Good Havens! Tax-Arbitrage and the Indian Experience

Abstract

Tax havens are an outcome of high tax rates in the 1970s. India has joined the concerted international movement in clamping down treaty abuse, in an effort to collect its rightful share of taxes. The sunset clause for tax exemptions forvarious businesses is approaching, pushing more firms towards profit-shifting towards havens. For tax authorities, data is no longer the problem. Banking secrecy laws are getting diluted due to international pressure, and the flow of data through bilateral information exchange agreements is on the rise. At the policy level, there is a case for (a) removal of a plethora of deductions and exemptions (b) reducing effective rates of taxes to render tax arbitrage irrelevant and (c) easing of procedures to move into the next trajectory of tax administration. There is also a case for strengthening the databases of the tax authorities across countries.