Understanding Tax Havens: Are They Legal for Indian Citizens?

Understanding Tax Havens: Are They Legal for Indian Citizens?

The phrase "tax haven" carries a lot of baggage. Say it in a room full of chartered accountants and you'll get a mix of reactions. Some will think of Panama Papers, others will think of perfectly legal holding structures used by Tata, Infosys, and half the companies listed on the NSE.

So which is it? Are tax havens shady loopholes, or are they legitimate tools that Indian citizens and businesses can legally use?

It depends entirely on what you do with them.

What Actually Makes a Jurisdiction a "Tax Haven"?

There's no official global definition. The OECD tried to create one back in 1998, and even they struggled. Generally, a jurisdiction earns the label when it offers zero or very low tax rates, doesn't require real business activity, and historically kept financial information private from other governments.

Places like the British Virgin Islands, Cayman Islands, Jersey, and even closer ones like Mauritius and Singapore have all been tagged with this label at various points. That said, the landscape has changed dramatically in the last decade, and the label doesn't quite stick the way it used to.

Take the BVI. It still has a 0% corporate tax rate, yes. But it now requires companies to demonstrate genuine economic activity under its Economic Substance Act, reports financial information automatically to tax authorities worldwide under CRS, and has a beneficial ownership register accessible to law enforcement. How the BVI functions as a tax-free jurisdiction today looks nothing like the secretive offshore world of the 1990s.

The distinction matters because Indian tax law doesn't care whether a jurisdiction has low taxes. It cares whether you, as an Indian taxpayer, have disclosed everything and paid what you owe.

The Indian Legal Framework

India's anti-avoidance framework is aggressive, and it's only gotten stricter over the past decade. If you're an Indian resident thinking about using an offshore entity, here's what you're up against.

The Black Money (Undisclosed Foreign Income and Assets) Act, 2015 was enacted specifically to target Indians hiding money abroad. Under this law, failing to disclose foreign assets or income can attract a penalty of ₹10 lakh, and in serious cases, rigorous imprisonment of up to 10 years. The tax on undisclosed foreign income is a flat 30%, with no deductions or exemptions allowed. Non-disclosure is treated as a criminal offence here, not just a civil penalty.

Then there's Schedule FA (Foreign Assets) in your ITR form. Every resident taxpayer who holds any foreign asset, be it shares in a foreign company, a bank account, a property, or even signing authority over someone else's account, must declare it. The threshold isn't based on value. Even if you hold one share worth $10 in a foreign entity, it goes in Schedule FA.

POEM (Place of Effective Management) rules work differently. If you set up a company in, say, the BVI, but all the decisions are being made from your Mumbai office by Indian directors, the Indian tax department can treat that company as if it were an Indian tax resident. That "offshore" company's global income then becomes taxable in India. POEM was introduced in the Finance Act 2015 and has been applicable for assessment year 2017-18 onwards.

GAAR (General Anti-Avoidance Rules), effective from April 2017, gives the tax department authority to disregard any arrangement whose main purpose is obtaining a tax benefit. So even if a structure is technically legal, if it lacks commercial substance and exists primarily to avoid tax, GAAR can tear it apart.

What's Legal and What Isn't

Consider an Indian IT company that sets up a BVI subsidiary to hold IP and receive royalties from global clients. The subsidiary has actual employees, an office, and makes real decisions locally. The Indian parent company charges arm's-length transfer pricing for the IP, and everything is disclosed in the Indian company's filings. This is legal. Multinationals do this routinely.

Now compare that with a Bengaluru-based businessman who sets up a BVI shell company to park personal funds abroad, doesn't disclose it in his ITR, and uses it to buy property in Dubai. Textbook tax evasion. It violates the Black Money Act, FEMA regulations, and probably half a dozen other provisions. This is the kind of case that ends up in ED raids and newspaper headlines.

Or take an NRI living in Singapore who sets up a BVI holding company for their Southeast Asian businesses. Since they're a non-resident, Indian tax law doesn't apply to their foreign income. As long as they're genuinely non-resident (not just on paper), there's no issue from India's perspective.

In all three cases, the jurisdiction is the same. The difference is behaviour and disclosure.

And that second example isn't hypothetical. The investigation into the Panama Papers alone led Indian authorities to identify over 426 Indian names linked to offshore entities. Many of those individuals had perfectly legal structures but hadn't disclosed them properly. Some faced prosecution not because they used offshore companies, but because they didn't tell the Indian tax department about them.

India Already Knows More Than You Think

Most people seriously underestimate how much financial information India now receives from overseas.

Under the Common Reporting Standard, over 100 countries, including the BVI, Cayman Islands, Switzerland, Singapore, and Mauritius, automatically share financial account information with India every year. If you have a bank account in Geneva or a brokerage account in Singapore, the Indian tax department likely already has that data. No request needed. It arrives automatically.

India also has Tax Information Exchange Agreements (TIEAs) with most major offshore jurisdictions, and bilateral treaties that allow specific information requests during investigations.

The CBDT has been using data analytics to cross-reference CRS data, AIR (Annual Information Return) data, and STR (Suspicious Transaction Reports) from Indian banks. According to the Income Tax Department, India's network of information exchange agreements now covers virtually every financial centre in the world.

Quietly holding assets offshore without India finding out stopped being realistic around 2017-18. It's only gotten harder since.

Offshore Structures Still Have Legitimate Uses

There's a lot of moral panic around tax havens that drowns out the practical reality. Indian law doesn't prohibit offshore structures. Holding companies for international operations, investment vehicles for cross-border deals, IP holding, joint ventures with foreign partners: these are standard corporate practices. What the law requires is a genuine commercial reason, FEMA and RBI compliance, full disclosure in your tax filings, and payment of applicable taxes in India.

The Indian government's own Liberalised Remittance Scheme (LRS) explicitly allows resident individuals to invest up to $250,000 per financial year abroad. That includes buying shares in foreign companies, property, or setting up businesses. It's not something you need to do in the shadows. It's a regulated, legal channel with proper RBI oversight.

What catches people off guard is the reporting side. Any remittance under LRS above ₹7 lakh in a financial year attracts TCS (Tax Collected at Source) at 20% under Section 206C(1G). You get credit for this when filing your ITR, but you need to track it. And the bank reports every LRS transaction to RBI, which shares data with the tax department. There's no gap in the information chain.

Where Does That Leave You?

Tax havens aren't illegal. Using them while hiding information from Indian authorities is.

If you're an Indian citizen considering any offshore activity, whether that's investing abroad, setting up a company, or structuring a cross-border business, disclosure is everything. File Schedule FA accurately. Get transfer pricing documentation in order. Consult a CA who understands both Indian tax law and international structuring.

The penalties for getting this wrong are severe, and the Indian government's ability to detect non-compliance keeps improving. But thousands of Indian companies use offshore structures every day, in plain sight, with full regulatory approval. Done properly, with the right advice and full transparency, it's just business.