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The income tax department has launched an investigation against 20-listed companies who are falsely claimed exemptions on long-term capital gains tax (LTCG) arising from stock market transactions.
"Tax department has written to market regulator Securities Exchange Board of India ( Sebi) against these companies which are identified to have fictitious LTCG claims for tax evasion over and above Rs 100 crore," a senior I-T official told Business Standard.
An LTCG norm for listed company says that the income earned from the sale of shares is exempted from tax if they have been held for a year.
"We have sought some transaction details with regards to the firms appeared to have misused the trading platform for evading tax and possibly to launder money" said the person cited above.
Such stock market dealing typically aimed at evading capital gains tax by showing the source of income as legitimate from stock markets. While the so-called losses which are actually bogus losses are being showed on books of accounts to offset the same against capital gains, said another I-T official.
An email sent to Sebi remain unanswered.
"Proper surveillance is required to track these companies, as all these said entities are solely created for dubious transactions. They made consistent loss because they are floated with the purpose of tax evasion. There is no real activity on the ground for any such company, said Sudhir Kapadia, national tax leader in EY.
They are mainly set up market operators who control the share capital of the company, added Kapadia. It is learnt that the said market operator deal with the share which has low paid-up equity capital and are trading at a low price in the market. Eventually price of such shares ramped up by 30-40 times and sometimes even more from their original value.
Once price hiked, the operators gives the physical shares to the beneficiary along with the back dated bill showing sale of shares to the beneficiary at an earlier date at a few rupees per share.
The beneficiary sends shares to depositories for conversion into electronic format. Thereafter the shares being sold in the secondary market at artificially raised price and receives payment through banking channels which ultimately converts unaccounted money into white money.
"The backdated entry allows the beneficiary to show the gain as a long-term capital gain and pay no tax on the same," said an I-T officer cited above
Rahul Garg, leader, (direct tax) at PwC India said, "Certainly sharp practices like this creates distortion in the market. I think any attempt to curb such undesirable practices is good for the space and it will also give level- playing field for genuine tax payers."
Recently, Sebi has taken stern action and debarred over 1,000 entities from the capital markets after they were found to be misusing stock exchange platforms for tax evasion to the tune of more than Rs 15,000 crore, as per the PTI report. An analysis of the enforcement and surveillance measures taken by Sebi since August 2014 shows that 167 stocks have been completely suspended for trading and trading has been restricted to a lower price band of 2 per cent for 123 others. Sebi has also referred tax department all those cases involving 11 stocks wherein the regulator has passed interim orders against 1,013 entities.
These apart, regulator has also written to the tax authorities with details of 1,854 entities who have provided exit to preferential allottees for trade value of nearly Rs 3,900 crore. These entities are suspected to have traded beyond their disclosed income limits.
