Indian financial regulators have been asked to prepare a "negative list" of tax havens as the government attempts to get a better grip on the huge tide of anonymous money entering its capital markets every year.
According to a paper circulated at the Economic Editors' Conference earlier this week, the Finance Ministry has requested that the list be drawn up by the Reserve Bank of India and the Securities and Exchange Board of India. The move is part of a wider policy designed to increase scrutiny of India's securities markets and reduce their vulnerability to money launderers.
The authorities are paying particularly close attention to the use of Participatory Notes (PNs), a financial instrument which allows the entities holding them to remain anonymous.
The government was alerted to the widespread use of these vehicles when the National Security Council revealed that that more than 85% of foreign fund inflows into India in 2005/6 were through PNs, up from 20% in 2003/4.
The NSC noted that while billions of rupees enters India as foreign investment, hardly any leaves as taxable returns on investment, leading it to conclude that "some other clandestine method is used for this purpose".
Given the heavy involvement of Mauritius in India's foreign investment, this jurisdiction is likely to be at the top of the regulators' list; Reserve Bank of India figures for FDI in 2004-2005 show Mauritius as the lead external investor into India. Mauritius accounted for US$820m out of a total US$2,320 in FDI.
In an attempt to head off pressure from India to change the countries' Double Tax Avoidance Agreement, the Mauritius government announced in October that it will tighten up rules on the issuance of Tax Residence Certificates, and in future will issue them for only one year at a time.
The Indian tax authorities have believed for years that Indian investors 'round-trip' through Mauritius in order to escape capital gains tax on stock market investments. However, their attempts to re-interpret the treaty through the courts have largely failed.
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