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Illegal funds outflow a headache

Calcutta, Dec. 14: The government today expressed concern over the “unmistakable trend” of private players parking money in overseas tax havens and low tax jurisdictions.

Speaking at a Ficci meeting here today, revenue secretary Sunil Mitra said, “This is a worrisome issue… There is an unmistakable trend showing that the Indian private sector has shifted away from bank deposits to deposits in overseas financial centres (OFCs).”

He said the share of deposits in overseas financial centres to total deposits had jumped to 54.2 per cent in 2009 from 34.5 per cent in 1995.

Such illegal fund outflows, according to Washington-based Global Financial Integrity, stood at $19 billion annually between 2002 and 2006.

Citing a recently released report of Global Financial Integrity, Mitra said “with deregulation and trade liberalisation since 1990s, there has been a spurt in illicit fund outflows primarily on account of trade mispricing. The increasing recourse (by domestic corporations) to OFC deposits relative to the domestic banking system is a factor of concern because OFCs are subject to lesser oversight than banks.”

Sufficient attention, therefore, needs to be given to transfer pricing norms, which are transactions between two entities of a company located in different countries .

“Intra-group transactions are not subject to the same market forces as transactions between unrelated parties operating in a free market, there is a huge potential for profit shifting via under- or over-pricing of intra-group transactions,” Mitra said.

He said a 2004 OECD (Organisation of Economic Co-operation and Development) report had pointed out that 60 per cent of global trade were done by multinationals, and half of the transactions were between subsidiaries of a parent company.

Besides, money shifted out of the country comes back in the form of foreign direct investment that even attracts tax incentives.

“The illicit funds outflow is attributable to the growth in opportunities for trade mispricing and expansion of global shadow financial system, particularly in low-tax jurisdictions, and disguised corporations situated in such low-tax jurisdictions enable the round tripping of funds illicitly shifted out of India,” Mitra said.

While the illegal outflows in China have dropped from 14.1 per cent of GDP (gross domestic product) to 8.8 per cent between 2000 and 2008, in India it went up to 2.4 per cent of GDP from 0.5 per cent.

Mitra said the direct taxes code was trying to address the concerns.

Tax collections

Tax collection during this fiscal may exceed the target of Rs 7,45,000 crore, Mitra said.

He said the collection of direct and indirect taxes during the current fiscal till November grew 28.6 per cent over the same period last year.

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