India’s Tax Evasion Fight Lowering Investments

June 10, 2012 Taxation in India

India's Tax Evasion Fight Lowering Investment NEW DELHI – India has seen a mass exodus of foreign investment, following the government’s recent announcement that it intends to implement new rules to fight tax evasion.

On June 10th the Indian media reported that over the last three months foreign entrepreneurs have pulled out nearly INR 1 trillion, previously held in Indian Participatory Notes, from the country.

The withdrawals follow the government’s announcement of the date of the implementation of new General Anti-Avoidance Rule (GAAR), which, in one year’s time, will grant tax authorities greater powers to conduct investigations into offshore transactions and allow greater monitoring of activities suspected of facilitating tax evasion in India.

In the last few years Participatory Notes have accounted for nearly 50 percent of all foreign institutional investment (FII) held in India. However, following the announcement of the GAAR rules, the total investments have dwindled to only 10 percent of all FII in the country.

Participatory Notes (PN) are often used by high net worth individuals outside of India to make investment into the country’s stock market without registering their details with the Securities and Exchange Board of India (SEBI).

Using PNs can save time and money for foreign investors, but, according to a recent government white paper, the method is also vulnerable to abuse by tax evaders and can potentially be used to anonymously launder money. The SEBI has also previously said that PNs are often routed through tax haven jurisdictions, making it difficult to ascertain the ultimate beneficial owner of the investment in India.

Photo by 24thcentury