SEBI crackdown on trading in 331 shell companies blocks investors’ Rs 9,000 cr

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The government crackdown against 331 “suspected shell companies” has hit several investors, including mutual funds and small investors, who hold shares worth nearly Rs 9,000 crore in these companies.

 

In a late circular on Monday, market regulator Securities and Exchange Board of India (Sebi) directed stock exchanges to immediately restrict trading in 331 companies identified as “shell companies” by the Ministry of Corporate Affairs in consultation with the Serious Fraud Investigation Office (SFIO) and the income-tax (I-T) department.

 

While, by definition, a shell company is one without any business operations or assets, several companies with active business dealings too were part of the  list with 331 names. At least five companies in the list have market capitalisation (m-cap) of over Rs 500 crore each, with diverse shareholding from institutional as well as retail investors.

 

These companies have been placed in the so-called graded surveillance measure (GSM) stage VI, where trading in the security is allowed only once a month with “surveillance deposit” of three times the trade value.

 

Companies, including J Kumar Infraprojects (m-cap of Rs 2,150 crore), Prakash Industries (Rs 2,124 crore), Parsvnath Developers (Rs 1,036 crore), and multinational company SQS India BFSI (Rs 535 crore), termed the “shell company” classification as wrongful and urged Sebi and exchanges to reconsider the directions.

 

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“It is hereby clarified J Kumar is not a shell company and the suspicion of the regulator is uncalled for. Our company’s compliance track record, both with the exchanges and Registrar of Companies, has been impeccable,” said the Mumbai-based infra developer, highlighting the various projects it currently working on, including some government contracts.

 

Sebi sources said over three dozen companies in the list technically don’t fall under the definition of a shell company and the circular maybe revised to correct the nomenclature.  “The regulator is verifying the companies who have raised grievances. However, a rectification may take some time as the exchange needs to conduct an audit and submit a report to Sebi. If there is an all-clear given by the auditors and the regulatory authorities involved, Sebi can lift the ban,” said a source.
Another source said the Ministry of Corporate Affairs has widened the scope of shell companies. Those with cases against them in the SFIO or those that have evaded taxes are part of the list. A finance ministry official said concerns of investors in these companies will be looked into.
Several companies made detailed representations to Sebi and corporate affairs ministry, stating they can’t be termed as shell companies. “There could be a possibility that companies who are listed in the shell categories are genuine. In that case, they can always approach Sebi and stock exchanges to remove the ban. This is more of a preventive action and could be rectified if an entity is not found guilty,” said J N Gupta, managing director at Stakeholders Empowerment Services (SES).

 

Experts said the while all companies may not be shell companies, it is possible that the enforcement agencies may have found some dubious links and decided to take action.

 

“This is in continuation of strong messages being sent to corporate entities that frauds of any nature will face strong action. Greater vigil and networking of several databases would throw up more malpractices and stricter action,” said Prithvi Haldea, founder-chairman at Prime Database.

 

Government’s fight against market manipulation to evade LTCG

 

Several probes by the I-T department and Sebi have shown that listed shell companies were being used to launder money by using the stock exchange route. The typical modus operandi has been to buy shares of shell firms, jack up the prices and sell shares after a year to claim long-term capital gains (LTCG) exemption.

 

The government decided to crack down on such sham transactions after the Special investigation teams (SIT) on black money suggested a mechanism to detect shell companies and put in place checks and balances to curb stock market abuse.

 

In the last three years, the I-T department has identified over 1,155 shell companies which were used as conduits by over 22,000 beneficiaries. The amount involved in non-genuine transactions of such beneficiaries was over Rs 13,300 crore.  So far, the I-T department has launched criminal prosecution complaints against 47 persons. The SFIO, too, has undertaken the exercise of preparing comprehensive digital database of shell companies and their associates. Based on the SFIO report, the MCA has removed 162,618 companies from the Registrar of Companies.

