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Budget proposals allowing foreign individuals to invest in mutual funds and halve the tax on dividends from overseas arms of Indian companies may provide a window for undeclared income parked abroad to enter the country.

Tax experts said many would use this to bring black money and cash stashed in tax havens into the country.

Public Accounts Committee member and Bharatiya Janata Party leader Yashwant Sinha agrees.

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"The schemes are a ploy to get back black money into the country. They have opened gates for flow of capital from tax havens, which was waiting to come to India under a pretext and incentive," Sinha said.

Sinha, who has twice been the country's finance minister, is also of the view that banks and mutual funds are not following the know-your-customer norms.

"The scrutiny of KYC norms is extremely poor, leaving the field open for people to bring back illegal wealth into the country.

"Also, in several tax havens, it is easy to put any amount of profits on your books without anybody asking questions.

"The money can later be transferred to Indian companies in the form of 100 per cent dividend," said Sinha.

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For long, high net worth individuals were using offshore derivatives instruments, known as participatory notes (P-notes), for investing in the stock markets.

P-note deals did not attract much scrutiny as they were struck overseas and the identity of the actual holder was hazy.

Of late, however, P-notes have been linked with flow of hot money into the country.

The earlier 30 per cent tax on dividends from overseas arms took the effective cost of bringing money into the country as profits to 33.3 per cent.

Mukherjee has now halved the tax to 15 per cent for financial year 2011-12.

"Since the Direct Taxes Code will kick in from the next financial year, which will again tax such dividends at 30 per cent, the scheme is a surprise. It is more like an amnesty scheme," said a top Mumbai-based tax consultant.

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"The scheme has been very smartly structured. Of course, capital will flow from tax havens.

However, the money coming into the country can only be used for business purposes, as it is companies that will receive dividends, not individuals," said Anil Harish, a partner with Mumbai-based D M Harish & Co.

"The intent is to incentivise repatriation of foreign dividends by providing a concessional tax rate. However, if these are received from non-cooperative jurisdictions, the flows will be subjected to source reviews based on the newly-introduced anti-avoidance measures," said Sameer Gupta, a senior partner with accounting firm Ernst & Young.

'Double Irish' or 'Dutch Sandwich' are some of the techniques companies use to route their money.

They funnel their corporate income through Ireland and from there to a shell in the Netherlands, from where it can be transferred to Bermuda.

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This money is later routed to India through a subsidiary in the Gulf.

This is because India has information-sharing agreements with the countries there and so these fund transfers do not attract close scrutiny.

In the Emirates, it is easy to show any amount of profit, as the authorities do not get into the nitty-gritty of transactions.

Once this is done, companies can even pay 100 per cent dividend.

Much of the economic activity in tax havens involves professional financial services such as mutual funds, banking, life insurance and pensions.

Generally, unaccounted funds are deposited with these intermediaries, who then on-lend or invest the money.

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The US National Bureau of Economic Research has suggested that roughly 15 per cent countries in the world are tax havens.

Apart from Switzerland, Isle of Man, Singapore, Mauritius, British Virgin Islands, Bahamas, Bermuda -- where Indian real estate and other companies have set up base -- the diamond and bullion traders have their branches in the Gulf countries.

In the past few years, Dubai has emerged as the main hub for Indians to route their hawala money.
Tax havens are countries which impose nil or nominal taxes and offer themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape high taxes in their country of residence.