Effectiveness of international agreement Report 2022

Running Head: EFFECTIVENESS OF INTERNATIONAL AGREEMENT
Effectiveness of international agreement
Name of the Student:
Name of the University:
Author Note:

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EFFECTIVENESS OF INTERNATIONAL AGREEMENT
Executive summary
This report is about the tax evasion in India. Different tax evasion schemes has been discussed.
Then tax treaties that India has signed with other countries has been discussed. Then different
strategy to combat the tax evasion has been explained. Different case studies has been discussed
on tax evasion.

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Table of Contents
Introduction..........................................................................................................................4
Nature of tax evasion in India..............................................................................................5
Tax evasion general scheme................................................................................................5
1. Dishonest tax reporting..........................................................................................5
2. Full protection for corporate profits.......................................................................5
3. Shield for wealthy individuals...............................................................................6
4. Offshore tax haven.................................................................................................7
5. Tax breaks..............................................................................................................7
6. Offshore banking....................................................................................................8
7. Role of Shell Company..........................................................................................8
8. Intermediaries in facilitating offshore tax evasion...............................................10
Illegal activities..................................................................................................................11
Legal activities...................................................................................................................13
Tax treaty...........................................................................................................................14
Leaked document (Sequoia)..............................................................................................15
Shifting profits to tax havens.............................................................................................16
Dependency on corporate sector........................................................................................16
Evasion include retirement funds and university endowments.........................................18
Expansion of business........................................................................................................20
Transfer as gift...................................................................................................................21
Tax agreement between India and Mauritius.....................................................................22
Tax agreement between India and South Africa................................................................23
Tax agreement between India and USA............................................................................24
Tax agreement between India and Australia.....................................................................25
Tax agreement between India and Brazil..........................................................................26
Tax agreement between India and Canada........................................................................28
Tax agreement between India and Singapore....................................................................29
Relationships between money laundering, tax evasion and tax havens............................30
Strategy to combat tax evasion..........................................................................................31
Formation of financial Intelligence unit............................................................................33
Organization for Economic Co-operation and Development (OECD)..............................34

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Case study:.........................................................................................................................34
HSBC tax fraud probe in India......................................................................................34
Sequoia capital’s scheme to use Mauritius to avoid Indian taxes.................................35
Vodafone tax evasion case.............................................................................................35
Conclusion.........................................................................................................................36
Bibliography......................................................................................................................36

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Introduction
Offshore tax evasion – Offshore tax evasion refers to the illegal activity knowingly or
willfully of a person or entity outside own national boundaries by avoiding payment of tax
liability. It can be location in land or any water based. Evading taxes is illegal in law and subject
to criminal offence and penalties. It is applied to non-payment of taxes, underpayment of taxes
and submission of tax in wrong tax forms. This illegal method is used to avoid paying proper
taxes and save income1. Some of the common offshore tax haven used by businesses for tax
evasion are tropical paradise, Bermuda, and Cayman Island where it provides full protection for
corporate profits, one of the famous Switzerland provides protection to individuals incomes, the
British Virgin Island are also considered to be an one of the best tax haven spot as they do not
have sales, corporate, inheritance, capital gain and taxes, and lastly is the Luxembourg which is
also known for tax haven.
As countries all over the world are starting trade with each other which requires a common tax
law for all which gave the cause of making international tax agreement. So many country enters
into a tax agreement also known as double tax agreement with other countries. This agreement
was basically for solving the problem of double taxation2. It is based on guidelines provided by
the Organization for Economic Cooperation and Development. This agreement covers income
taxes, inheritance taxes, value added taxes, GST and all other tax matters.
1 Shubhang, S. "Tax Evasion in India." Research Journal of Humanities and Social
Sciences 4.4 (2013): 465-469.
2 Ault, Hugh J. "Some reflections on the OECD and the sources of international tax
principles." Reprinted from Tax Notes International 70.12 (2013): 1195.

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Nature of tax evasion in India
People had observed tax evasion and black money and tax policies to reduce the problem.
Reduction in tax evasion will increase the wealth and income in India while it will reduce the
problem tax evasion. A few nature of tax evasion in India has been discussed below:
 Regressive – Tax system has become more regressive in recent years. Poor people
consumption is more than the rich people and marginal level to consume is decreasing
with the increase in income. Poor people spent most of their income in consumption and
tries to avoid most of the taxes which has also caused to increase the problem of tax
evasion.
 Progressive – Government has made the tax system more progressive to protect the
interest and increase the income and wealth. But progressive taxation failed to increase
the wealth and income and encouraged the tax evasion.
 Widening – Tax has been wide spread in almost all the commodities that consumers buy
with high rate of tax. So consumers protect their income by using tax evasion methods.
Tax evasion general scheme
1. Dishonest tax reporting – Taxpayers intentionally misrepresent their financial statement
to reduce their tax liability which is known as dishonest tax reporting. Taxpayer
sometime declare less income and showing loss than actual earned. Dishonest tax
reporting is also the part of tax evasion. Taxpayers avoid taxes to earn more money and
reduces tax burden.

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2. Full protection for corporate profits – Protection of corporate profit is done by other
companies who are specialized to prevent loss by preserving the profit. Losses arises due
to human action or negligence like fraud, wastage, theft and others. They protect
corporate profit by their experience, knowledge and forensic analysis3.
3. Shield for wealthy individuals – Tax shield is the process of reduction of overall tax
amount of an individual or a business by claiming mortgage interest, medical expenses,
depreciation and other methods. It vary from country to country depending on the tax
rate. There are few types of shield for protecting the wealth of individuals are as follows:
 Increase of liability insurance – In this method insurance coverage is increases to
make it equals to the personal individual liability covering the net worth amount.
 Keeping asset separately – Different states have different rule on this, if an
individual keep his money in a bank deposit with a joint account with his spouse
than the money will be divided into half among them. While calculating tax only
the part of the taxpayer is calculated and the remaining are protected from tax as it
the money of his spouse4.
 Protection from renter – Protecting the rental property by creating a business
entity after receiving rent. Business entity will be used as a shield to protect the
original wealth.
 Review jointly held accounts – Any money deposited in the joint account must be
critically examined whether it is with elder parents, children’s or business
3 Awasthi, Atul. "Transformation of Tax Laws: A Global Perspective." Intertax 45.2
(2017): 175-181.
4 Bardhan, Pranab. "Corruption and development policy (drawing upon the recent Indian
debate)." Journal of Public Economic Theory 17.4 (2015): 472-479.

