A documentary on the working of tax havens in the context of the double taxation avoidance treaty between India and Mauritius reveals that while India may have received foreign investments due to the treaty, tax losses on its account run to the tune of tens of thousands of crores. Is it worth it?
Well known independent journalist and educator, Paranjoy Guha Thakurta’s latest documentary, “A Thin Dividing Line” brings out how tax havens or low tax jurisdictions blur the dividing line between legal forms of tax avoidance, euphemistically called tax planning, and illegal forms of tax evasion or money laundering. The documentary was screened as Moneylife Foundation’s 200th event to an informed audience on 28th February, followed by a discussion with Mr Thakurta. The hour-long documentary includes views from high ranking Indian tax officials, academicians, politicians and an array of top Mauritian officials including its former prime minister on the infamous treaty signed in 1982.
Ever since Indian economic liberalisation in 1991, over 40% of investments via foreign institutional investment (FII) and foreign direct investment (FDI) have been routed through Mauritius. But why is Mauritius more popular than other tax havens? The film suggests it is the proximity to India and the fact that over 60% of Mauritius residents are from Indian origin. The corporates in Mauritius pay effective tax of 2%. In India, laws and rules have been created and defended ostensibly because these have helped attract foreign investments. However, India has not necessarily benefitted from all these foreign investments to the extent envisaged or anticipated. Greater transparency in financial transactions, stricter regulation and more effective implementation of existing laws are needed. Even if certain financial transactions adhere to the letter of the law, not all of these are desirable or beneficial for humankind.
With the treaty, India has given up its right to levy capital gains tax under article 13. Mauritius does not charge capital gains tax allowing foreign investors to take advantage of the treaty to avoid paying taxes. Mr Thakurta said, “An estimate done by a study puts a figure of many tens of thousands crores in loss for Indian exchequer.”
Mauritius authorities interviewed in the documentary talk about due diligence, compliances and safe guards to ensure clean business, the need for resident directors and other checks. However, it is an open secret that Mauritius is packed with ‘nameplate’ companies with top accountants and lawyers in India helping to set them up from India itself. The process of hiding the trail of beneficial ownership through layers of shell companies that sometimes transmit money through multiple tax havens is also well known to the government and Indian authorities.
Mr Thakurta’s film discusses “round-tripping” to make it legal. He says, “It’s not like laws in India cannot be enforced, but there are loopholes that are not plugged. Those responsible are incapable or deliberately not doing it.”
In the discussion that followed, a well know capital market commentator pointed how the stock price of tiny companies listed on the Indian market are routinely rigged up a few hundred times and then sold to a faceless FII usually based in Mauritius, thus allowing easy laundering of funds. Moneylife editor Debashis Basu pointed out how every issue of the magazine published examples of stocks that are so-ramped up by as much as 2,000% sometimes (under a section titled Unquoted). But four years after the magazine began to publish these brazen examples of manipulation, the regulator who has spent crores of rupees on market surveillance software has failed to act.
Moneylife sample of 1,197 companies recorded a profit decline of 15% for the December quarter even though revenues increased by 7%. Operating profits were flat. Mid-and small-cap companies are the worst hit
It is well-known that high interest rates, rising inflation and declining consumer sentiment stunted India Inc’s growth in the December 2013 quarter. But now that we have most of the results in, the extent of the fall looks quite severe. An analysis of the third quarter results of Moneylife’s sample of 1,150 companies (out of a total of 1,197 companies) shows that net profits have declined by 15% year-on-year (y-o-y) to Rs83,110 crore in December 2013 from Rs97,527 crore in December 2012. As many as 302 out of the 1,150 companies (26%) have reported a net loss in the December 2014 quarter. And just 40% of the companies have reported a rise in net profits. Operating profits of the 1,150 companies increased marginally by 0.46% y-o-y to Rs1.69 lakh crore from Rs1.68 lakh crore.
In terms of margins, the net profit margin of the companies declined to 6.3% in December 2013 from 7.9% in December 2012, while the operating profit margin declined to 12.8% from 13.6% over the same period.