Direct tax collection rises fastest since 2013-14

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The Income Tax Department’s time series data of direct taxes for 2016-17 estimates the government has collected ₹8,49,818 crore as income tax on individuals and businesses, recording a 14.5 per cent growth, the highest rise since 2013-14.

Personal income taxes rose 21.4 per cent, but taxes on corporate incomes grew more slowly at 7 per cent.

The biggest rise was reported under the head of ‘other direct taxes’, which includes collections on account of Income Declaration Scheme 2016 and Pradhan Mantri Garib Kalyan Yojana 2016, schemes for declaring previously undisclosed income. Collections under this head is estimated to have risen 1,348 per cent to ₹15,624 crore.

The sharper rise in personal income taxes has also meant its share in the direct tax collection has increased to over 40 per cent for the first time since 2002-03 and the share of taxes on corporate incomes have fallen below 60 per cent. These estimates are based on provisional data, which the department has extracted from Online Tax Accounting System (OLTAS) and Principal Chief Controller of Accounts under the Central Board of Direct Taxes, and are bound to be revised after the returns for the last fiscal year is reconciled.

Saturday August 5 was the last day for filing of returns by those who are not required to get their accounts audited. Others can file their returns before March 31, 2018, for incomes earned in 2016-17.

Total tax collection

The growth in direct tax collections notwithstanding, its share in total tax collection has fallen below 50 per cent for the first time in 10 years. The share of direct taxes in the total taxes was estimated at 49.7 per cent for 2016-17, after staying well above 50 per cent between 2007-08 and 2015-16. This reversal in trend may be attributed to increase in collection under service tax.

The time series data also estimates that the gross tax receipts before reducing refunds made through the year rose 17 per cent to ₹10,12,506 crore, the highest jump seen since 2010-11. This included a 24 per cent jump in self-assessment tax (a bulk of which is taxes paid by unincorporated businesses), 14 per cent rise in tax deducted at source (TDS) and 15 per cent increase in advance tax payments.

Incidentally, TDS growth has slowed from 22 per cent reported for 2015-16, while advance tax payments growth has risen from 9 per cent reported then. TDS accounted for 36 per cent of the taxes collected in the last fiscal year and advances taxes accounted for 41 per cent. Income tax laws require a bulk of the taxes on incomes of individuals and businesses to be paid in advance on a quarterly basis.

The Income Tax Department has estimated the number of assesses for 2016-17 at 6.27 crore, of which about 95 per cent or 5.93 crore were individual assessees. The number of assessees grew just about 2 per cent from 2015-16.

On State-wise basis, Maharashtra continued to contribute a bulk of the direct taxes, accounting for about 37 per cent of the collection. Delhi accounted for 12.8 per cent of the taxes collected and Karnataka about 10.1 per cent.

Source: http://www.thehindubusinessline.com/economy/direct-tax-collection-rises-fastest-since-201314/article9805948.ece

Now, India Inc vendors under I-T lens, firms asked to give payment details

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The income-tax (I-T) department has asked large corporate entities, including multinational firms, to furnish details of employees off the payroll to check whether they are filing tax returns after deduction at source, or TDS.

According to I-T officials, many lawyers, chartered accountants, consultants, and designers — not on the payroll of companies — have not filed I-T returns (ITR), fearing they would have to disclose their full income.

The move is part of the government’s efforts to increase the tax base and nab potential evaders. The deadline for filing returns for the assessment year (AY) 2017-18, to track income in the fiscal year 2016-17 (FY17), is July 31.

Such professionals who could be potential evaders have been identified through a complete tax profiling, by linking their banks and transaction details.

The tax department, through its non-filer monitoring system, has identified about 13.7 million people with potential tax liabilities who have not filed returns. A preliminary examination of the data has revealed that many third-party vendors in different tax brackets have not been filing returns, while some have been inconsistent in doing so.