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partners. So that if any conflict arises among the joint members than the entire
account can be wiped out before.
 Creating a business entity – Having a business or any part time business which is
also considered under tax can be separated by showing it as a sole-proprietorship.
It will give it a shield to protect itself from paying taxes.
4. Offshore tax haven – Tax haven is a place in an offshore country with a very low rate of
taxes that offers other countries individual or business to deposit their money with them
and protect it from tax payment. They provide high level of secrecy without sharing any
financial information to any country tax authority. Some of the popular tax haven places
are like United States, Hong Kong, British Virgin Island, Monaco, Panama, Bermuda,
Alaska, Florida, Texas and Washington which are easily identifiable by checking their
special tax law5. Tax haven withdraws the countries money from the economy which
badly effects the country wealth due to loss of tax revenue of the government.
Government runs the country by collecting the tax from every individual and businesses.
5. Tax breaks – A tax break is when the government provides an offer by which the tax
amount of the taxpayer reduced. It is a saving on the tax liability that US government
offers to provide benefit. It is made to provoke the economy of country by increasing the
income of the taxpayer which will help them to spend more. Tax break is offered by the
government in varies forms like claiming deduction or excluding income6.
5 Benk, Serkan, Robert W. McGee, and Bahadir Yuzbasi. "How religions affect attitudes
toward ethics of tax evasion? A comparative and demographic analysis." Journal for the
Study of Religions and Ideologies 14.41 (2015): 202-223.
6 Bhowmik, Sharit. "India: nation-wide strike on 20-21 February 2013." Global Labour
Column 125 (2013).

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6. Offshore banking – Offshore bank are those banks which are regulated by international
banking and take deposits from company or individual outside of their national residence.
This types of bank is established by the British Channel Island of northwest France. This
types of bank are usually located in islands with less rules and regulation which makes it
the best place to hide incomes of individuals and companies. This bank provide the same
service as the normal banks like saving deposits or investment service. Main advantage of
this bank is that they are either exempted from tax or having low rate of tax on deposits.
They maintain a high degree of privacy by operating as an independent banking
institution. Offshore banks are found in Cayman Island, Panama, Macau, Bermuda and
Luxembourg7.
7. Role of Shell Company – Shell companies are those companies which came into
existence after the incorporation of companies Act 2013 and operates without any active
business operation. They does not transact in ordinary course of businesses instead they
enter into a legitimate transaction with the objective of tax evasion. It is used by large
public companies, private companies or individuals. Companies uses this as a tax haven
in abroad to protect or hide their income and take tax advantage. A shell company may
not have an authentic business but it can provide fake financial transaction to prove its
existence. The main role of shell company are as follows:
 Corporate restructuring – It is the process of redesigning corporate structure to
face different scenario as and when required. It is the modification required to
make enterprise flexible according to the situation. Shell Company is the only
7 Bhushan, Puneet, and Yajulu Medury. "Determining tax literacy of salaried individuals-
An empirical analysis." IOSR Journal of Business and Management 10.6 (2013): 76-80.

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way to merge the public and private company into one entity which will be known
as reserve merger. Private company gets the opportunity to make their market
widen and can attract the public investors. It helps the firm to expand easily and
collect capital. Shell Company gets some benefits while corporate restructuring
are like lower cost, limited banking fees, no supervision over transaction,
capitalization of stock and easy fundraising8.
 Reverse merger of public company – Under this system public company having
no assets acquires a private company which requires funds to operate. During this
process of acquiring shareholders of private company gets major portion of public
shares. Shareholders are empowered to control the board of directors of the
private company in order to manage the affairs of the public company9.
 Reverse merger of private company – Private company also takes advantage of
reverse merger by acquiring other company by easily accessing the capital
market. Under reverse charge private company after acquiring the public
company does not hold any assets in its own name. It is easy for a private
company to transfer to a public company but reverse charge means making the
private company new with moderate inexpensive method. It is the main reason for
8 Chandrappa, M. "Tax evasion and black money in india: causes and
remedies." International Journal of Management Research and Reviews 6.10 (2016):
1376.
9 Chopra, Rajiv. "Impact of Demonetization on Indian Economy." Global Journal of
Enterprise Information System 9.2 (2017).

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which private company adopt this method to fund itself. Reverse merger will
provide an immediate liquidity for private entity10.
8. Intermediaries in facilitating offshore tax evasion – Tax intermediaries is one of the
important participant in the tax environment. They try to identify the tax environment for
tax planning. It help to shape the tax system by different government policies. There are
mainly two principles of tax intermediary that is tax advisers and bank and other financial
institution11.
Tax advisers are those persons or firms who have knowledge of tax law provides tax
advice and other services. In today’s global business economy tax is getting complex and
the requirement of tax advisor has increased. For managing this type of tax risk taxpayers
appoints tax advisors. Tax advisors help the taxpayer to plan, design and comply with all
risk management and develop new corporate tax policies. Tax advisors also helps the
taxpayer to minimize tax amount while compiling with all other tax laws. They are
regulated by the law and IRS guidelines as they are representative of tax authority to
resolve tax related issues of the taxpayers. They get license form the Internal Revenue
service to work as advisors. They are self-employed finds the client to solve their issues
like lowering their tax liability, computing taxes with correct deductions and credits.
10 Das, Raja Sarkar Dr Sabyasachi. "GST AND ITS IMPACT ON ONLINE
MARKETPLACES IN INDIA." Global Journal of Multidisciplinary Studies 6.7 (2017).
11 Devarajappa, S. Devarajappa, and S. Devarajappa. "Tax Evasion in India: A Study of
its Impact on the Revenue of the Government." EPRA International Journal of
Economics and Business Review 5.9 (2017).

