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Tax shelter: Crime or Intelligence

Tax shelter can be understood as a method of reducing one’s taxable income as a way to reduce one’s taxes. It is a slick way of paying low taxes and still following the tax guidelines laid down by the government.

The role played by the FDI

FDI stands for Foreign Direct Investment. It happens when a business entity takes controlling ownership of another business entity in a different country. It is one of the key driving forces of the economy. India gets FDI in two ways, i.e., automatic and government routes. In the automatic route, a Non-Resident Indian does require the prior permission of the Reserve Bank or the Government for investing. This is the most common way through which scams occur in the country. The government route requires the mandate of the Government for investing. The company will have to apply through the Foreign Investment Facilitation Portal. After clearing through either of the routes, the nation/entity can invest in India through FDI. The top sources of FDI in the country are small nations such as Mauritius. This is so because such nations are tax havens.

What is a Tax Haven?

Tax havens are such offshore nations that offer little to no tax liability to foreign individuals/entities in a politically and economically static environment. Tax havens can also be called Offshore Financial Centers (OFC). They often levy hefty customs or import taxes to compensate for their losses in tax income. They also charge a registration cost for a new firm, as well as renewal fees or a licensing fee, which must be paid annually. These fees would amount to periodic fixed revenue for tax havens. Further, these countries require little to no information from foreign investors. Black money can be kept secretly here without anyone’s knowledge. Some tax havens around the globe are Hong Kong, Bahamas, Mauritius, etc.

How are taxes saved by FDI and Tax Havens?

To obtain a tax shelter, a corporation establishes a subsidiary or relocates its headquarters from its home country to one of the tax havens. They save a lot of money on taxes which goes directly into their pockets. India loses a lot of money to tax havens around the world. Companies also establish subsidiaries in certain countries, which bring in the same amount of money that FDIs do for their main firm. The new firm may not have them as the sole owner, but they may be on the board of directors. This is done in order to boost the company’s stock price.

If a tax shelter is a loss for our country, why is it permitted?

The Double Taxation Avoidance Agreement (DTAA) is a tax treaty signed between two or more nations with the primary goal of preventing taxpayers in these countries from being taxed twice on the same income. India now has DTAAs with over eighty nations, including extensive agreements with Australia, Canada, Germany, Mauritius, Singapore, the United Arab Emirates, the United Kingdom, and the United States. DTAAs are designed to make a country more desirable as an investment destination by removing the burden of dual taxes. However, numerous people or organisations take unfair advantage of this and relocate their money to tax haven countries such as Mauritius, which has a DTAA with India. Earning their money in tax haven countries where they already pay lower taxes, these individuals profit from DTAA and frequently end up paying no taxes. DTAAs are designed to make a country more desirable as an investment destination by removing the burden of dual taxes. However, some people or businesses take unfair advantage of this.


There is no question that stealing taxes to line one’s own coffers is a crime. The middle class suffers much, and this agony is best appreciated by an employee earning a pittance and compelled to pay taxes. To discourage such practices, the Indian government has enacted tough rules for people or organisations who hide their assets overseas. To be more specific, they must provide adequate disclosure of their offshore assets as well as their international portfolio interests. All of the government’s actions appear to be promising enough to keep major corporations from using tax regulations or tax-havens. However, there is always a gap between policies and their execution.

By Devanshi Shukla