The PNB fraud, which happened via SWIFT, went undetected since it was not linked to core banking solutions (CBS) and because checks failed at several levels RBI has announced the setting up of a panel under the chairmanship of Y.H. Malegam to study rising cases of bank fraud and set out a blueprint to curb them.
The Reserve Bank of India (RBI) has set 30 April as the deadline for banks to integrate SWIFT (Society for Worldwide Interbank Financial Telecommunication) with core banking solutions (CBS) as it looks to strengthen internal controls in banks following the Rs11,400 crore PNB fraud.
“That (30 April) could be a deadline but it is an outer limit. Today, the urgency is such that everyone wants this project to be on fast track,” Usha Ananthasubramanian, managing director and chief executive officer of Allahabad Bank, and chairman of the Indian Banks’ Association (IBA), said on the sidelines of an IBA event on Friday.
“There is already a mandate from RBI that you need to comply with this straight through processing and combining SWIFT with CBS… Everybody has started…” she added.
The PNB fraud revolves around SWIFT. Branch officials of the lender fraudulently issued letters of undertaking, basically guarantees, to jeweller Nirav Modi-linked companies without getting proper approvals and without making entries in CBS, the software used to support a bank’s most common transactions.
The scam that happened via SWIFT went undetected since it was not linked to CBS and because checks failed at several levels, say experts.
RBI announced the setting up of a panel under the chairmanship of Y.H. Malegam, a former member of its central board of directors, to study rising cases of bank fraud and set out a blueprint to curb them.
In a letter to banks, RBI also reiterated that they must strictly comply with the principle of “four eyes”—that each SWIFT message must be processed by four bank officials: a maker, a checker, a verifier and an authorizer—two people who have seen the letter said on condition of anonymity.
“Apart from talking about maker-checker concept, RBI has asked banks to maintain a Chinese wall between officials dealing with SWIFT and CBS,” said a senior official at Mumbai-based bank, one of the two people cited above.
The Union Budget 2018-19 has rationalised the I-T Act provision relating to prosecution for failure to furnish returns.
Seeking to crackdown on shell companies, the government has proposed to remove exemption available to firms with tax liability of up to Rs 3,000 from filing I-T returns beginning next fiscal.
The Union Budget 2018-19 has rationalised the I-T Act provision relating to prosecution for failure to furnish returns.
Thus, a managing director or a director in charge of the company during a particular financial year could be liable for prosecution in case of any lapse in filing I-T returns for any financial year beginning April 1.
“The income tax departments would now track investments by these companies. Also, the focus will be on those firms that show less profit and also those who file I-T returns for the first time,” a senior finance ministry official said.
There are around 12 lakh active companies in the country, out of which about 7 lakh are filing their returns, including annual audited report, with the ministry of corporate affairs. Of this, about 3 lakh companies show ‘nil’ income.
The Section 276CC of the Income Tax Act provided that if a person wilfully fails to furnish in due time the return of income, he shall be punishable with imprisonment and fine.
However, no prosecution could be initiated if the tax liability of an assessee does not exceed Rs 3,000.
The government has amended the provision with effect from April 1, 2018 and removed the exemption available to companies.
“In order to prevent abuse of the said proviso by shell companies or by companies holding benami properties, it is proposed to amend the provisions… so as to provide that the said sub-clause shall not apply in respect of a company,” it said.
The official said that as many as 5 lakh are companies not filing returns and they could be a potential source of money laundering. “These could be small firms which are engaged in honest business, but there could be some which are a potential threat. We have to look into the data.”
Nangia & Co Managing Partner Rakesh Nangia said though the amendment has been brought about to prevent abuse by shell companies/benami properties, checks similar to those placed in the law for invoking GAAR, should be in place to avoid genuine hardship.
“Though the taxman may be driven by compulsions to ensure proper tax compliance, care must be taken while taking such action. In most developing countries, prosecution for tax matters is applied only in cases of serious tax frauds and not in general compliance matters,” Nangia said.
The Budget announcement follows the recommendation of the task force on shell companies, which was set up in February last year.
In the government’s fight against black money, shell companies have come to the fore as they are seen as potential for money laundering.
Till the end of December 2017, over 2.26 lakh companies were deregistered by the MCA for various non-compliances and being inactive for long.
Shell companies are characterised by nominal paid-up capital, high reserves and surplus on account of receipt of high share premium, investment in unlisted companies, no dividend income and high cash in hand.
Also, private companies as majority shareholders, low turnover and operating income, nominal expenses, nominal statutory payments and stock in trade, minimum fixed asset are some of the other characteristics.
Since last year, the Central Board of Direct Taxes (CBDT) — the apex policy making body of the I-T department — has been sharing with the MCA specific information like PAN data of corporates, Income Tax returns (ITRs), audit reports and statement of financial transactions (SFT) received from banks.