Revenues of the 1,150 companies increased by 7% y-o-y, to Rs13.27 lakh crore from Rs12.40 lakh crore. Of these, as many as 402 companies (35%) reported a decline in sales and nearly 44% of the companies reported a y-o-y sales growth of 10% and over.
On working out the numbers based on market capitalisation we find that as many as 866 mid-, small-and micro-cap companies have suffered the most. For the 284 mega-and large-cap companies, sales grew y-o-y by 9.72% and 6.59% respectively. However, for mid-, small-and micro-cap companies sales grew y-o-y by 0.05%, 2.07% and -6.47%. Likewise, the earnings of mega-and large-cap companies declined by 9% each y-o-y respectively, while the NP growth of the mid and smaller companies declined much more, by over 300%.
The net profit margin of the 104 mega-cap companies declined from 12% in December 2013 to 10% in December 2012, while the operating profit margin declined marginally to 16% from 17% in the same period. For the 180 large-cap companies, net profit margin declined to 4% from 5% and operating profit margin declined from 11% to 10%. For the remaining 866 smaller companies, the net profit margin declined from 0.63% to -1.45% while the operating profit margin declined from 8% to 7%.
As the permitted list shows, a large number of areas like consumer education, RTI or investor literacy, which could benefit middle class people are kept outside the purview of CSR
The Ministry for Corporate Affairs (MCA) has notified rules for corporate social responsibility (CSR) spending on Thursday that has in its ambit a narrow range of activities including livelihood enhancement projects and steps for the benefit of armed forces veterans. As per the notifications issued for Section 135 and Schedule VII of the Companies Act, 2013, CSR spending by companies would be applicable from 1st April. Interestingly, all Central public sector enterprises (CPSEs) were mandated to perform CSR activities out of their net profit since 9 April 2010. Here are the main rules for CSR notified by the government.
Where can CSR money go?
It appears that the government intends to ensure that the CSR spending only goes to specific areas as defined in Schedule VII of the Companies Act, 2013:
(a) Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water
(b) Promoting gender equality, empowering women, setting up homes and hostels for women and orphans, setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups
(c) Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro-forestry, conservation of natural resources and maintaining quality of soil, air and water
(d) Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects
(e) Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art, setting up public libraries, promotion and development of traditional arts and handicrafts
(f) Measures for the benefit of armed forces veterans, war widows and their dependents
(g) Training to promote rural sports, nationally recognised sports, Paralympic sports and Olympic sports
(h) Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government
(i) Rural development projects
(j) Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central government for socio-economic development and relief and welfare of the scheduled casts, the scheduled tribes, other backward classes, minorities and women
As this list shows, a large number of areas which could benefit middle class people either as consumers or investors are outside the purview of CSR. For instance, a consumer education programme or one that explains citizens how to use the Right to Information (RTI) Act would not be considered part of CSR spending.
For which companies is CSR mandatory?
As per the rules announced, “Every company having net worth of Rs500 crore or more, or turnover of Rs1,000 crore or more or a net profit of Rs5 crore or more during any financial year shall constitute a CSR Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.” The CSR Committee will also have to formulate policy and monitor the implementation and report back to the board of directors.
How much should be spent?
The rules stipulate that “The Board ….shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy,”.
The Act also stipulates that companies will have to give priority to local areas where they operate from, which makes it imperative for them to focus on local needs. The Act, thus, seeks to ensure an all-round development of the geographies around a corporate entity.
Collaborations and exclusions for CSR activities
As per the notification, the company may collaborate with other companies for undertaking projects or programs or CSR activities provided that the CSR Committees of these companies would be able to report separately on such projects or programs in accordance with the rules. In addition, the CSR projects or programs undertaken in India will only amount to the CSR expenditure.
CSR project or activities that benefit only employees or their families of the company would not be considered as CSR activities as per Section 135 of the Act.
Under the new rules, companies are allowed to build CSR capacities of their own personnel as well as of their implementing agencies through institutions with established track records of at least three financial years, provided it does not exceed 5% of the CSR expenditure of the company in one financial year.
Political contributions of any amount directly or indirectly to any political party under Section 182 of the Act would not be considered as CSR activity.