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Tax-free hills become investment hotspot
October, 15th 2007
Call them covert SEZs. To an enterprising businessman these pockets resemble tax havens. Places such as Leh in J&K, Itanagar in Arunachal Pradesh, Shillong and Tura in Meghalaya, Aizwal in Mizoram and many others have become hotspots for big-ticket investments by businessmen wanting to quadruple their return on investment.

Under the Income-Tax Act, tribals in these areas need not pay income-tax at all. However, in most cases the locals lack money to invest in business. Seeing an opportunity, they tie up with outsiders in a deal based on trust to kick-start profitable businesses from hotels, bus services, petrol pumps to small grocery or vegetable shops. More and more such deals are getting legal as businessmen from the plains are now resorting to an innovative method of finalizing the deal through a power of attorney, sources familiar with the matter told SundayET.

The actual business model works like this. The investor pumps in money only after the local partner under whose name the trade license is issued, gives a power of attorney to the investor allowing him to manage the entire business.

The investor thus gets the legal backing to manage the entity, and most importantly the license to operate the bank accounts. At times, we have received disputed cases where the local partner demands more than the agreed amount which varies from 5 to 10% in case of contracts, or even up to 25% in case of business profit.

Though legal documents play a role, the understanding between the two partners is crucial to such a deal, a senior advocate from Gauhati high court said. When contacted a senior Central Board of Direct Taxes official said, This has been happening for quite sometime. But we take actions only when we have specific instances.

As the locals dont need to pay any tax, they can transfer black money from partners, and show that amount as their own capital. In fact, locals often look out for potential business partners. Showing a photo of a beautiful site in Leh, Salim Khan of Kangla hotel said, We want to build the best hotel in Leh, but we need financiers.

With frequent film shootings and massive increase in foreign traffic the tourism market is booming. Till now, there was not even a 3-star hotel here. Now look around you, everything is changing. Even the biggest hotel now being built here is being funded by a non-local. And he is going to earn big. Do you know of any financier?

In a hilly state like Himachal, where outsiders are not allowed to buy land beyond 350 sq yd, many investors bunk the rules to set up shops. In fact, some of these investors happen to be foreigners. Says a senior government official: A lot of investors are coming to state either through power of attorney or by sheer trust. But its almost impossible to catch them as they adhere to all rules and regulations.
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