Before 2004, India had prevented the outflow of foreign exchange and convertibility of the rupee was not allowed. In 2004, Reserve Bank of India created a scheme called Liberalised Remittance Scheme (LRS) where an Indian resident was permitted to take $ 25,000 outside of India. This money could be used for many purposes such as gifting money, children’s education, donations or medical treatment. Over a period of time, the limit was gradually raised to 250,000 $. This means that a resident individual could take upto 250,000 $ legally outside India for any purpose. This included buying of shares, but RBI did not specifically allow resident Indians to set up companies abroad until 2013.

In 2010, the RBI clarified that LRS allows buying shares but specifically prohibited setting up of a companies abroad by individuals. But many individuals sought to take a different view when Chartered Accountants gave an interpretation that acquiring companies is not the same as setting up companies. There are many players in the overseas market like Mossack Fonseca that kept registering and churning out companies. ‘Churning’ means excessive trading by a broker in a client’s account largely to generate commissions. Anybody could buy a company or buy shares. In 2013 August, RBI allowed resident Indians to invest directly in JVs and overseas subsidiaries through the Overseas Direct Investment (ODI) window route, where you could set up a 100% subsidiary or invest in a Joint Venture company.

From a legal aspect, individuals who had to set up companies overseas prior to August 2013 would have legally violated the rules on LRS scheme and FEMA regulations. But people who had incorporated companies even ahead of 2014, which makes it clear outliers. The important question is : When you can’t take money out, how can you set up an entity abroad? In the Panama Papers it was found that people had incorporated companies, bought the companies and had acquired shares over a period of time. The issue with any tax haven is the layers of secrecy and the avenues of the tax saving which is termed as tax planning. Also, a person would not get to know who is the owner.

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