Manmohan Singh want tax havens banned, can he do it?

This could be a major step if the Indian government is serious about taking on the issue of corruption and recovering stolen assets parked abroad

As on date, we as people living in a law-abiding country otherwise considered to be a world class example in democratic rule with transparency as one of the pillars. We are not aware about who really owns amongst our biggest private airlines, shipping lines, airports, seaports, real estate companies, telecom operators, media houses, payment processors, processed food companies and other such beneficiaries. This is in the era of market forces and liberalisation, which are thrust on us in the last couple of decades. Start digging, and beyond the front-facing directors and CEOs, you come up against a wall of secrecy—which starts and then goes no further. All secrets hidden and well and truly locked away in what are known as “tax havens”, where lie billions of dollars and euros worth of assets. The assets are sometimes stolen or illegal, and are waiting to be re-invested in India as the famous ‘FDI’ or “Foreign Direct Investment”.

Broadly speaking, this situation came about and then exploded in the last 10-15 years, because the rich—sudden wealth—class first stole blatantly to the best of their abilities. Nothing was sacred, narcotics, counterfeit currency, illegal mining, fodder, the works especially, public works. They were able to ‘persuade’ the law-makers who also increasingly are part of the same sudden wealth class, to make tax laws accordingly. This worked well for a while, since a trickle down effect took the aspiring middle class along, too.  But now with huge inflation and increase in cost of living staring the same middle class in the face, it is time to place some correctives to get the stolen assets back. It is time to fix the larger issues, in particular, the thefts in the first case.

One of the most important events, out of the many steps, proposed to be taken at the Group of Twenty (G20) meet in Cannes, France, therefore, has to do with the way the Indian prime minister Manmohan Singh spoke strongly in favour of addressing, as well as resolving, the issue of tax havens. This is, without doubt, a major step, if the Indian government is serious about taking on the issue of corruption and recovering stolen assets parked abroad. How much support they get from within the Indian system as well as the rest of the world remains to be seen. But the official Indian position has now been declared in no uncertain terms, and on a local Indian front. We can certainly expect more raids and investigations on people and corporates with funds parked in secret accounts abroad in the near term. On an international front, as one of the largest client countries for tax havens, a declared position of this sort will certainly cause more than a few flutters.

The Central Board of Direct Taxes (CBDT) now has a separate directorate under it to look further into this issue and that amongst the earliest investigations involve about 800 such accounts held by Indians in tax havens abroad through just one branch of HSBC Bank. It is obvious that there is much more that will be revealed in the coming days. That the Government of India may be using professional help for the same bunch of ‘consultants’ who set up the secret accounts in these tax havens in the first case makes it all the more interesting. This writer knows more than a few people who are aware of this situation. Set a crook to catch a crook, great, has been done before too, but for sure, there are more than a few very rich people in India taking a closer look at their investment consultants. These are the sort who helped them set up those ‘secret’ accounts in tax havens in the first case.

That’s when you learn Rule # 1 of dealing with tax havens—their biggest source of income is usually from funds that have been ‘frozen’, for one reason or the other.
But what is a tax haven, how do they work, and which are the biggest tax havens in the world?

For decades now, popular lore and repetitive shallow media reports have placed Switzerland as the end all and be all of secret tax free accounts. No doubt, Switzerland does have a long track record of going back centuries in this business, but over the last few decades it has been losing its prominence and credibility. As on date, there are over 25 tax havens available for people who wish to park their funds in secret accounts. Almost all of them have representatives and ‘consultants’ in India, who will assist in setting them up, without leaving the country if so desired. But Switzerland is no longer in the dominant position it used to be in.  One reason, of course, is competition from different ‘parent’ countries. People are comfortable with tax jurisdictions where their parent countries have ‘agreements’ made by rich law-makers for rich people. An example in this case is Mauritius with India. Similar examples include Macau and Hong Kong for China, Delaware for the US, Multiple Commonwealth islands like Isle of Man, Caymans, Monaco and Luxembourg for the Europeans. Even Mongolia is joining up through an office in Singapore. In otherwise open economies like Holland and Belgium, there are helpful tax jurisdictions within the system itself, for those who need them.