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Bank and other financial institution are designed to promote and facilitate financial
information and other related information12.
Illegal activities
Illegal activities are those activities which are against the law or an act of violation of law
made by the court. It is an unlawful activity which is unjust or disgraceful. Some of the illegal
activities in India are as follows:
 Wildlife trading – Wildlife trading is increasing now a days which is the main reason of
declaring it as illegal. In India wildlife products are traded like tiger skin, elephant ivory,
rhino horn, snake skin, turtle shells and many other things which lead to the extension of
many spices. So Wildlife protection Act 1972 has been acted which defines the laws and
regulation to protect the wildlife animal form killing and trading. Under this act
punishment are also defined which is up to six year but not less than one year and with
fine up to Rs. 5000. With the help of this act it provide protection from extinction of
wildlife. Now a day’s many organization tries to increase the awareness and innovation
of wildlife protection13.
 Software piracy – It is one of the most important issues that every country is facing.
Software companies are losing huge amount of money due to piracy. Specially United
States, Russia, china and India loss huge amount in few years. So to take measures Indian
12 Dharmapala, Dhammika, and Vikramaditya S. Khanna. "Stock Market Reactions to
India's 2016 Demonetization: Implications for Tax Evasion, Corruption, and Financial
Constraints." (2017).
13 D'Souza, Jayesh. Terrorist financing, money laundering, and tax evasion: Examining
the performance of financial intelligence units. CRC Press, 2017.

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government has issued the Indian copyright act 1957 to tackle this issues. Under this act
it has been stated that copyright software’s if used without permission is illegal and
criminal offence. Punishment of finding guilty under this act is presentment up to three
year and fine up to rupees two lakh.
 Pimping and trafficking – This is the one of the oldest issues in the world consist of
prostitution and selling peoples. According to some studies there are more than 3 million
prostitutes in India. For tackling this issues government created law by issuing Immoral
Traffic in Woman and Girl Act 1956, Immoral traffic Act 1956 and immoral traffic
prevention Act 1956. Mainly the third party who force someone in the field of
prostitution if found guilty in assisting or dragging is punishable to offence with prison
up to three year. It also consist of fine up to rupees two thousand14.
 Narcotics – Any purchase or sale of narcotic items is a criminal offence which can even
cause death penalty. Drugs up to a certain limit for personal consumption is exempted or
limited punishment but huge amount of narcotic drug is illegal. So government
introduced the Narcotic Drug and Psychotropic Substance 1985 which consist of all laws
and regulations for narcotic drugs. It also consist of law for penalties in case of different
situation. It can cause imprisonment from ten to twenty year for the first time offence and
fifteen to thirty year for any other subsequent offence. If a person is found to be involved
in trafficking or supplying narcotic drugs or any part of it is also liable as criminal
offence15.
14 Ghuge, Nishant Ravindra, and V. V. Katdare. "A Comparative Study of Tax Structure
of India with respect to other countries." International Conference on Global Trends in
Engineering, Technology and Management (ICGTETM-2016). 2016.
15 Greenberg, Rachel J. "Taking a Byte out of International Tax Evasion: Combating Base
Erosion and Profit Shifting." Chap. L. Rev. 19 (2016): 307.

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 Trade in arms and ammunition – Trade in arms and ammunition is declared as illegal by
the court of law. Government issued the Indian Arms Act 1959 which describes the laws
for trade in arms and ammunition. This act consist of rules like a person cannot keep
arms without any license, one cannot sell, manufacture, repair and sale fire ammunition.
Even a person cannot transform any arms or cannot copy makers name to manufacture
fire arms. Under this act violation of rules can cause life imprisonment16.
 Begging – It is long problem of India but recent it has been seen that some beggars
earned lakhs of rupees just by begging. So it is a crime to beg but due to unemployment,
poverty and lack of government rules it has not stopped.
Legal activities
Legal activities are those activities which are done by following the law of the court. It is
an activity where illegal things has been avoided. Law is applicable to all individual and person
living in the society. Some activities are good and some are bad. To protect or prevent this bad
affects court introduces some laws and regulations that provides a set of laws. Activities which
are done by following this laws and regulation are known as legal activities. Indian laws are
complex as it follows different laws for different religions17.
16 Guindon, G. Emmanuel, et al. "Cigarette tax avoidance and evasion: findings from the
International Tobacco Control Policy Evaluation (ITC) Project." Tobacco
control 23.suppl 1 (2014): i13-i22.
17 Hanlon, Michelle, Edward L. Maydew, and Jacob R. Thornock. "Taking the long way
home: US tax evasion and offshore investments in US equity and debt markets." The
Journal of Finance 70.1 (2015): 257-287.

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Tax treaty
Tax treaty is the agreement between two country and two individuals for solving the
issues of double taxation. It determines the fixed amount of tax applicable for all countries.
Many countries faces problem in tax matter while selling their goods in international market.
Both the countries enter into the same tax agreement so that no issues arises later on during trade.
It help to remove the double taxation. India has signed tax treaties with majority of the countries
of the world and limited agreement with eight countries18. Treaties that India has signed are as
follows:
 India Mauritius treaty
 India South Africa treaty
 India USA treaty
 India Australia treaty
 India Brazil treaty
 India Canada treaty
 India china treaty
 India Luxembourg treaty
 India Malaysia treaty
Leaked document (Sequoia)
Sequoia is an American firm who had invested near about $ 1.5 billion in more than 70
Indian companies and earned a combined profit of $4 billion. They were before the investor of
18 Jain, Neelesh. "Tax evasion: A dark side of e-commerce." International Journal of
Engineering and Management Research 3.5 (2013): 16-18.

