Govt plans law to counter cross-border tax evasion
August, 08th 2007
The government is planning to introduce strict laws to check cross-border tax evasion, often done though special transactions. Under the proposed legislation, any transaction carried out primarily to evade tax will be denied the benefits extended by the Double Taxation Avoidance Agreement (DTAA). Instead, such transactions will be governed under the domestic tax law. It will also cover the practice of registering companies in tax havens.
Many developed countries, including the US and the UK, have already enacted laws to contain tax evasion through artificial transactions. In the US, tax havens have already become a major presidential election issue.
The laws in these countries unambiguously support their revenue departments to deny the tax benefits to such transactions, while ensuring that genuine commercial transactions are not blocked. According to unofficial estimates, tax havens hide nearly $12 trillion, a major part of which is due to tax evasion.
The tax that could have been generated on hidden funds is estimated at $250-300 billion. The finance ministry has received proposals to enact stricter laws by the committees set up for framing the new tax code and also by the international tax division of the income-tax department.
The international tax division of the income-tax department has faced serious problems in its attempt to tax capital gains arising from the recent mergers and acquisitions involving Indian and foreign companies. Since some of the investments in such cases were routed through companies registered in tax havens, the department lacked the legal footing to make water-tight demands on these companies, though it had served the notices.