Foreign Remittances – The way to evade tax?

As overseas remittances continue to jump, the Comptroller and Auditor General (CAG) is concerned that the tax collections have not matched the growth in foreign exchange earnings amid fears that some of these transactions may have completely escaped the tax net due to lack of appropriate regulatory oversight.

Besides, ambiguity in the classification of incomes of foreign institutional investors (FIIs) and telecom companies have led to inconsistent tax assessments.

CAG, the government’s auditor, has estimated that as much as Rs 56,676 crore was remitted during 2007-08 to offshore financial centres (OFC), which are recognised by the World Bank as jurisdictions that are “opaque to regulations.”

“This constitutes about 19% of the amount remitted out of India under the invisibles account,” the CAG said in a report on Taxation of Payments to Non-Residents, which was tabled in Parliament on Friday.

Of particular concern were remittances made to under-developed jurisdictions for services which these countries appear ill-equipped to deliver.

“There is also the risk of treaty shopping by residents of third countries,” the report said.

Treaty shopping is a process by which entities residing in third countries seek to avail benefits of double taxation avoidance agreements (DTAAs) between two countries.

The report said payments to foreign telecom companies under revenue sharing arrangements between telecom companies should be taxed at source.

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