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companies like Apple and Google which attracted the Indian companies to invite them as
investors. They made the investment through an offshore based corporate structure situated in
Mauritius. Then files of 200000 document has been leaked which is collectively known as
Mauritius leaks. The leaked document consist of details how different companies uses offshore
companies like Mauritius to hide their original income and pay low tax. This documents did not
show any illegal act done by Sequoia but it shows the loopholes through which the companies
are lowering their original tax payments. Sequoia used this data to legally escape from paying
taxes to US and India19.
India has always made huge profit from international companies while paying a little tax. But
their tax rate is high by which it can earn huge amount of tax. So India allowed Sequoia to
investment in Indian company by which India will earn a large amount of tax. Indian law
enforcement reviewed the Sequoia operation and raided their Bengaluru office for tax evasion.
When Sequoia hired professional to review its income statements it did not get any information
from the Mauritius entity. It also did not showed any full time employee of the organization.
Sequoia India holds itself responsible on tax and other matters. They continuously took help
from the experts and international tax councils to make its financial matters regulated20.
Shifting profits to tax havens
Tax haven is an offshore country which take deposits from the individual or company
from other countries to protect their income from paying taxes. This offshore tax havens has low
19 Jalan, Akanksha, and R. Vaidyanathan. "Tax havens: conduits for corporate tax
malfeasance." Journal of Financial Regulation and Compliance 25.1 (2017): 86-104.
20 Janský, Petr, Alex Prats, and Christian Aid. "Multinational corporations and the profit-
shifting lure of tax havens." Occasional Paper 9 (2013).

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amount of tax charges than other countries. There are many popular tax haven countries where
investors or businesses can lower their taxes and take benefits. Tax havens provide banking
services as normal bank provides. This tax havens provide offshore banking service where
companies or individual directs all their sales through the subsidiary set by the tax haven rather
than through parent company. By which company earns profit in the name of the offshore tax
haven instead of its own country name21.
Dependency on corporate sector
India has diversified economy that keep on developing or can say as it is a developing
country. Today Indian GDP is ranked at 7th with the 3rd largest purchasing power. Indian
economy is basically running from the taxes that are collected from different sectors like:
 Agriculture sector – It is one of the important sector of India providing 15 % of the
current Indian GDP. Fifty percent of the society depends on the agriculture. Seeing all
this Government of India has given priority to this sector by providing government
subsidies, reducing tax rates, making some agriculture tax free, introduced the technique
of cooperative farming, food processing has been introduced and providing land for
agriculture22.
21 John, Rijo M., and Hana Ross. "Illicit cigarette sales in Indian cities: findings from a
retail survey." Tobacco control 27.6 (2018): 684-688.

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 Industry sector – This is another prime sector of Indian economy that bring drastically
changed the Indian market. This is the sector which provides a good amount of tax and
making contribution for the growth of Indian economy. Government also help this
sectors by providing subsidies, introducing new government policies, providing
employment opportunities and many others23.
 Services sectors – This sector has a special role in providing benefit to the economy by
providing services like finance, banking, outsourcing and information technology. Indian
IT industries has made a huge market in both Indian and International. They contribute
near about 55 percent of the GDP of Indian economy. They had emerged a huge hub
providing huge employment opportunities, tourism, medical sectors and new study.
 Food processing – Food processing has been growing at high speed providing good
amount of tax by focusing in make in India concept and contributing to the GDP growth.
In near future this sector is going to provide a major part of the GDP as it trend to
increase at high rate due to urbanization, increase of income level and growing of
demand for processing foods24.
 Manufacturing sectors – This sector is the second largest contributor in the growth of
GDP. This sector are growing at a rapid rate and spreading all over the world which is
22 Kalpana, V. "Tax Evasion-A Major Threat to Economic Development and Growth–
Causes and Remedies." International Journal of Scientific Engineering and Research
(IJSER) 4.5 (2016): 54-56.
23 Kaur, Harmanpreet. "Goods and Services Tax (GST) in India: An overview." South
Asian Journal of Marketing & Management Research 6.1and2 (2016): 23-28.
24 Khanna, Vikramaditya, and Dhammika Dharmapala. "Stock market reactions to India's
2016 demonetization: Implications for tax evasion, corruption, and financial constraints."
(2017).

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going to increase the Government revenue. Government also take major steps to increase
this sector and also provide benefit to the society by providing employment and other
opportunities.
Evasion include retirement funds and university endowments
University endowment refers to that amount of money which is received by the university
in the form of donation which is to be used for the purpose of providing scholarship to poor
students, upgrading the university facilities, hiring new professors and many more when needed.
There are many restriction and policies in spending this fund25. University endowment principle
amount is kept intact and the interest on investment amount is used to the charitable works. As
this endowments are used by non-profit organization they are not subject to tax but due to the tax
saving purpose some people uses this endowment to tax evade Government has put some tax
condition depending on who is receiving the amount and for what it is received. University
maintain and increase endowment fund by investing the amount as they know that this income
are tax free. Universities uses shielding function by investing in offshore corporation to hide
their actual income. As university endowment are charged tax on the dividend or interest earned
on their investment. Taxability depends on the nature of the non-profit making organization like
if the beneficiary party is exempted form tax then the endowment qualifies for tax exemption26.
25 Kumar, Chandu Ravi. "GST in Indian Economy: It's Benefits and
Impact." International Journal of Science and Research (2015): 759-761.
26 Lampreave, Patricia. "Anti-Tax avoidance measures in China and India: An evaluation
of specific court decisions." Bulletin for international taxation.-Amsterdam 67.1 (2013):
49-60.

