Are the rich in India under taxed?

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Shinzani Jain is a 3rd year BSL LLB student at ILS Law College, Pune. She is a volunteer at the Academy of Political and Social Studies. Shinzani likes to read, write and research and is interested in politics and journalism.

Dilapidated roads wrecked with ruts and naked boney kids roaming around with potbellies are common sight throughout India. Government hospitals nurture equal number of pallid patients and rodents. Corruption in India is double the global average. As the crime rate continues to rise, the country barely survives with a desperate need of security forces. The absence of investment in infrastructure is visible in every aspect, from urban planning to good roads and education to health.

One of the many reasons of this abysmal state of affairs as mentioned by the government is insufficient stable income of the government, and subsequent insufficient expenditure on social, development and infrastructural sectors.

The question then is whether India indeed is under–taxed, when a common man is paying a large chunk as taxes. With the number of Ultra High Net Worth Individuals in the country rising each year, the problem cannot be the absence of individuals capable of paying taxes. The reason behind this paradox is the disproportionate tax collection.

Interestingly, statistics reveal that there is a massive outflow of black and illicit money from the Indian economy. Several routes are used for money laundering, siphoning corruption money, tax evasion and funding of criminal/illicit activities. One needs to ask, “How do these routes continue to flourish despite the acknowledgement of them?”

Another intriguing fact is that Mauritius (a tax haven) has cumulatively accounted for almost 40% of the Foreign Direct Investment (FDI) coming to India over the past decade. In the year 1982, India signed a Double Taxation Avoidance Agreement (DTAA) with Mauritius.

Over the years, investigations have revealed that the treaty has been abused as a tool for tax evasion by Foreign
Institutional Investors (FIIs). It has been observed that several of the investments made in India from Mauritius are those by shell companies, in order to avoid paying taxes in India. It is important to note here that Mauritius does not charge these investors on capital gains at all. As a result, the investors elude paying taxes in both countries. It has also come to light that most of these shell companies have their base in India, which means the capital that flows out of India comes back to India in the form of foreign investment. This process is called round tripping.

A startling fact is that this mechanism has been acknowledged by economists, tax authorities and the finance ministry in several reports. However, the amendments and proposals made in order to rectify this massive abuse have either been ineffective or have exclusion clauses protecting the investors. Even the apex court, in Azadi Bachao Andolan v. Union of India tactfully cleared the floor for the investors calling for legislature to take policy measures, if so required. Ever since the controversy caught attention in the year 2000, each government has blatantly kept the framework untouched for want of foreign investment.

Thus, in the present situation, instead of plugging the loopholes, we are deliberately nurturing them; indicating to a clear lack of conviction and political will.

If enforced with conviction, a scheme of stringent legislations can curb this massive leakage of revenue. A few measures that can be taken are enforcement of the IT Act, widening and deepening of the tax base, enforcement of wealth tax, sealing the misuse of the DTAA, imposition of central taxes on property etc. Till then, as the investors relish the perks, the country will continue to bleed.

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