Dubai has been a favourite destination for parking of illegal funds of Indians, who may have evaded various laws, including FEMA and the Income Tax Act. With a zero tax regime and a very liberal banking system, with few questions asked regarding funds inflow and outflow, it has been a tax haven of sorts, which has been patronised not just by South East nations like India, but by the nearby African, Central Asian and European nations too. As far as India is concerned, Dubai has had a notorious past of permitting a free run to criminals and tax evaders from India, even though due to international pressures in recent years, curbs have been imposed. It is for these reasons and the attraction of Dubai as an entrepot, that Indians have invested heavily in real estate in Dubai. Between 2013 to 2017, Indians have invested about Rs.100,000 crores, in real estate in Dubai. In the first three months of 2018 itself, the amount invested by Indians in real estate in Dubai, has been Rs.5000 crores.
It has been a common global practice for individuals and corporates to park money abroad, either to save on taxes or to avail of the benefits of residence in an attractive nation. American corporates itself are said to hold overseas assets worth USD 1500bn, seeking better tax and investment options. Such hoarding of funds is generally done in nations where taxes are nil/low and remittance laws are liberal, such that funds can flow in and out with ease. While such stashing of funds abroad by American corporates is reported to be generally legal, that has not been the case of India. Till about a decade ago, as a general rule, Indians could not buy assets abroad, because our restricting forex laws did not permit such remittances. Only those who had earnings in foreign exchange, by way of exports, could retain part of it abroad and invest it in assets. Even the regulations permitting Indian corporates to invest abroad were not liberal, with severe restrictions and conditions thereon.
It is these restrictive/rigid forex laws and oppressive tax laws, that gave rise to a culture of tax evasion and illegal parking of funds, in undisclosed assets abroad, in violation of India’s tax and FEMA laws. This practice of ‘evade tax and remit’, was encouraged by tax havens like Switzerland, whose very economies depended on the management of such illegal remittances into their nations. But in recent times, these nations too have been forced to share information with countries and overseas investments have come under the radar of tax and enforcement authorities, as in India.
The news is that the Indian Income Tax Department is probing the purchase of properties in Dubai by 7500 Indians, to check whether these have been out of legitimate disclosed sources and are not otherwise. In case these are funded by illegal hawala channels, then tax penalty and prosecution of these Indians will be harsh, apart from action against them by the ED and the money laundering authorities. With such action, the illegal investments into Dubai, emanating from India will certainly be reduced to a trickle.