Shelling shell companies PDF Print E-mail
Tuesday, 14 February 2017 00:57
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Santosh's edit

Focussed action against shell companies welcome


After focusing, as a first step, on 18 lakh bank accounts where Rs 4.2 lakh crore of demonetized money was deposited – that’s a whopping Rs 2.3 crore apiece – the taxman is doing well to now focus on the role of shell companies in possible laundering of black money. A task-force under the co-chairmanship of revenue secretary and company affairs secretary has been set up to deal with the issue, first flagged by the special investigation team on black money working under the Supreme Court. According to a finance ministry press release, while there are 15 lakh registered companies in the country, just six lakh of them file their annual returns. While that suggests a low level of tax compliance and needs to be probed, it doesn’t mean the companies are shell ones – the issue is a deeper one. A small sample of these firms showed that they had deposited Rs 1,238 crore of demonetized currency between November and December last year. More important, the finance ministry analysis showed some of these companies appeared to be shell firms – shell firms have been described as firms whose cash levels were out of sync with their incomes or those which had almost nominal expenditure levels especially vis a vis their incomes etc. Indeed, the Serious Fraud Investigation Office (SFIO) had found ‘entry operators’ – people whose job was to create fake entries for corporate/individuals – were running 49 shell companies; 559 beneficiaries were identified to have laundered Rs 3,900 crore with the help of 54 professionals like chartered accountants (CA); the CA institute also initiated disciplinary proceedings against some of its members since it was convinced of the charges.


If, without unleashing a raid raj, the taxman is able to isolate shell companies successfully, this will go a long way in stopping the generation of black money in the country using these fronts. Invoking the Benami Act and freezing of the bank accounts of these firms, as has been proposed, it is true, can be very harsh and therefore encourages arm-twisting by the taxman, even corruption. That is why, the process of deciding which company is a shell one has to be totally transparent, and each company must be given more than a fair chance to defend itself; involving the CA institute in this process is good practice. Keep in mind, however, that with the amount of money laundering as high as the data shows, it is clear that the government has to be a lot more focused than in the past – and now that it has a lot more data, this has to be used as best it can.


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