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Retirement benefit fund are those funds which are helpful to leave the retirement life without any
financial worries. It consist of different government schemes like:
 Provident fund – It is the amount which is formed by the contribution of the employer
and employee with interest. The entire amount is receivable at the retirement providing
tax free benefit if some conditions are fulfilled like provident fund account must be a
recognized one and employee must have done a continuous service for a period of five
years27.
 Gratuity – It is included in the monthly salary on which tax exemption is calculated on
the average salary last drawn in ten month which is multiplied by number of year of
service completed. The maximum amount of exemption is up to ten lakh.
 Superannuation – It is received at the time of retirement only which is normally received
at a lump sum amount or paid on fixed monthly basis. Tax exemption on this is 1/3rd of
the commuted amount or 50 percent of the income.
 Leave encashment – It is received for not availing holidays and it is receivable only after
the retirement. In this tax exemption is maximum to three lakh or 10 month of leave
encashment which ever will be lower28.
Retirement funds are also taxable if not properly invested. So, some people uses different
techniques to save their taxes and pay less tax which are as follows:
 Investing in products which provides tax free maturity amount.
27 Liu, Antung Anthony. "Tax evasion and optimal environmental taxes." Journal of
Environmental Economics and Management 66.3 (2013): 656-670.
28 Liu, Antung Anthony. "Tax evasion and optimal environmental taxes." Journal of
Environmental Economics and Management 66.3 (2013): 656-670.

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 There are many equity fund which are tax free in long term.
Expansion of business
Expansion of existing business is created a dispute while calculating tax as the nature of
expenditure done in expansion. This expenditure can be of revenue or capital in nature. Business
authority claim that the expenditure they did is the revenue expenditure but the income tax
authority held that the business expansion cannot be held as revenue expenses and shall be
treated as capital expenditure29. But the court declares that all the expenditure done in the
purpose of increasing profit will be treated as revenue expenditure. So during tax calculation this
revenue is deducted from the income to reach the net profit on which tax is to be paid.
Transfer as gift
India being the country of lots of celebration with diversified culture, society and
religious. Many occasion arises where gift are presented which is the symbol of love, status and
affection. And by this gift some people try to evade their taxes so government enforced gift tax
on gifts if certain condition are fulfilled. Gift also includes cash, demand draft, bank cheques and
other valuable items. In kind gift also includes money without consideration, immovable
property without consideration, any jewelry, drawings, art piece and other items30. Tax on any
cash or kind gift is exempted up to the amount of fifty thousand whereas exemption in case of
gift of immovable property whether with consideration or not is exempted up to fifty thousand.
29 McGee, Robert W., and Adriana Ross. "A demographic study of polish attitudes
toward tax evasion." Available at SSRN 2410561 (2014).
30 MITTAL, SANJIV, et al. "IMPACT OF GAAR ON INDIAN EQUITY MARKET: AN
EMPIRICAL STUDY." CLEAR International Journal of Research in Commerce &
Management 4.10 (2013).

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According to the income tax the gift tax is charged on the recipient of gift which is charged
under the head of income from other sources at the normal rate of tax. Gifts includes property,
money and other valuable items but people wants to avoid tax on this item and tries to find
different ways to avoid taxes. Gifting to own children is the most used method to avoid tax on
income and the taxpayer shows it as expenses in his income statement31.
Tax agreement between India and Mauritius
India and Mauritius has signed an agreement by on May 2016 agreeing on the matter of
double taxation and prevention of any tax evasion. This agreement is applicable to all person
who are resident in both the contracting country. This agreement on double taxation between
India and Mauritius provides India from exemption of tax on capital gains earned by a Mauritius
resident32. This capital gain is taxable according to the resident rule in Mauritius.
31 Muhrtala, Tijani Oladipupo, and Mathias Ogundeji. "Professionals’ perspective of tax
evasion: some evidence from Nigeria." Universal Journal of Accounting and Finance 1.2
(2013): 35-41.
32 Muhrtala, Tijani Oladipupo, and Mathias Ogundeji. "Professionals’ perspective of tax
evasion: some evidence from Nigeria." Universal Journal of Accounting and Finance 1.2
(2013): 35-41.

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EFFECTIVENESS OF INTERNATIONAL AGREEMENT
The key feature of this agreement are as follows:
 India can charge tax on capital gain arising from the transfer of shares in a resident
company acquired after 1st April 2017.
 Investment made before 1st April 2017 has been out dated and shall not form the part of
capital gain tax in India.
 Any transition between the periods 1st April 2017 to 31st March 2019 the tax rate will be
limited to 50 percent of the Indian tax rate.
 The benefit of reduced rate on the transaction between a specified periods shall be subject
to LOB article while the resident of Mauritius shall be entitled to get the benefit of tax
deduction.
 An Indian resident whose total expenditure in operation in Mauritius is less than 270000
in a year then he shall be deemed as Shell Company33.
33 Muller, Alan, and Ans Kolk. "Responsible tax as corporate social responsibility: The
case of multinational enterprises and effective tax in India." Business & Society 54.4
(2015): 435-463.