“Such measures are part of the second phase of the tax department’s Operation Clean Money, to bring those who have declared unaccounted cash and deposits after demonetisation under the tax net,” said a senior official of the Central Board of Direct Taxes (CBDT). Sources said the CBDT had set the target of adding 10 million taxpayers in the current financial year (FY18).

Under provisions of Section 194 (C) of the I-T Act, a company has to deduct tax at source at the rate of 10 per cent on payments made to professionals or for technical services, if their bill is Rs 30,000 or more.

“The efforts of the tax department to expand the taxpayer base are understandable. Tracking TDS is an important tool to check whether people have filed their taxes,” said Sanjay Sanghvi, partner, Khaitan & Co.

During 2015-16, there were only 55.9 million people in the country who paid income tax. Last year, the tax department had added 9.1 million taxpayers, expanding the base to 65 million.

The government had recently amended the provisions in the I-T rules dealing with the filing of returns. Those not filing on time will have to pay a fine.

For instance, for people earning below Rs 5 lakh annually, missing the deadline will make them liable to a fine of Rs 1,000; those with earnings above Rs 5 lakh annually will have to cough up Rs 5,000 as penalty.

At present, there is no fine if the returns are filed with a delay within the AY. Official data suggest that about 5 million companies registered in the country, of which only 690,000 filed I-T returns last year.

Source: Business Standard

Capital gains tax evasion under CBI scanner

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The Central Bureau of Investigation (CBI) is probing if any government officials were involved in misusing stock exchange platforms to benefit from the long-term capital gains tax (LTCG) exemption.

According to sources, CBI officials visited the headquarters of the Securities and Exchange Board of India (SEBI) in Mumbai to get relevant files pertaining to LTCG cases probed by the markets regulator.

This comes at a time the income tax (I-T) department is probing the entities which had allegedly misused capital gains provisions to evade taxes worth Rs 34,000 crore.

Gains made from the sale of shares held for more than a year are exempt from taxes.

According to sources, the CBI is trying to gather information if any government official made any undue gains by being the end-beneficiaries. “We have collected some relevant documents along with transaction trails with regard to the companies that appeared to have misused the trading platforms to evade taxes. We suspect that there are high chances of government officials being involved, especially as end-beneficiaries,” a CBI source said. “The undue advantage could be hidden and may have been done in a multi-layered arrangement, which needs to be identified.”

Sources said the central agency was in the process of vetting the documents and would accordingly take a call on registering a case against the suspected beneficiaries.

The issue is critical as a few instances of abuse have been reported despite several measures taken by the regulator and the bourses. The intensity of the matter has raised the probability of revocation of capital gains benefits.

So far, investigations by the SEBI revealed that 11,000 entities have bought shares of more than Rs 5 lakh each in the past three years in listed firms that might not have any business operations. The SEBI has identified these entities using data analytics and trading and surveillance data.

The probe suggests that such deals were aimed at evading capital gains tax by showing the source of income as legitimate from stock markets. The so-called losses, actually bogus losses, are showed in the books to offset the same against capital gains.

The modus operandi is thus: Operators advise beneficiaries to invest in the listed companies, which allot shares on preferential basis at a nominal rate. These shares are under a lock-in period for a year.

Subsequently, these operators manipulate the scrip. They also rope in entities to provide the “last traded price” to book LTCG and also to buy shares at a higher price. The beneficiary pays cash to the operator through a multi-layered structure from the gains made by evading taxes.

The markets regulator had reservations that the cases were about tax evasion, which do not fall under its purview. However, if share prices were manipulated, it could proceed under section 11B of the SEBI Act, which allows it to impound the sale proceeds.

It also pointed out that the evidence provided by the tax department was not sufficient to establish connections between promoters of companies, beneficiaries and the “last traded price” and “exit” providers.

Source: http://www.business-standard.com/article/markets/capital-gains-tax-evasion-under-cbi-scanner-117062100019_1.html