Panama papers controversy bring our attention to two important aspects of :
- Clearly demarcating legislative lines that differentiate tax evasion from tax avoidance
- Enforce stringent measures against exploitation of tax-machinery by closely monitoring all cash and income flows
Negative impacts of globalisation:
- Offshore banking and tax havens have mushroomed and help secretly transfer money quickly. This deprives a nation of its legitimate tax base and indirect taxes have to be high thus social sector spending takes a hit.
- Often the money taken out illegally or avoided in taxation using various loopholes, is re-invested through means like FDI, Participatory notes, Hedge funds etc. thus delivering double blow. For example Mauritius Route for India is allegedly round tripping. This kind of foreign investment is a necessity of a globalised economy for ease of doing business. Often the same money can also be used for terror financing, drug trafficking, etc.
- Wealth flows from the periphery of developing nations to the core of the developed nations ( dependency theory) as the developing nations get integrated into the world economy. Thus globalisation perpetuates inequality for ex. Belize rice farmers committed suicide due to entry of US rice in their market.
- For allowing globalisation, India had to do structural reforms like FERA diluted to FEMA, Liberalised Remittance Scheme of RBI, current account convertibility, etc. all of which facilitated easier flow of cash and capital thus allowing companies a chance to masquerade illegitimate cash.
Thus rich is getting richer and poor getting poorer ( also supported by Gini index in India) and in name of globalisation, stable regimes, local economies, etc. are sacrificed and taxes evaded for want of more money and power.
What can be done?
- General anti avoidance rules (GAAR) tied in sync with other international agreements like Double Taxation Avoidance Agreements (DTAA)
- OECD’s initiative to encourage automatic exchange of tax information across jurisdictions – Base Erosion and Profit Shifting (BEPS)
- Filtering outflows via RBI’s Liberalised remittance schemes, enforcing KYC/KYI norms on any outgoing money, screening outflows for illegality before they reach a tax haven.