23
EFFECTIVENESS OF INTERNATIONAL AGREEMENT
 If any interest arises in India out of any Mauritian resident for any borrowing after 31st
March2017 then he is subject to pay tax at the rate of 7.5 percent to the Indian bank.
Tax agreement between India and South Africa
Government of India and South Africa has signed on the agreement in respect of double
taxation and prevention of money evasion through income tax. This agreement is applicable to
all person residing in both the countries and also applicable to all the identical and similar taxes
which is imposed by both the states. There must be a fixed place of business which can be
wholly or partly carried on whether it could be a branch, office, factory or workshop34.
 In this agreement it has been stated that the income derived by the resident of a state
from an immovable property or any agriculture then it must be taxed in that state.
 Any profit arise by an enterprise in a state shall be taxable in that state until the business
is carried on other state.
 If any profit included in the income which was received in other article of this agreement
then this agreement shall not be effective.
 Profit of an enterprise from the operation operation of transportation shall be taxable in
the state were it arises.
 If dividend, interest, royalty and other fees is received form an Indian company by a
South African resident then it shall be taxed in South Africa.
 Capital gain derived by Indian resident form the immovable property located in South
Africa is taxable in South Africa.
34 Murshed, Muntasir, and Syed Yusuf Saadat. "Modeling Tax Evasion across South
Asia: Evidence from Bangladesh, India, Pakistan, Sri Lanka and Nepal." Journal of
Accounting, Finance and Economics 8.1 (2018): 15-32.

24
EFFECTIVENESS OF INTERNATIONAL AGREEMENT
Tax agreement between India and USA
India and USA entered in an agreement to prevent the double taxation and undue
imposition of tax. It helped to eliminate the double taxation of the people having income in both
the countries. This agreement is applicable to all the individuals, company, entity and others
having income in both the countries35. This agreement consist of the followings:
 In USA income tax is imposed by the internal revenue code on the insurance premium
paid by the foreign people. By this India USA tax agreement, now taxes will be imposed
on the insurance premium up to the amount the risk is covered.
 In India the income tax includes the surcharge and surtax but after the application of
India USA tax treaty it does not applied to the income tax.
 Income derived from the immovable property by an Indian resident situated in the USA
than it must be taxed in USA.
 In case income from the immovable property situated in India must be taxed in India.
 Interest income arising in India paid to a resident of USA must be taxed in USA.
 Dividend income from an Indian company to a resident of USA shall be taxed in USA.
Tax agreement between India and Australia
India and Australia signed the agreement for the avoidance of double taxation and to
prevent fiscal evasion. This agreement is applicable to all persons who are resident of both the
35 Murthy, KV Bhanu, and Niti Bhasin. "The impact of bilateral tax treaties: A multi-
country analysis of FDI inflows into India." The Journal of International Trade &
Economic Development 24.6 (2015): 751-766.

25
EFFECTIVENESS OF INTERNATIONAL AGREEMENT
countries. In India income tax includes surcharge and surtax on the profit of companies36. This
agreement is applied to the similar taxes which is imposed upon Australia and India.
 For the purpose of agreement the persons in contracts must be resident to any of the both
country.
 There must be a permanent establishment which consist of a branch, office, factory and
workshops.
 Income from the immovable property of a person must be taxed in the state in which the
property is situated.
 Profit from a business shall be taxable in the country in which the enterprise runs. If the
business runs in one country and its operation are performed in any other country then its
income must be taxed in the country of the business origin.
 Profit from the operation of ships and aircrafts must be taxed in the state where the profit
has been generated. Profit form the carriage form one country to another must be taxed in
the country where it is transported.
 Dividend received by a resident form an Indian company must be taxed in the beneficiary
country37.
 Interest income received by a resident must be taxed in the beneficiary country.
36 Preobragenskaya, Galina, and Robert W. McGee. "A demographic study of Russian
attitudes toward tax evasion." Journal of Accounting, Ethics and Public Policy 17.1
(2016).
37 Ramdurg, Anil I., and Dr Basavaraj. "Demonetization: redefining Indian
economy." International journal of commerce and management research 2.12 (2016): 7-
12.

26
EFFECTIVENESS OF INTERNATIONAL AGREEMENT
 Royalty arising in one state and it is received in some other country then it must be taxed
in the beneficiary country.
Tax agreement between India and Brazil
Brazil has number of tax treaties specially designed to minimize the double taxation in
international agreement. The Government of India and Brazil signed an agreement to avoid this
problem of double taxation and to prevent the Evasion problem38. It is applied to all persons who
are resident of both the countries.
 Income derived from the immovable profit by a resident of a country situated in other
country must be taxed in the other state. Immovable property includes livestock,
property, equipment and other valuable items.
 Profit of a business shall be taxable in the state in which the business is carried on
through its main office is situated in some other country. In determination of profit there
must be a permanent establishment39.
 Profit from the shipping and transport shall be taxable in the country in which the
enterprise is situated. If there is no specific place for the entity then tax must be charged
in the country where it is transporting.
 Dividend received by a resident of one country from a company of another country then
tax must be charged in the receiving country. But if the dividend is taxed in other country
38 Rani, Kavita, and Sanjiv Kumar. "Black Money In India–A Conceptual
Analysis." Indian journal of Research 3.1 (2014).
39 Rao, M. Govinda. "Political economy of government finance in India." India
Review 14.1 (2015): 58-72.

27
EFFECTIVENESS OF INTERNATIONAL AGREEMENT
of which the company is resident then tax shall be charged with percentage of not
exceeding 15 percent.
 Interest arising on one country and paid to a resident of another country then it must be
taxed in the receiving country of resident.
 Royalty arises in one country and received by a resident of another country then it is
taxed in the resident country where it is received40.
 Capital gain received by a resident of country form an immovable asset which is situated
in another country then it must be taxed in the state form where the immovable property
belongs.
Tax agreement between India and Canada
The government of India and Canada made an agreement for the avoidance of double
taxation which is applied to the person residing in one of the both countries contracting. This
agreement is applied to all incomes and capital. This agreement is applied to all similar taxes that
are imposed in the country and each country every year notifies each other for any change in
taxation law for which the agreement is done41.
 Income from the immovable property which includes agricultural income also which is
taxed in the state in which it is situated.
 Profit from the business of an enterprise of a country shall be taxable in the country
where it is situated and must be a permanent establishment. If the enterprise carries on its
40 Rogoff, Kenneth S. The curse of cash: How large-denomination bills aid crime and tax
evasion and constrain monetary policy. Princeton University Press, 2017.
41 Rout, S. K., and M. Arora. "Taxation of smokeless tobacco in India." Indian journal of
cancer 51.5 (2014): 8.

