FDI inflows should be well tracked to restrict black money
Evading tax has always been a common practice among the affluent. While this may seem an off-handed primary opinion, there is no denying that traditionally, certain big business houses used to keep parallel books of accounts in order to show lower profits, and eventually evade taxes. Loopholes were easy, due to inconsistencies between corporate accounting principles and those followed by income tax authorities. But with technology, and with advances in accounting reconciliation mechanisms, the age-old practice of maintaining phantom books of accounts became futile (yes, for all our arguments, there will always be a Satyam to prove us wrong...still). Amidst all this, parking/routing money in nations where tax rates are relatively lower has become the most sought-after option to evade taxes. In simple words, corporations and individuals today are re-routing their money to their home nations via tax havens (where tax rates are generally around one per cent). The tax haven concept has always been a problem-child for developing and under-developed nations with respect to lost taxes, but has been advantageous with respect to FDIs.
A research paper titled, ‘Estimating Tax-Elasticities of FDI: The Importance of Tax Havens’ by Peter Schwarz concludes that “for US multinationals, a reduction in host country tax rates corresponds with higher FDI-stock. The estimated elasticity suggests that a one per cent reduction in host country tax rates leads to an increase of total FDI between 0.3 to 1.8 per cent, depending on the specific tax burden indicator.” A study by Blanco and Rogers shows that “less developed countries in the neighbourhood of tax havens exhibit significantly larger FDI inflows” and higher FDI flows strengthen the investment confidence level for that particular nation. In India, reportedly, around 40 per cent of FDI is being redirected from tax havens, like Mauritius.
So what should India do in such cases? The first step should be to immediately initiate researches into finding out whether India on the whole has been advantaged or disadvantaged due to tax havens. The second step should be to have a due diligence process that ensures that any FDI coming into India is through clean sources.
Evading tax has always been a common practice among the affluent. While this may seem an off-handed primary opinion, there is no denying that traditionally, certain big business houses used to keep parallel books of accounts in order to show lower profits, and eventually evade taxes. Loopholes were easy, due to inconsistencies between corporate accounting principles and those followed by income tax authorities. But with technology, and with advances in accounting reconciliation mechanisms, the age-old practice of maintaining phantom books of accounts became futile (yes, for all our arguments, there will always be a Satyam to prove us wrong...still). Amidst all this, parking/routing money in nations where tax rates are relatively lower has become the most sought-after option to evade taxes. In simple words, corporations and individuals today are re-routing their money to their home nations via tax havens (where tax rates are generally around one per cent). The tax haven concept has always been a problem-child for developing and under-developed nations with respect to lost taxes, but has been advantageous with respect to FDIs.
A research paper titled, ‘Estimating Tax-Elasticities of FDI: The Importance of Tax Havens’ by Peter Schwarz concludes that “for US multinationals, a reduction in host country tax rates corresponds with higher FDI-stock. The estimated elasticity suggests that a one per cent reduction in host country tax rates leads to an increase of total FDI between 0.3 to 1.8 per cent, depending on the specific tax burden indicator.” A study by Blanco and Rogers shows that “less developed countries in the neighbourhood of tax havens exhibit significantly larger FDI inflows” and higher FDI flows strengthen the investment confidence level for that particular nation. In India, reportedly, around 40 per cent of FDI is being redirected from tax havens, like Mauritius.
So what should India do in such cases? The first step should be to immediately initiate researches into finding out whether India on the whole has been advantaged or disadvantaged due to tax havens. The second step should be to have a due diligence process that ensures that any FDI coming into India is through clean sources.
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