy forces more people to evade taxes. The trick of the trade here is that the structure or rule of law should be such that the cost of evading taxes and manipulating becomes much higher than the cost of paying taxes. This situation is more ideal one, but more you come closer to the situation, the easier it will be,’ he adds. Â
As per Swiss National Bank's latest data, the total money held by Indians in Swiss banks stood at over Rs 14,000 crore as on December 2013, up by nearly 42 per cent from a year ago. As it is well known, the figure stated here is just a tip of an iceberg.
The Special Investigation Team set up by the Supreme Court on black money is frantically moving its probing wings from Swiss Alps to other islands nations which are infamous for being tax havens.
With lot of fuss around the subject, it becomes important to first distinguish between countries which are tax havens and countries which attract black money but necessarily are not tax havens.
PwC India Executive Director (Direct Tax) Sandeep Chaufla says, ‘A tax haven would essentially be
a country where there would be no taxes at all like Cayman Islands, Bermuda, Bahamas and other island nations, whereas countries like Singapore, Switzerland, Netherlands, Mauritius do have a strong and elaborate taxation policy, but these countries attract funds by providing tax exemptions in order to shore up their investment.’
These tax havens share a common thread. These small nations’ economies are dependent
on tourism and banking operations.
We have listed some of the notable tax havens, and other countries which have attracted illicit funds from India.
Bermuda
The Bermudas (no surprises) is also British Overseas Territory in the North Atlantic Ocean, located off the east coast of the United States. Neither the residents, nor non-residents are subject income, withholding or capital gain taxes.  They too share a double tax avoidance agreement (DTAA) with India. Financial Secrecy Index 2013 ranked it as 14th safest tax haven.
St Kitts and Nevis Â
It is a federal two-island country in the West Indies, located in the Leeward Islands. Unlike, Cayman Islands and British Virgin Islands, the federation does have a 10 per cent withholding tax for remitting outside St Kitts and a corporate tax of about 35 per cent. However, most of the qualified companies are not required to pay taxes for up to 15 years. The country also shares DTAA with India.
Cayman Islands
The Cayman Islands is a British overseas territory located in the Caribbean with population of about 58,435 as of 2013 and gross domestic product of $3,393 million. The territory levies absolutely no taxes on capital gains, income tax and transfer tax and there is no effective control over foreign exchange. Thus, it has no taxes other than customs duties and stamp duty. It shares a double tax avoidance treaty with India and also a tax information exchange pact. It is the 4th safest tax haven according to Financial Secrecy Index 2013.
Liechtenstein
Liechtenstein is the German-speaking alpine country and a microstate in Central Europe bordered by Switzerland to the west and south and by Austria to the east and north. There are no restrictions on the import or export of capital. A non-residents pay taxes only on income derived from activities conducted within Liechtenstein borders. Dividends, royalties, rentals and interests are exempt from income tax. Capital gains tax is usually included in income tax or property tax payments and the maximum income tax rate is 18 per cent. It does not share a DTAA with India.
Isle of Man
Isle of man is a self-governing British crown dependency located in the Irish Sea between the islands of Great Britain and Ireland. There is no income tax on resident and non-resident companies, except income received by licensed banks from a deposit taking business and income from land and property in Isle of Man. They are taxed at 10 per cent rate. In the personal taxation category, non-residents are taxed at 20 per cent rate, which excludes banks and building society interest and dividends from Isle of Man resident companies.
Switzerland
Switzerland, considered to be most notorious of all, is situated in Western and Central Europe where it is bordered by Italy to the south, France to the west, Germany to the north, and Austria and Liechtenstein to the east. Like others, no restrictions are levied on the import and export of capital. Non-residents are taxed on Swiss employment income, business profits and profits attributable to Swiss immovable property. Financial Secrecy Index ranks Switzerland as the top safest tax haven in the world in 2013.
British Virgin Islands
Also a British overseas territory, the islands have a population of only 27,800 and gross domesic product of $909 million as of 2012. Like other British territories, British Virgin islands too does not levy taxes on capital gains and other incomes and there is no control over flow of foreign capital. India shares a double tax avoidance treaty as well as tax information exchange pact.