While bitcoins are still not illegal in India, income tax and ED are scrutinising all transactions.
Crypto currencies appear to be living up to their cryptic reputation.
Days after the income-tax department issued about 5 lakh notices to high net-worth individuals (HNIs) who own bitcoins or any other crypto currency, investors are drafting replies that would show they have no dues to the authorities.
On its part, the income tax department may also find it difficult to figure out whether wealthy investors actually hold any bitcoins, or the income earned from these instruments. The department may also struggle to calculate the capital gains tax on bitcoins as investors have used complex investment strategies. Some also claim that they have never bought any crypto currency, or that their accounts may have been hacked a few years ago.
“The tax department is investigating the source of income and whether money invested in bitcoins or any other crypto currency is from money laundering,” a senior official in the know told ET. “Bitcoins are not illegal and income tax is applicable, but if the source of money invested in bitcoins is illegitimate, then the enforcement directorate (ED) or any other investigating agency will take over the investigations,” a senior official in the know told ET.
For the moment, those receiving notices are busy with their response to the authorities. A 37-year-old technology executive from Banguluru, also a bitcoin investor, has heard from the taxmen. The executive says that he never gained any income from bitcoins as he bought and sold portions of the crypto currency over the years on different platforms, including over-the-counter.
Another Surat-based trader, who too has received an income-tax notice, plans to tell the revenue authorities that his account was hacked into and that he doesn’t own any bitcoin anymore.
The tax department can levy prevention of money laundering act (PMLA) on investors and the investigations can be taken over by ED.
For verifying some of the facts regarding bitcoins and crypto currencies, the tax department is seeking to rope in technology experts to assess whether the respondents’ claims of hacking are tenable.
Experts point out that it is near-impossible to hack in to a bitcoin wallet.
“It is virtually impossible to hack and steal one’s bitcoins through the wallet as these are encrypted data. Also, the reason why many criminals are using bitcoins or other crypto currencies is that it is nearly impossible to know all the transactions that were carried out,” said Brijesh Singh, Special Inspector General of Police (Cyber), in Maharashtra Police. “If investigators get hold of one such currency—say a bitcoin—then all the past data of transactions are already there, and cannot be wiped out,”
The tax depart department issued notices to about 5 lakh HNIs who hold crypto currencies. The notice lists 28 questions that include answers on sources of income, and whether such income was declared in the income-tax returns.
Industry trackers say that a large portion of those who have received tax notices are diamond, textile and commodity traders. “The suspicion is that these individuals used to carry out trades in crypto currency after the clampdown on the cash economy. Some of these individuals don’t even own bitcoins in their own name,” said a tax official.
“Many bitcoin investors are not technology executives but grey market operators who settle their trading in different products in crypto currency. This is almost impossible to track as bitcoins are traded on a daily basis and across platforms,” said Tushar Ajinkya, Partner, DSK Legal.
Many experts point out that the tax department will also find it difficult to figure out how many bitcoins an individual owns due to the complex methodologies undertaken by many HNIs to buy, sell, and invest in bitcoins.
“Identifying the evasion of taxes in crypto is altogether a new case, for which they (tax authorities) need to be technically equipped,” said a top executive from a Southeast Asia-based bitcoin platform.
While bitcoins are still not illegal in India, income tax and ED are scrutinising all transactions.
ET had on December 16 written that the indirect tax department is also investigating whether sales tax and VAT or GST are applicable on bitcoin exchanges. However, figuring out the timelines of transactions could be tricky for the investigating agencies.
To trade in bitcoins, people necessarily need not come to the exchange. They can buy from a third party outside the exchange and can sell outside the exchange. Currently, the authorities have no means to identify either the trades or the people.
Cyber security experts say that some of the bitcoin investors could be those who are actually looking to evade taxes.
The IT department, as of now, can only identify the people who have bought or sold in the exchanges. That too, it will be a daunting task for them to ascertain the exact gains since the bitcoin bought on the exchange could have been mixed by replacing it with a different bitcoin from the OTC (Over-the-counter) market in a short period. It is known as a sort of “mixture services” in market parlance.
“The holder can hold on to the replaced bitcoin for a much longer time without the IT department knowing about the same,” said the executive mentioned above.
Similarly, it is difficult to identify the purchase price for someone who bought from the OTC market and sold on the exchange platform.
Mixture Services is also used to hide identities. Tax authorities will struggle to know how much one earned between exchange buying and OTC selling.
Insolvency and Bankruptcy Board of India has published draft rules dealing with insolvency resolution process of individuals and firms on its website . The existing insolvency and bankruptcy code, at present, applies only to corporate defaulters
The government on Tuesday expanded the scope of the new insolvency rules to bring individual businesses under its purview.
