Unmasking Treaty Shopping: The Fight That India Has Against Global Tax Dodging
- IJLLR Journal
- Jan 4
- 2 min read
Khushi Verma, Dharmashastra National Law University, Jabalpur, M.P.
Nikhil Gupta, IMS Unison University, Dehradun, Uttarakhand
ABSTRACT
Economic liberalisation and cross-border capital mobility have greatly transformed the international investment landscape, but have also spawned complex avoidance of taxes, like treaty shopping and shell entities abuse. These systems use the loopholes in Double Taxation Avoidance Agreements (DTAAs) to lose revenue, especially in developing economies such as India. Traditionally, capital gains tax avoidance was done through the use of routes including India-Mauritius and India-Singapore DTAAs, which raised a question of base erosion and profit shifting (BEPS). It is estimated that USD 100-240 billion of developing countries are lost every year as a result of these practices by OECD and UNCTAD.
India has reacted to this by taking a multi-pronged strategy: renegotiations of treaties, introducing anti-abuse rules, including the Principal Purpose Test (PPT) and the Limitation of Benefits (LOB) clauses of the Multilateral Instrument (MLI), and introducing the General Anti-Avoidance Rules (GAAR) in 2017. Even judicial interpretations have changed- permissive view adopted in Azadi Bachao Andolan to substance-over-form in Vodafone. On one hand, the reforms have reduced the abuse of treaties and increased the equity of taxes, but on the other hand, it has raised concerns regarding discouragement of actual foreign investment, which can be confirmed by the decrease in FDI inflows through Mauritius since 2016.
The obstacles are still multidimensional, starting with transparency issues in beneficial ownership to disparities in the global application of BEPS standards. On top of legal and economic aspects, perpetrating distributive justice and equity, treaty shopping takes a disproportionate toll on domestic taxpayers. The solution, therefore, requires a balance between investor confidence, revenue protection, and international cooperation, and the changing framework in India provides insight into what other developing economies can learn.
Keywords: Tax justice – Fairness in the tax system, Distributive justice – Fair distribution of wealth and resources in society, Cosmopolitan ethics – Belief in moral obligations that go beyond national borders, Fiscal distortions Unnatural changes in the economy due to unfair tax rules, Hedge funds –Investment funds that take high-risk bets to get high returns.