Another reason for Switzerland losing its prime position is the growing sense of mistrust. Delayed or non-return of secret funds parked in Switzerland, before and during World War II, to the descendants and heirs of millions of Jews ,and others who died during the Holocaust, or fled after WW-II, is one highly publicised cause for concern. The recent disclosure of details otherwise considered top-secret by WikiLeaks, has shaken the gnomes, as well as, their clients. Since real numbers for this sort of business are impossible to come by, even a guess can not be hazarded on who are the biggest. But the fact that more and more jurisdictions are getting into the business can only mean there is not just room for more.

(This is first part of a two-part series)

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COMMENTS

Nagesh Kini FCA

7 years ago

Post-liberalization a lot of laundered money came home from tax havens and Mauritius and the Govt.was ga-ga about it and winked at it too. Now the PM wakes up after giving all the offenders to move their stashed funds elsewhere.
Indian black money where ever lying needs to be hounded out. Like the UK-Swiss Treaty it has to be retrospective to access this data, or else nothing will come to light.

Vinay Joshi

7 years ago

Dear Veeresh &
Dear Ms. Sucheta,

No doubt an important a sub raised, tho' its only first part ot the article.

Irrespective "TAX HEAVENS" are notified as 'DTAT' - avoidance of double taxation.

Right! if i'm not mistaken! [correct me.]

Now, DTAT - is a law ratified by the parliament - just like other tax laws?

When has the parliament with the Presidential ascent has clubbed it with the Income Tax Act? Any answer!

Simple question - what is the legal validity of DTAT?
What had happened to P/Notes?

I.ve appreciated the mute point PM wants TxH banned!?

Regards,

REPLY

malq

In Reply to Vinay Joshi 7 years ago

Dear Vinay Joshi ji,

Thank you for writing in.

On P-Notes, I found this article also of interest:-
http://www.thehindubusinessline.in/2011/...

On legalities of DTAT your queries are very valid, and shall be addressed in another article, as some aspects appear to be playing out currently.

Once again, thank you for writing in.

Regards/VM

25 companies call-off IPOs due to sluggish market conditions

“The bad mood of capital markets has led 25 companies to call off their IPOs during the 2011 calendar year. The probable amount that these companies were planning to raise was to an aggregate of Rs31,000 crore,” brokerage firm SMC Global Securities said in a report

New Delhi: Owing to a sluggish trend in the stock market, at least 25 companies have called off their initial public offer (IPO) plans so far in 2011, reports PTI.

Mostly from the real estate and power sectors, these 25 IPOs were together estimated to raise about Rs31,000 crore worth capital to fund the companies’ business expansion plans.

The BSE benchmark Sensex has lost more than 23% since the beginning of 2011 and hit its 52-week low of 15,478.69 on 23 November 2011.

“The bad mood of capital markets has led 25 companies to call off their IPOs during the 2011 calendar year. The probable amount that these companies were planning to raise was to an aggregate of Rs31,000 crore,” brokerage firm SMC Global Securities said in a report.

Even after getting approval from market regulator Securities and Exchange Board of India (SEBI), these companies could not launch their IPOs within the valid period of one year from the date of approval, mainly on account of the ongoing turmoil in the capital markets.

These 25 companies having cancelled their IPOs included a host of the real estate players, such as Lodha Developers, Ambiance Real Estate, Kumar Urban Developers, Neptune Developers, BPTP, Raheja Universal and Lavasa Corporation.

Besides, a number of power sector companies, such as Sterlite Energy, Jindal Power, Avantha Power and Ind Bharat Power Infra, have also called off their IPO plans.

Also, the government’s disinvestment programme to bring public issues of several blue-chip PSUs couldn’t take off.

“If the government is not getting enough confidence to bring FPO (follow-on public offer) for ONGC, how will the promoters of any smaller companies stick their necks out? This is surely impacting the confidence of the promoters of the smaller companies,” SMC said.

Besides, a few companies such as Micromax have already announced IPO deferrals even though approval for SEBI validity still remains.

There are at least 10 companies who have valid approval from the market watchdog and are left with just two months in their validity period of one year from the date of SEBI approval like Pride Hotels, Tara Jewels.

SMC said that the cancellation of IPOs could impact the companies’ ability to raise capital to finance their expansion projects, which could eventually result in a slowdown in capacity building and job creation.

It also noted that the trend in the IPO market may lead to panic in the minds of the private equity (PE) funds, as they would be unable to exit from their investments.

