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India Inks Treaty With Singapore, Black Money Won't be Re-routed to India

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New Delhi: On the 50th day of demonetisation, Finance Minister Arun Jaitley said India had amended an agreement with Singapore to close a tax loophole that allowed black money to be taken out of India and brought back into the country via Singapore as legitimate money.

The so-called Double Taxation Avoidance Agreement (DTAA) with Singapore has been amended to prevent investments from Singapore from dodging taxes in India.

The Finance Minister said that the amendment will come into force from April 1, 2017.

Jaitley said the agreement with Singapore was the third such agreement signed this year with countries to close avenues for black money to be spirited out of the country and brought back via international channels, a process that is called “roundtripping”. The other DTAA’s amended this year were with Mauritius and Cyprus.

This is how roundtripping works: undeclared money in India is spirited out through trade mis-invoicing or hawala channels into tax havens abroad. From here the money is routed through the international shadow banking system so that tax authorities in India cannot trace the money trail. The money finally makes its way back into India via Mauritius or Singapore, disguised as FDI (and hence legitimate money) and invested in financial markets in India.

It is the last stage where the DTAA comes in handy. The tax treaty stipulates that investments emanating from these countries will only be taxed once, either in India or in the originating country, to avoid double taxation. This is the loophole that individuals and companies use to avoid paying tax in India.

Since Singapore and Mauritius do not have capital gains tax, all a company has to do to avoid paying tax in India is to produce a certificate proving it is domiciled in either of these tax jurisdictions, thus automatically triggering the DTAA provision that stipulates that if you have paid your taxes there you don’t need to pay in India. However, since those taxes are nil in the originating countries, in effect, the investments are tax free routes for converting black money into white.

Critics of DTAA allege that what is being shown as legitimate investment is actually black money being roundtripped into India. Government figures suggest that the argument has merit.

Statistics from the Department of Industrial Policy and Promotion show that Mauritius and Singapore and the top two nations for inward bound FDI equity inflows into India. The two nations accounted for 50% of inflows between 2000 and 2016. Cyprus contributed another 3%.