On Tuesday, the Insolvency and Bankruptcy Board of India (IBBI) published the draft rules dealing with insolvency resolution process of individuals and firms on its website (www.ibbi.gov.in) ; public comments can be submitted till 31 October.
Once notified, even individual businesses such as proprietorships will come under the bankruptcy regime. This will enable an orderly bankruptcy resolution within the purview of a transparent rules-based regime. The existing insolvency and bankruptcy code, at present, applies only to corporate defaulters.
“These rules shall apply to matters relating to the insolvency resolution process for individuals and firms under Part III of the code,” said the draft rules issued by IBBI.
Part III of the Insolvency and Bankruptcy Code, 2016, deals with insolvency and bankruptcy of individuals and partnership firms.
According to a statement issued by IBBI on Tuesday, the draft rules and regulations have been submitted by a working group which was formed to recommend the strategy and approach for implementation of the provisions of the Insolvency and Bankruptcy Code, 2016, dealing with insolvency and bankruptcy in respect of guarantors to corporate debtors, i.e., personal guarantors, and individuals having businesses.
“So far, the rules were only in respect of the Corporate Insolvency Resolution Process (CIRP) and the rules concerning individuals and partnership firms were yet to come,” said Satwinder Singh, partner at Vaish Associates, a law firm. “The jurisdiction for corporate, companies, limited liability partnership (LLP) lies before the National Company Law Tribunal (NCLT) and with the Debt Recovery Tribunal (DRT) for individuals and firms. The provisions relating to insolvency and bankruptcy of individuals and firms had not been notified earlier, so now the IBBI has come out with the draft rules.”
Harsh Pais, partner at law firm Trilegal, said, “It is a positive step towards consolidating the bankruptcy regime for individuals, for whom there was no systematic approach previously. For companies, at least there was recourse to the Companies Act, whereas for individuals there were only some archaic laws from the early 1900s, which were hardly relied upon in practice.”
Most of the small and medium enterprises (SMEs) take the legal form of either partnership or proprietorship firms. Though the loans are smaller in value, SME borrowers far outnumber companies, resulting in their borrowings exerting a significant influence in the financial sector’s stability.
Bankruptcy resolution is high on the agenda of the central government, which is keen to improve the ease of doing business in India and attract more private investments from domestic and overseas sources. An efficient exit route from failed projects is an essential factor that lenders consider before participating in projects.
Qualified accounts can be flagged on the ministry’s portal, thereby, helping regulators to keep a check on suspicious entities
The ministry of corporate affairs (MCA) says work has begun for an “early warning system” regarding shell companies.
The term is used to refer to a company without active business operations or much of assets. This by itself isn’t illegitimate but they could be used as a manoeuvre for financial operations of a suspect or illegitimate nature.
Currently, there is no way to check shell companies systemically, an official said. Chartered accountants (CAs) do come out with qualified accounts of such companies but these come in a random way on the ministry’s MCA21 portal. Qualified accounts refer to bits of information about which CAs have doubts or disagreement with the audited entity’s management.
After the hoped-for early warning system comes, qualified accounts would be flagged on the ministry’s portal, helping it and other regulators to check on such entities. “We are yet to work out the nitty gritty of this system but are on the job,” another official said.
He said this would do away with the current system of random inspections to identify such companies. The portal will have filings by CAs in such a way that regulators will be alerted, he said.
Earlier, minister of state for corporate affairs P P Chaudhary had said the government would try to use the information technology tool of artificial intelligence in this regard.
CAs told Business Standard that an early warning system by itself wouldn’t change things by much. There should also be stringent norms to make auditors more independent. One of them said it is a company’s promoters who appoint the auditor, which means the latter does not retain the independence to openly report facts. So, a CA’s appointment would need to move away from promoters.
The ministry had recently issued rules to limit the number of subsidiaries a company may have — no more than two layers. This will apply prospectively but existing companies have to disclose details of their entire list of subsidiaries to the registrar of companies within 150 days. Banks and insurance companies are excluded from this rule.
With no limit on the number of subsidiaries, regulators found it difficult to track illicit transactions.
A multi-agency clampdown has begun on shell companies to tackle the black money menace wherein the role of auditors has come under the scanner for alleged connivance in facilitating illegal transactions.
The auditors’ role is also being looked into for not raising the red flag as several cases have come to the fore, including at listed companies, for alleged mismatch in financial statements, sharp erosion in net worth, siphoning off funds to group and promoter entities, sources said.
Stepping up the vigil, the corporate affairs ministry as well as Sebi and other regulatory authorities are keeping a close tab on activities carried out by shell companies.
Sources said regulatory agencies are examining the role of auditors to ascertain whether they were also involved in suspected illegal activities.