The PE funds generally invest in unlisted companies in the hope of a later exit through IPOs.

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ICRA lowers growth projection to 7.3-7.5% for FY11-12

In light of the dampening business sentiments, sluggish domestic industrial growth, intensifying macroeconomic headwinds and the likelihood of lower monthly merchandise exports in second half of FY11-12, ICRA has revised its forecast for the pace of GDP growth in FY 11-12 to 7.3%-7.5% from the earlier expectations of a 7.5%-7.7%

Mumbai: Ratings firm ICRA on Monday revised downward its growth projection for the Indian economy to 7.3%-7.5% for this fiscal on the back of dampening business sentiment and sluggish industrial growth, reports PTI.

“In light of the dampening business sentiments, sluggish domestic industrial growth, intensifying macroeconomic headwinds and the likelihood of lower monthly merchandise exports in second half of FY11-12, ICRA has revised its forecast for the pace of gross domestic product (GDP) growth in FY 11-12 to 7.3%-7.5% from the earlier expectations of a 7.5%-7.7%,” the firm said in the latest report.

This is the lowest projection so far as the forecasts from the government, the Reserve Bank of India (RBI), CMIE and Crisil stand above or at 7.6%. The Indian economy had expanded by 8.5% in the last fiscal (2010-11).

ICRA said the GDP growth in the second quarter (July- September) is likely to be a modest 7% because of easing of manufacturing growth, contraction in mining and quarrying output and moderation in the services sector. The Q2 growth data is scheduled for release on 30th November.

GDP grew at 7.7% during the first quarter of the current fiscal, the lowest in 18 months.

Industrial output also showed signs of slowdown with growth in factory output rising by a meagre 1.9% in September, which was the lowest monthly rate of expansion in two years.

Experts have blamed the high interest rate regime, which has increased the cost of borrowing, for hindering fresh investments and leading to a fall in industrial output.

The RBI has hiked its lending rates 13 times, totalling 350 basis points, since March 2010 to curb inflation.

Headline inflation has been above the 9% mark since December last year and stood at 9.73% in October this year.

The government and RBI have conceded that the high interest rate regime is hurting growth but reiterated that inflation control in the biggest priority.

ICRA said it expects inflation to moderate to around 7% by March 2012, in line with RBI’s projections.

“ICRA expects headline inflation related to the Wholesale Price Index (WPI) is likely to have peaked and would decline to around 7% by March 2012, unless commodity prices increase sharply in the coming months,” it added.

The ratings firm, however, warned that any further depreciation of the Indian rupee beyond current levels would exacerbate inflationary pressures.

The rupee has depreciated by over 15% in the past three months against the US dollar. This has become a matter of concern as a weaker rupee makes import expensive and India depends on imports for over 80% of crude oil needs.

Warning that the next fiscal may also be tough, ICRA said, “While the execution of ongoing projects and healthy order books may support growth in the current year, investment growth is likely to moderate substantially in FY 12-13 unless policy issues are addressed and there is a substantial pick up in the pace of implementation of big ticket economic reforms.”

ICRA has also warned that the government will not be able to meet the fiscal deficit target of 4.6% and said it will shoot up to 5.5%. The fiscal deficit in first half of FY 11-12 has reached 68% of the Budget estimates for the year.

“Given the anticipated moderation in growth of tax revenues, low likelihood that government of India would meet its disinvestment target and the additional expenditure proposed under the two Supplementary Demands for Grants, ICRA expects the fiscal deficit for FY 11-12 to worsen to around 5.5% of GDP,” the report said.

It added that considering the prevailing market conditions, the government is likely to fall considerably short of its disinvestment target of Rs40,000 crore in the current fiscal.

While almost eight months of the fiscal has passed, the government has been only able to mop up a little over Rs1,100 crore through the follow-on public offering of Power Finance Corporation.

Although the fiscal policy remains expansionary, higher outgo towards items such as subsidies (particularly fuel) and salaries (reflecting higher DA), limit the fiscal space available for boosting infrastructure spending to support investment growth, the rating agency warned.

On the global front, it said the economic environment remains bleak owing to the deepening sovereign debt crisis in Europe, impacting global trade and financial flows.

The report warned that the rupee fall may only help maintain the competitiveness of merchandise exports, demand for which is likely to suffer in light of the uncertain growth outlook for the advanced economies.

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