Monday, September 19, 2011

Taxing treaty

What is treaty shopping?
Sinduja Bhojwani, Mumbai
It refers to the practice of foreign investors looking to become the resident of a country, with which the investment destination country has the most favourable Double Taxation Avoidance Agreement (DTAA). The Indo-Mauritius DTAA springs to one's mind at once. US, German, Swiss and French companies first set up a shell company in Mauritius, repatriate capital to these shell companies and from there route their investments into India, thereby becoming residents of Mauritius, and becoming eligible for exemption from capital gains tax in India as well as in Mauritius — an obnoxious feature of the treaty, but the one that foreign investors in India like the most.
Currency convertibility
Why can't I maintain 25 per cent of my savings account balance in US dollars, 25 per cent in Indian rupees, 25 per cent in Euro and the remaining 25 per cent in Swiss francs? My bank manger turned down my request.
Pushpa Natarajan, Chennai
The bank manager was not acting whimsically or on an impulse. His was the right response given the fact that only non-residents and NRIs are allowed to maintain saving bank accounts in India designated in foreign currencies. India has not embraced capital account convertibility fully and it is some distance away. Till then, you have to rein in your well-thought desire to diversify your currency portfolio, so to speak, which, of course, makes eminent practical and economic sense, given the fact that rupee's true worth is now taking a battering, thanks to unrelenting inflation.
Banking business
Why does the RBI want to bar real estate companies and brokers from entering the banking business?
Shruti Mahajan, New Delhi
This is because these are the sectors prone to asset bubble. When the Real Estate sector is awash with funds, it results in artificially high valuations for houses. This is true for the stock market. The RBI has rightly opined that if any promoter has even a 10 per cent interest in these sectors, he would invite disqualification. But this country has witnessed several labyrinthine and crooked versions of diversion of funds, and one suspects that despite the sound safeguard, there is no guarantee that wily promoters of banks would not be able to find ways and means to channelise funds into these sectors through subterfuges.

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