28
EFFECTIVENESS OF INTERNATIONAL AGREEMENT
operation in some other country and the profit arises from it shall be taxed in that state
which is attributable to the permanent establishment and sale of goods or services of
similar kind42.
 Profit of an enterprise of a country received form the operation of shipping and air
transport shall be taxable in that state only. If the carriage is a passenger carrier than the
profit derived form it shall be taxable in other state.
 Dividend, royalty and interest received by a resident from a company situated in another
country must be taxed in the beneficiary country.
 Capital gain arising in one country must be taxed in the country form where it is
originated43.
Tax agreement between India and Singapore
A tax treaty has been signed by India and Singapore in order to eliminate the double
taxation and reducing the tax burden for both the countries. Without this treaty income of both
the country will be double taxed which may create discourage in trade and commerce between
both the countries. India Singapore double tax agreement is applicable to all the resident of both
the country. This agreement covers the capital gain tax and income tax of both the country44.
42 Sankar, R. "GST: Impact and Implications on Various Industries in Indian
Economy." The Journal of Internet Banking and Commerce 22.2 (2017): 1-9.
43 Shafiq, M. Najeeb. "Aspects of moral change in India, 1990–2006: Evidence from
public attitudes toward tax evasion and bribery." World Development 68 (2015): 136-148.
44 Rout, S. K., and M. Arora. "Taxation of smokeless tobacco in India." Indian journal of
cancer 51.5 (2014): 8.

29
EFFECTIVENESS OF INTERNATIONAL AGREEMENT
This agreement also specified the tax that are applicable on the income of residents of both the
countries. The main provisions in India Singapore treaty are as follows:
 Business profit – According to the treaty the profit from any business is taxable in the
country where the actual business operation is conducted. Without this treaty business
profit would have been taxed in both the countries and the burden of tax has to bear by
the business twice. So to remove this problem agreement in DTA has been done.
 Interest, royalty and dividend – In this agreement the rate of tax has been declared in case
of interest, royalty and dividends. Without this treaty the tax rate would be 15% to 20%
in both the countries but due to this agreement the tax on interest would around 10% to
15% which is lower than the prevailing tax rate.
 Capital gains – Capital gain are chargeable to tax is specified in the DTA agreement for
both the country. Capital gain that arises from the sale of property is taxable in the
country where the property resides. But the capital gain in other assets will be taxable in
the country of the investor.
Relationships between money laundering, tax evasion and tax havens
Money laundering is become a very complex and rigid term. It is the process of making
huge amount of money through illegal activates like human trafficking, drug, terrorist and others.
This money laundering amount has been easily withdrawn by online banking and crypto
currency without any detection which is being used to fund the terrorist. In other word money
laundering has become the important part of criminal activity as it support the criminal and

30
EFFECTIVENESS OF INTERNATIONAL AGREEMENT
terrorist. Government has taken an active part in order to detect the money laundering by putting
eyes on the financial institutions and through systems to detect this activities45.
Tax evasion is also an illegal activity where a tax payer intentionally manipulates its income to
save tax. It is applicable for both non-payment and underpayment of taxes. There are many
factors to consider the tax evasion and the most commonly financial situation need to be
explained. Tax evasion uses the illegal methods for non-payment of taxes. It must be addressed
with proper reasons because there is a requirement of sufficient revenue to prevent them from
implementing social, economic, environmental and other factors. Tax evasion provides profit to
the financial institution, politicians and other peoples involved in the illegal activity. So a proper
and effective tax administration must be made in order to strengthening the tax policies46.
Tax haven is a process of depositing incomes in an offshore financial institution in order to save
tax. Tax havens take either no tax or less amount of tax which help the tax payer to earn more. It
is easy to identify the tax haven by some factors like lack of transparency, no substantial
activities and lack of information. Tax haven countries still earns form tax haven as they charge a
low rate of taxes from other countries and there is no such jurisdiction to control this. This tax
haven country attract the individual or companies to invest their money which help this countries
to grow their economy.
Strategy to combat tax evasion
45 Sharma, Chandan, and Arup Mitra. "Corruption, governance and firm performance:
Evidence from Indian enterprises." Journal of policy modeling 37.5 (2015): 835-851.
46 Shirley, M. Angel Jasmine. "Impact of demonetization in India." International Journal
of Trend in Research and Development (2017): 20-23.

31
EFFECTIVENESS OF INTERNATIONAL AGREEMENT
By keeping in mind the risk of avoiding tax there are few strategies that can be used to
avoid tax evasion are as follows:
 Providing regular information to all the staffs about the tax rule and tax evasion is
important to keep them update of the new tax rules and the risk of avoiding. By showing
the risk of tax evasion it is easy to control the problem.
 Law enforcement agencies has income tax department who has the responsibility to
implement variety of rules and regulation whenever needed. It is controlled by the
Ministry of finance who is directly reportable to the prime minister of India. Under law
enforcement of India the directorate of criminal investigation has been created to control
the black money.
 Mutual legal assistance treaty or MLAT has been created which is an agreement between
countries on agreeing to provide or share information related to criminal offence like tax
evasion and others. It is a type of request for mutual legal assistance from other countries.
 Multilateral instrument or MLI is designed to take action against tax evasion by
providing counter solution through different treaty and solution for dispute in cross
border for tax matters.
 Multilateral authority agreement – The multilateral agreement is on mutual administrative
assistance in tax matter which was developed by the OECD to prevent tax evasion. Under
this agreement exchange of information is available for all the countries especially for the
developing countries which could get more benefit from it.
 Double taxation treaty has been created which will provide an agreement between
countries about the income tax matter on different types of transaction. Without the
double taxation treaty international company has to pay double tax on their transaction