The Bahamas
The Bahamas is an island country consisting of more than 700 islands in the Atlantic Ocean which is north of Cuba and Hispaniola; northwest of the Turks and Caicos Islands and southeast of the US state of Florida. It is one of the wealthiest Caribbean countries with an economy heavily dependent on tourism and offshore banking. The corporate and other income taxes are not levied in this country.
Singapore
Singapore is a sovereign city state and island country in Southeast Asia. Non-residents are taxed on employment income at the higher rate of 15 per cent and resident tax rates. All other income of non-residents sourced in Singapore is taxed at a rate of 20 per cent. It shares DTAA with India. It grabbed 5th position in the Financial Secrecy Index 2013.
Mauritius
Mauritius is an island nation in the Indian Ocean off the southeast coast of the African continent. Mauritius imposes no taxes on capital gains. It has concluded tax treaties with more than 35 countries. It shares DTAA with India which has allegedly long been abused by investors for round-tripping of funds. It ranked 19th in the Financial Secrecy Index 2013.
Jersey
Jersey is situated off the coast of Normandy, France. This small nation does not impose any tax on capital gains, however, corporate tax rate is 10 per cent for financial services company. Income tax is levied at a flat rate of 20 per cent.
The Financial Secrecy Index ranks Jersey as the ninth safest tax haven in the world. India does share double tax avoidance agreement with the country.
Luxembourg
It is a landlocked country in Western Europe, bordered by Belgium to the west and north, Germany to the east, and France to the south. Luxembourg does not restrain any kind of capital inflow and outflow. It has a progressive personal tax rate of upto 39 per cent. It does not share DTAA with India. It is ranked as the second safest tax haven in the world.
Black money or unaccounted money in a parallel economy travels to foreign countries through Hawala (clandestine) routes, thus escaping the fiscal authorities of the country in which the money is generated depriving the nation and its citizens of the money which could have been used for betterment of society. ‘Black money which occurs via illegitimate measures causes revenue losses to a country. The money which could have been used for development purposes can get invested in various nefarious activities like financing terrorist organisations. There are many sectors where this money is invested like real estate, stock markets etc causing market distortions and destabilisation in economy. If black money is being invested in real estate market, the speculation it results in, can distort the market function of demand and supply creating bubble in the market,’ says Fitch India Ratings Director - Public Finance and Principal Economist Sunil Kumar Sinha.
‘It is very difficult for a country to curb this menace, but a prohibitive tax structure in an economy forces more people to evade taxes. The trick of the trade here is that the structure or rule of law should be such that the cost of evading taxes and manipulating becomes much higher than the cost of paying taxes. This situation is more ideal one, but more you come closer to the situation, the easier it will be,’ he adds. Â
As per Swiss National Bank's latest data, the total money held by Indians in Swiss banks stood at over Rs 14,000 crore as on December 2013, up by nearly 42 per cent from a year ago. As it is well known, the figure stated here is just a tip of an iceberg.
The Special Investigation Team set up by the Supreme Court on black money is frantically moving its probing wings from Swiss Alps to other islands nations which are infamous for being tax havens.
With lot of fuss around the subject, it becomes important to first distinguish between countries which are tax havens and countries which attract black money but necessarily are not tax havens.
PwC India Executive Director (Direct Tax) Sandeep Chaufla says, ‘A tax haven would essentially be
a country where there would be no taxes at all like Cayman Islands, Bermuda, Bahamas and other island nations, whereas countries like Singapore, Switzerland, Netherlands, Mauritius do have a strong and elaborate taxation policy, but these countries attract funds by providing tax exemptions in order to shore up their investment.’
These tax havens share a common thread. These small nations’ economies are dependent
on tourism and banking operations.
We have listed some of the notable tax havens, and other countries which have attracted illicit funds from India.
Bermuda
The Bermudas (no surprises) is also British Overseas Territory in the North Atlantic Ocean, located off the east coast of the United States. Neither the residents, nor non-residents are subject income, withholding or capital gain taxes.  They too share a double tax avoidance agreement (DTAA) with India. Financial Secrecy Index 2013 ranked it as 14th safest tax haven.
