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Amendments in DTAA to control Round Tripping (Relevant for GS Prelims, GS mains Paper III)

India secured amendments to the Double Taxation Avoidance Agreement (DTAA) with Singapore, effectively closing one route of laundering domestic black money by “round-tripping” it from countries like Mauritius, Cyprus and Singapore.

The Centre got the DTAA amended with Mauritius in May and since the Singapore tax treaty was based on the same terms as Mauritius, efforts were afoot to re-negotiate the pact with Singapore. A similar treaty with Cyprus was amended in November.

How the amendments will control Round Tripping?
There was a reasonable apprehension that these agreements were being misused for round-tripping domestic black money, organising its flight outside the country and bringing it back into the country through these three routes. 

The tax exemptions for investors under the existing agreement will be discontinued from April 1, 2017. Investments made before March 31, 2017, will be grandfathered, and after that, for two years, the capital gains will be shared half and half between the country of residence of investor and India. Post-2019, the entire capital gains becomes exclusive to India. 

A significant apprehension about these pacts was the complete exemption of taxes on capital gains that investors could utilise in the name of double tax avoidance as these three countries had no capital gains taxes. “So the beneficiary would not pay any capital gains tax in India on the ground that the Singapore taxation rules would be applicable to them and there was no capital gains in those jurisdictions.”

What is Round Tripping?
The term ‘round-tripping’ is self-explanatory. It denotes a trip where a person or thing returns to the place from where the journey began. In the context of black money, it leaves the country through various channels such as inflated invoices, payments to shell companies overseas, the hawala route and so on. After cooling its heels overseas for a while, this money returns in a freshly laundered form; thus completing a round-trip.
This route is far from simple or straightforward. Those indulging in this game are past masters who make the money flow through multiple layers consisting of many entities and companies.



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