32
EFFECTIVENESS OF INTERNATIONAL AGREEMENT
which is increasing their expenses and lead to tax evasion. Its main aim is to prevent
double taxation of income and capital and tax evasion over the incomes stated in the
agreement between the treaty countries. DTA is also applicable in avoiding double
taxation in gift tax and estate. By applying this treaty it will help to remove the double
taxation and lead to reduction of tax evasion.
 Proper tax planning must be ensured to tackle the difficulties and to ensure the risk of
offshore investment. Tax advisories must be appointed to take a proper advice on the tax
matter for the benefit of the company.
 Conducting proper risk assessment is necessary form time to time to help to ensure
avoiding tax evasion.
 Proper distinction between tax evasion and tax avoidance must be shared among all
staffs. Tax avoidance is a legal process of avoiding tax and tax evasion is escaping tax
illegally.
 Encouraging the staffs to report on any suspicion tax evasion. It is important to take
necessary steps when needed47.
Formation of financial Intelligence unit
Due to the problem of tax evasion many countries established the Financial Intelligence
Unit that serve as the center point for all tax receipts. It analyses the suspicious transaction,
money laundering, financing of terrorism and other matters to take necessary steps against them.
FIU has invented some precautionary measures against this problems like anti-money
laundering. There are four basic models which are as follows:
47 Shubhang, S. "Tax Evasion in India." Research Journal of Humanities and Social
Sciences 4.4 (2013): 465-469.

33
EFFECTIVENESS OF INTERNATIONAL AGREEMENT
 Judicial model – It is established by the government to provide the judicial power to the
investigating agency of seizing funds, detaining peoples, investing any search and others.
 Law enforcement model – It is the law providing model that provide anti-money
laundering measures along with other laws.
 Administrative models – It is an independent authority which receives information and
process them and transmit the required law enforcement. It act as a mediator between the
financial and the law enforcement. It act as a decision maker for the crime or any tax
evasion related incident48.
 Hybrid model – It is the link between the judicial and law enforcement by combining the
elements of two or more FIU models.
Organization for Economic Co-operation and Development (OECD)
It is group of 34 countries that develop the economic and social policy for economic
development, sustainability development and improving the standard of living. More than
decades OECD provide valuable information for the statistical, economic and social data. It
provide different discussions and analysis that help the government to make economic policies. It
has the common reporting standards which is approved by the OECD. This standard consist of
four key parts which are as follows:
 CRS
 Commentaries in the CAA and CRS
 CRS XML scheme
48 Wang, Xu, et al. "Tax Avoidance and Evasion: Cigarette Purchases From Indian
Reservations Among US Adult Smokers, 2010-2011." Public Health Reports 132.3
(2017): 304-308.

34
EFFECTIVENESS OF INTERNATIONAL AGREEMENT
 CAA providing the international legal framework
Case study:
HSBC tax fraud probe in India
HSBC is being probed by tax and other law enforcement agencies around the world
including the India for tax evasion, money laundering and unlawful banking. This bank has set
aside $773 million to deal the impact of the financial investigation. They were forced by the
enforcement agencies of various countries to provide all the information regarding the panama
leaked paper which consist of many Indian names included in tax violation through offshore
havens. In 2015 Indian tax authority gave notice to the HSBC Company in India of having
evidence of tax evasion against them. HSBC revealed many names and document of having
decoy name to open account. Then RBI declares HSBC not qualifying as banking sector for
breach of many rules49.
Sequoia capital’s scheme to use Mauritius to avoid Indian taxes
Sequoia capital an American capital firm invested billions of amount in Indian companies
and earned revenue. They were previously investors of Apple and Google. They made many
Indian investments in Mauritius offshore based corporation which was later on leaked and
reveled files of huge documents of its offshore details. This leaked Sequoia document provided
the detail of companies made investment, location of the offshore havens and the tax treatments.
49 Wei, Wei, and Robert W. McGee. "Gender and attitude toward the ethics of tax
evasion: a comparison of European and Asian views." Journal of Accounting, Ethics and
Public Policy 16.4 (2015).

35
EFFECTIVENESS OF INTERNATIONAL AGREEMENT
This leaked revealed how the multinational companies are cutting their tax bills through
Mauritius. Government of Mauritius denies this activity and accused it as a harm for country
reputation.
Vodafone tax evasion case
In 2007 Vodafone decided to expand its operation in Indian mobile market by buying
Hutchison Essar. They decided to invest in share of the similar company which was situated in
the Cayman Island which was far from the hand of Indian tax authority. With the order of
Supreme Court investigation has been done on the transaction of the Vodafone and it was found
that over 20,000 corers tax is unpaid. Vodafone was striped in form the world and about its taxes.
In 2012 Indian government introduced Income tax act 2012 which implement tax on any transfer
of shares between any two non-residents. Vodafone got a huge unpaid tax bill and international
arbitration has been initiated against them.
Conclusion
It is a lot of pain for any one paying huge amount of taxes to the government but it is the
rule of every country of paying tax. Government takes only a certain percentage of the income
which is fair enough. People don’t understand the importance of tax payment and evade taxes.
Tax evasion is a serious offence and punishable with sentence and fine. Tax evasion creates a
huge loss for the government as it create loss for near about 500 billion dollars every year. It is
the amount that can be used by the Government for the economic growth. So it is illegal in doing
it and must be avoided by knowing its disadvantage on the overall country.

36
EFFECTIVENESS OF INTERNATIONAL AGREEMENT
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