St Kitts and Nevis Â
It is a federal two-island country in the West Indies, located in the Leeward Islands. Unlike, Cayman Islands and British Virgin Islands, the federation does have a 10 per cent withholding tax for remitting outside St Kitts and a corporate tax of about 35 per cent. However, most of the qualified companies are not required to pay taxes for up to 15 years. The country also shares DTAA with India.
Cayman Islands
The Cayman Islands is a British overseas territory located in the Caribbean with population of about 58,435 as of 2013 and gross domestic product of $3,393 million. The territory levies absolutely no taxes on capital gains, income tax and transfer tax and there is no effective control over foreign exchange. Thus, it has no taxes other than customs duties and stamp duty. It shares a double tax avoidance treaty with India and also a tax information exchange pact. It is the 4th safest tax haven according to Financial Secrecy Index 2013.
Liechtenstein
Liechtenstein is the German-speaking alpine country and a microstate in Central Europe bordered by Switzerland to the west and south and by Austria to the east and north. There are no restrictions on the import or export of capital. A non-residents pay taxes only on income derived from activities conducted within Liechtenstein borders. Dividends, royalties, rentals and interests are exempt from income tax. Capital gains tax is usually included in income tax or property tax payments and the maximum income tax rate is 18 per cent. It does not share a DTAA with India.
Isle of Man
Isle of man is a self-governing British crown dependency located in the Irish Sea between the islands of Great Britain and Ireland. There is no income tax on resident and non-resident companies, except income received by licensed banks from a deposit taking business and income from land and property in Isle of Man. They are taxed at 10 per cent rate. In the personal taxation category, non-residents are taxed at 20 per cent rate, which excludes banks and building society interest and dividends from Isle of Man resident companies.
Switzerland
Switzerland, considered to be most notorious of all, is situated in Western and Central Europe where it is bordered by Italy to the south, France to the west, Germany to the north, and Austria and Liechtenstein to the east. Like others, no restrictions are levied on the import and export of capital. Non-residents are taxed on Swiss employment income, business profits and profits attributable to Swiss immovable property. Financial Secrecy Index ranks Switzerland as the top safest tax haven in the world in 2013.
British Virgin Islands
Also a British overseas territory, the islands have a population of only 27,800 and gross domesic product of $909 million as of 2012. Like other British territories, British Virgin islands too does not levy taxes on capital gains and other incomes and there is no control over flow of foreign capital. India shares a double tax avoidance treaty as well as tax information exchange pact.
The Bahamas
The Bahamas is an island country consisting of more than 700 islands in the Atlantic Ocean which is north of Cuba and Hispaniola; northwest of the Turks and Caicos Islands and southeast of the US state of Florida. It is one of the wealthiest Caribbean countries with an economy heavily dependent on tourism and offshore banking. The corporate and other income taxes are not levied in this country.
Singapore
Singapore is a sovereign city state and island country in Southeast Asia. Non-residents are taxed on employment income at the higher rate of 15 per cent and resident tax rates. All other income of non-residents sourced in Singapore is taxed at a rate of 20 per cent. It shares DTAA with India. It grabbed 5th position in the Financial Secrecy Index 2013.
Mauritius
Mauritius is an island nation in the Indian Ocean off the southeast coast of the African continent. Mauritius imposes no taxes on capital gains. It has concluded tax treaties with more than 35 countries. It shares DTAA with India which has allegedly long been abused by investors for round-tripping of funds. It ranked 19th in the Financial Secrecy Index 2013.
Jersey
Jersey is situated off the coast of Normandy, France. This small nation does not impose any tax on capital gains, however, corporate tax rate is 10 per cent for financial services company. Income tax is levied at a flat rate of 20 per cent.
The Financial Secrecy Index ranks Jersey as the ninth safest tax haven in the world. India does share double tax avoidance agreement with the country.
Luxembourg
It is a landlocked country in Western Europe, bordered by Belgium to the west and north, Germany to the east, and France to the south. Luxembourg does not restrain any kind of capital inflow and outflow. It has a progressive personal tax rate of upto 39 per cent. It does not share DTAA with India. It is ranked as the second safest tax haven in the world.
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