The ministry as well as Sebi are closely looking at the functioning of auditors in various companies, especially those that have not been carrying out business for long. After a detailed analysis, the authorities would decide on the next course of action, sources added.
Auditors, who have greater responsibilities under the Companies Act, 2013, are required to ensure that financial statements of a company are proper and can red flag dubious transactions.
As part of larger efforts to fight illicit fund flows and tax evasion, the ministry has already struck off the names of over two lakh companies from the records and further action is expected.
Besides, Sebi has taken against 331 listed entities that are suspected shell companies. While the watchdog had imposed strict trading restrictions on these scrips, curbs have been eased in some cases after the companies went on appeal against Sebi’s move.
On Tuesday, the government said more than 1.06 lakh directors would be disqualified for their association with shell companies.
The ministry, which is implementing the companies law, has also identified professionals, chartered accountants, company secretaries and cost accountants associated with the defaulting companies.
Besides, such people “involved in illegal activities have been identified in certain cases and the action by professional institutes such as ICAI, ICSI and ICoAI is also being monitored”, an official release said on Tuesday.
Separately, authorities are looking at the possibility of having stricter scrutiny of global auditing firms to make them more accountable with such auditors coming under the lens in various corporate misdoings.
A big area of concern pertains to the big guns seeking to wash off their hands whenever their names crop up in any accounting wrong-doing while their delaying tactics in the name of jurisdiction have also been noticed, an official had said earlier.
While the existing legal framework provides for stringent provisions for auditing activities, there is no specific system in place when it comes to overseas audit firms.
While discussions on having tighter regulations for foreign audit firms are going on, the ministry is already examining the recommendations of the 3-member expert panel on various issues related to audit firms amid concerns over certain practices circumventing regulations.
The expert panel, headed by Teri Chairman Ashok Chawla, had submitted its report in March this year.
Enforcement action by the income tax department will be reserved for cases where specific tip-offs regarding large-scale tax evasions have been received
The income tax department will maintain the number of income tax returns (ITRs) chosen for scrutiny at the current level of less than 1% of all returns, in spite of a surge in individual tax filings to keep the process non-intrusive and taxpayer-friendly.
Gentle persuasion through text messages, emails and advertisements will remain the department’s main ways of interacting with taxpayers, while enforcement action will be reserved for cases where specific tip-offs regarding large-scale evasions have been received.
Out of the 52.8 million income-tax returns filed for the 2015-16 fiscal year, only about 300,000 cases, or around 0.6%, were scrutinized, a person privy to the deliberations within the tax department said on condition of anonymity.
“Even when the number of our assessees grow, scrutiny will be limited to this level—250,000-400,000 cases. It will always be less than 1% of returns received. We are absolutely non-intrusive to almost everyone. Even in most of the cases scrutinized, we do not hold searches or surveys,” the person cited above said, adding that the income-tax department vests its faith in taxpayers.
Searches conducted by the tax authorities—about 600 such cases happen in a year—will also stay at this level in future. “Only when we get very, very specific information of tax evasion of a substantial amount, we take enforcement action,” said the person.
The department recently sent 17 million text messages to individuals urging them to file returns for fiscal 2017 before the due date of 5 August, said the official.
This has led to a 25% jump in personal income-tax return filings for fiscal year 2016-17 to 27.9 million before the due date compared to the same period in the previous year.
Going by past trends, this figure could rise to about 66 million returns by the end of March 2018. Returns for a particular fiscal year can be filed by the end of the next year, called the assessment year, with interest on tax dues if any.
Close to three-fifths of the 52.8 million returns the department received for 2015-16 had come in after the due date in August 2016.
“Engaging with people through electronic means is easy and is a better strategy to ensure compliance than scrutinizing more tax returns. It is important for taxpayers to meticulously keep a record of their financial matters to remain compliant,” said Rahul Garg, a partner at consulting firm PwC India.
The income-tax department is also processing refunds faster. It has started issuing refunds within 10 days to taxpayers who have met the 5 August deadline for filing returns.
Individuals who make large purchases, such as houses, or cars priced above Rs10 lakh, but do not file income-tax returns figure among those who receive gentle reminders to file their returns as the authority secures information about such transactions from other sources.
Linking the permanent account number (PAN) used in filing tax returns with Aadhaar, the 12-digit number issued by Unique Identification Authority of India that identifies individuals using biometrics, is also enabling officials to check if the investments and spending of income-tax assessees are in line with their known sources of income.
So far, 94 million PANs have been linked with Aadhaar numbers after the central government made quoting the unique identification number compulsory for the filing of income-tax returns from July onwards.
He said this would do away with the current system of random inspections to identify such companies. The portal will have filings by CAs in such a way that regulators will be alerted, he said.
