On Money Laundering: Tax Havens for Indians(Part-2)

One KPMG estimate says that from USD 800 Billion to USD 2 Trillion amount of money is laundered every year in the world. While it could be beneficial to financial institutions located in foreign- which are holy havens for Black money, it is making the economic growth of many countries in plunging situation. Black money has been resulting in transfer of funds from India to foreign countries where tax rates are quite low. Notably these countries are called as tax havens. The main features of most of these countries are their banking firms and tourism sector has a big share in their economy; the assets of banks in these countries is in disproportionate multiples of their total Gross Domestic product; and the client details remains very secret in the banks of these countries. Most of these countries are small and are governed in a good way. For example consider the case of Cayman Island spreading in an area of 264 km square and GDP of 2.25 bn. Assets of bank is approaching a figure of USD1305 bn there. Same is the case with many countries like Andorra, The Bahamas or British Island. Most of them are notably were once British colonies. It is just a myth that Switzerland is the favourite place for putting dirty monies.

It is not appropriate to close the discussion without citing the example of investment flowing from Mauritius to India. There is a treaty since early 90s that allow significant tax benefit from Investment made from Mauritius. India-Mauritius tax agreement suggests that capital gains created in India via security sales can be taxed in Mauritius only. There is no tax on such investments there, which implicitly leads to zero taxation on capital invested through Mauritius in India. Indeed, a lot of foreign direct investment comes to India via Mauritius. From April 2000 to February 2012 total inflow of FDI in India was 162 billion, out of which 39 per cent came via the route of Mauritius. Mauritius has been put into negative light in the economic circles of India after the instance of 2G scam and now IPL. The pain is that government cannot know the real person who has invested the money. Thought this year, government made it clear to have a Mauritius residency proof for people to invest in India, yet no substantial step has been taken because it is also the one way black money comes back into India.
From this what I infer is that if someone were earning 10 lacks in bribes, he can put it into some Mauritius account and then invest back into India to make it look legitimate. That’s how big fish make big money. For example Y.S. Jagan Mohan Reddy has been alleged to invest INR 124 Crores of his black money in Sandur Power Company, via Mauritius and Luxemburg.
In next post, you will read some of the aspects which are not allowing to curb the Money Laundering menace.