Government Must Investigate Spike In Exports And Imports.

India's exports to the Bahamas, a tax haven, surged to $2.2 billion in 2010-11 from a modest $22 million in 2008-09. The magical growth raises doubts over the veracity of the figures and raises the possibility that inflated exports point to other shady activities. The directorate of revenue intelligence, the income-tax department and the Reserve Bank of India (RBI) should investigate the matter, with alacrity. Recent research findings by Kotak Institutional Securities signalled money laundering through the trade route as there was a wide difference between the export data from company reports and official export data for 2010-11.

However, over-invoicing exports is a cumbersome way of bringing in black money stashed away abroad, when investment into India through the sub-accounts of foreign institutional investors offer a simpler route. Another possibility needs to be investigated as well, that the surge in both exports and imports reflects attempts to take advantage of interest rate arbitrage. Money is cheap abroad and expensive in India.

Bring short-term funds in through fake exports, deploy it in the local economy at high rates of interest and repay through over-invoiced imports. Such circular flow of funds could be another explanation for the implausible surge in exports. So, a probe is a must to shed light on what really is going on. Action is also needed to check illicit trade flows. One, the government should improve the monitoring mechanism to ensure that the value of goods exported on paper matches the actual value. Greater cooperation among various Customs authorities is in order to combat commercial frauds.

Two, the Centre should push tax havens to share information on tax evaders. The tax department should be in a position to lift the corporate veil and establish audit trails in trade transactions. Better transfer pricing regulation will also help check tax-haven abuse. Policymakers should appreciate the untenability of sustaining interest rate differentials between domestic and foreign markets in excess of the margin for the rupee's exchange rate uncertainty.

Source : economictimes.indiatimes.com