The term ‘tax haven’ evokes many ideas. To some, it brings to mind the names of a few countries (thanks to media interest); to others, it is just any place where politicians and businessmen stash away their money.
To a tax professional, ‘tax haven’ means any place (not necessarily a country/ state) that has, among others, the following attributes:
Unusually low, or nil, rates of tax (though consumption-based levies such as VAT may be comparable to other developed nations).
An economic environment that is subject to very little regulatory oversight
Secrecy — a persistent desire to not co-operate with any other country on economic and taxation affairs.
Little or no actual economic activity taking place within its territory
Last, countries that have the above three attributes promote themselves as ‘tax havens’.
Rogue states
A tax haven may not look as threatening as a ‘rogue state’ – but inflicts far worse injury on the developed and emerging economies of the world.
First, it eats up the legitimate tax revenues of a legitimate business that a developed or emerging economy needs in order to survive — while the business enjoys the resources provided by the developed/ emerging economy.
Second, the limited regulatory environment fosters an unhealthy attitude towards accountability and disclosures.
Third, and most effectively, such tax havens lead to creative business structures which are designed to leverage the lax tax environment in such countries.
While tax havens have been around for quite some time, it is only recently that most countries have woken up to the fact that the mere presence of tax havens is affecting their economy. The recent scrutiny around the business structures of many notable global corporations is a testament to this.
Google tax
In fact, the UK has even enacted a levy to be called ‘Diverted Profits Tax’ with the media unflatteringly calling it ‘the Google tax’. It is intended to tax profits of multinational corporations which otherwise go untaxed in the UK due to the way their activities are structured around such tax havens. The levy is being hailed by most of developed and emerging countries as a significant step in combating tax havens. Many other countries are expected to follow suit.
Is India a ‘tax haven’?
Given the discussion on tax havens, one may wish to introspect if India could possibly be a tax haven. Well, to most of the developing world, India offers a slew of tax exemptions and reliefs, has a peak corporate tax rate that is lower than that of the US, Germany and France, and has signed tax treaties with a few countries that offer better terms to a foreign corporation/ foreign national.
Foreign capital
But does that necessarily make India a tax haven? I do not think so. Every country in its history has offered some benefit or ‘discount’ to invite much-needed foreign capital. India, being a capital deficit economy, had to definitely roll out the red carpet to foreign investors by way of tax exemptions and tax breaks.
But businessmen in India never got such free lunches. And if they did, such offers came with strings attached — obligations on performance, employment generation, export and investment, among others. Further, those businesses were always subject to periodic regulatory scrutiny, and audit of their performance and compliance with the rules.
Recently, India asserted its ‘sovereign status’ on taxing rights over multinational corporations having a nexus (however remote it may be) with India – the Vodafone saga is an example. Though the events that transpired alarmed a lot of foreign investors, the Government has since promised a stable and predictable tax regime.
Tax terror
In fact, the Finance Minister recently sent out a strong message stating that “Let it be clearly understood that India is not so vulnerable that every legitimate tax demand can be considered tax terrorism, because we are not a tax haven and we don't intend to be one.”
This statement reiterates the objective stated by the present government – a rational and predictable tax regime which will comprise a reasonable tax rate and systematic phasing out of tax exemptions.
If you like irony, consider this – America was created because colonists did not want to pay taxes. And today, it is at the forefront of creating laws (which other countries follow) to combat the menace of tax havens. Therefore, to answer the question – Is India a tax haven? – I think we can safely say it is not.
** Karthikeyan P of EY also contributed to the article. The views are personal.
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