A software consultant in Bangalore, a property developer in Pune and a yarn trader in Mumbais congested business hubthese disparate businessmen were all pursuing their own interests separately. But in the last six months all three discovered the wonderworld of offshore accounts.

They found out that opening these accounts was childs play. They had heard about Cayman Islands, Isle of Man and other distant, exotic tax havens; but their search ended when a lawyer in Mumbai offered a solution thats much closer, more familiar and a lot cheaper. Its good old Dubai.

In the last one year, hundreds of high net worth, resident Indians have floated companies in Dubais free trade zone to either evade tax or stash away piles of unaccounted cash. After the government began taxing export earnings, many exporters have been looking for a way to escape the tax. What some of them did was to buy shares of a newly-formed company in Dubai using a fraction of the $50,000 remittance facility that RBI allows to Indians.

In the Emirates, a foreigner can own 100% in a company only if its set up in one of the free trading zones. So, a company is formed, fully owned by an Indian consultant, and the money he makes by advising international clients are parked in Dubaiin a bank account that the new company has opened. The money is tax-free in Dubai, but not in India.

The fun is that he can eventually bring the money to Indiaby either investing in Indian securities or coming in as an investor with a private equity player or a venture capital fund, which is investing in India, may in the local real estate. You cant do that easily if the money is in Cayman, as these tax havens dont have a tax treaty with India, but the Emirates do. Though Mauritius has a treaty with India, no Indian can form a company in the Indian Ocean island and RBIs $50,000 window does not permit Indians to put money in Mauritius, along with a few other countries like Pakistan and Afghanistan.

This is the story when the money earned is legitimate, but the predominant concern is to hide it to escape tax. What if the source of money cannot be explainedsay, a kickback from a large international contract or black money generated locally.

Thats when hawala (or irregular foreign exchange transactions) comes in.

This is the age-old route, where things work like a well-oiled machine. The resident Indian has to hand over large sums of cash to the hawala operator in Mumbai and the latters agent outside India puts an equivalent sum (less handling, conversion expenses) in the Dubai account of the firm that the Indian owns.

Setting up a company and opening an account would only cost a few thousand dollars. Often tax experts advise that the company should appear to have some substance; in tax parlance this means some activity, some employees.

Here too, Dubai is a better alternative. People have friends, relatives and staffing is easy and inexpensive, said a person familiar with the subject. Significantly, unlike the US there is no controlled financial corporation rule in India, so there is no consolidation of firm income for tax purpose.

Tax has to be paid only after the money is brought in. However, rules are different when the money is in an individual account, say in the Bahamas. In this case, the resident Indians worldwide income is taken into consideration for taxation.

Bankers said Dubai, which is fiercely promoting free trade zones, would possibly ignore such transactions and the Emirates is more difficult for regulators to track. However, at the end of the day, these zones have moved far beyond shell companies. Thanks to its dedicated infrastructure, some of the biggest sectors have set up shop there. In the last few years, several Indian diamond houses have moved a large part of their operations from Antwerp to Dubai.