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Nations not sharing tax evasion info to face sanctions
February, 11th 2011

India is considering sanctions against countries that refuse to share information on suspected tax evaders as pressure mounts on the government from the Supreme Court and the opposition over the issue of black money stashed overseas.

The sanctions will be in the form of indirect punishment, making the cost of doing business in these countries expensive and removing their attractiveness for potential tax evaders. They will include a higher tax burden and stringent documentation rules for Indian taxpayers who have business links with offending countries, known as non-cooperative jurisdictions.

The sanctions have been proposed by an internal panel of the government that was asked to recommend a tool-box of measures to fight tax evasion. The panels report has been sent to the finance ministry for consideration in the budget later this month, said a senior government official.

The Supreme Court is hearing a public interest litigation to direct the government to take steps to bring back the billions in black money stashed abroad. Battling a series of corruption scandals, the government is also under pressure from the opposition, which claims there is little seriousness in tackling the problem of black money.

Although no accurate estimates of the amount of black money stashed overseas are available, a recent study by international watchdog Global Financial Integrity said India has been drained of $462 billion, or over `20 lakh crore, between 1948 and 2008. Some others claim the amount could be more than $1.5 trillion.

The government needs legal backing to name countries as non-cooperative jurisdictions. One option is to make the changes in the income-tax law so that it becomes possible, the official said.

Higher withholding tax likely

The panel has recommended charging a higher withholding tax on payments made to companies based in such jurisdictions, making the cost of transactions so expensive that these tax havens lose their allure. For example, an Indian company is paying royalty to a foreign company based in a tax haven and withholds tax at 10%. If the tax haven is named as a non-cooperative country, the Indian company has to withhold a higher tax of, say, 20%. Else, it will be denied a tax break on the expense, pushing up the cost of doing business.

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