Effectiveness of International Agreements on Tax Evasion in India

This report provides a comprehensive analysis of tax evasion in India, examining various schemes, including dishonest tax reporting, offshore tax havens, and the role of shell companies. It delves into the nature of tax evasion, exploring both illegal and legal activities, and investigates the impact of tax treaties between India and countries such as Mauritius, South Africa, the USA, and others. The report also addresses the relationships between money laundering, tax evasion, and tax havens, and outlines strategies to combat evasion, including the formation of financial intelligence units and the role of organizations like the OECD. Furthermore, it presents case studies, such as the HSBC tax fraud probe and the Vodafone tax evasion case, to illustrate the practical implications of tax evasion. The report aims to provide a detailed understanding of the complexities of tax evasion in India and the effectiveness of international agreements in addressing this issue.

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

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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.