The response to the Income Declaration Scheme (IDS), 2016, has been overwhelming. As mentioned by the Finance Minister in a press conference, 64,274 Indian citizens revealed Rs 65,250 crore worth black money under the scheme. As 45% of this amount will go to the Government, its coffers are set to get heavier. However, if you think the action against black money will end with the cessation of IDS 2016, you have more surprises in store. The Government has already warned tax evaders of more stringent actions had they not disclosed their income under IDS 2016.
 

 

Stock markets are on the radar now

Now the income tax department is focusing on tax evaders investing in stock markets. The large-scale investigation, of a magnitude that we haven't seen before, carried out by the income tax department has exposed some startling data. The department has examined the Securities Transaction Tax (STT) returns submitted by the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) for the Financial Year (FY) 2013-14 and FY 2014-15.

What are the revelations?

Daily News and Analysis dated October 13, 2016, reported this, as per which the total trading turnover on the stock exchanges jumped from Rs 32 lakh crore to Rs 66 lakh crore between FY 14 and FY 15. Moreover, the turnover worth Rs 5,000 crore was carried out using duplicate or bogus PAN cards in 2014-15. Interestingly, the investments worth close to Rs 61 lakh crore attributed to 3.0% of total investors. Out of these top 3% High Net Worth Individuals (HNIs), approximately 47% didn't file I-T returns in FY 2014-15. The number of investors evading the tax went up 150% in FY 15. According to the reports of the tax department, 1,21, 423 stock market investors haven't disclosed their source of income but have investments ranging from Rs 2 crore to Rs 10,000 crore in the equity markets. Most of these tax evaders come from 3 states—Maharashtra, Gujarat, and Tamil Nadu.

In August 2015, Ashishkumar Chauhan, MD & CEO of BSE had admitted the channelising of black money in the stock market by saying, "Exchanges were being used for tax evasion. BSE has more than 5,700 companies, most of which are old and small. SEBI orders have proved that some of these companies were using the exchanges for tax evasion. BSE is taking several steps to prevent companies from undertaking such illegal activities."

Modus operandi of tax evaders…

You may not even have heard of the companies such as Pearl Electronics Ltd, Globus Power Gen, Risa International, Maa Jagdambe Tradelinks. They have witnessed frenzy rallies to the tune of 400% to 7500% between FY 13 and FY 15. Yes, you read it right. Some of these stocks have gone up 75 times. No sane person would believe that these stock moves were backed by the positive fundamentals. In reality, the prices were jacked up through the circular trading of manipulative brokers who ran unofficial covert-from-black-to-white schemes.

Step 1

People who are interested in converting their black money into legitimate wealth, use some of their disclosed income to subscribe to the preferential allotment.

Step 2

Once the lock-in period is over, brokers who work hand-in-glove with the promoters of the company buy back these shares at much higher prices from the tax evaders. This generates legitimate gains which are astronomical at times. With this, the first episode ends.

Step 3

In the second episode, the broker accepts cash from the tax evaders and routes it through various accounts (controlled by him) to buy the shares he had bought at higher prices, creating fictitious losses to square off false profits.

In other words, a tax evader converts unaccounted cash into legitimate wealth by risking some of his legal capital.

Government's fight against tax evasion and corruption is unlikely to end with the competition of IDS, 2016.

 

Trading volume of many investors is disproportionately higher in comparison with their disclosed income. The department has shortlisted 1,800 such companies SEBI takes proactive steps to control price manipulations Brokers controlling the paid-up capital often jack up prices to create wealth for evaders, and then distribute these dumped stocks to false buyers by utilising the cash provided to them by the original buyers.

 

Joint operation between SEBI and I-T department

On various occasions, the Income Tax department has communicated with SEBI to bring to its notice companies and entities which have claimed fictitious profits and losses to evade taxes. Usually, stock market operators control the paid-up share capital of microcap companies with a lower free-float to manipulate stock prices.

The capital market regulator has demonstrated its willingness to act tough against those who misuse the stock market route to evade taxes and making unaccounted profits. Between August 2014 and March 2016, it barred 1,000 entities from capital markets and also banned the shares trading activity in approximately 167 companies. SEBI had also informed the Income Tax deportment about 1800 such entities with disproportionately high investments as against their disclosed earnings. Smaller companies with very low trading volumes were found targeted to stash the unaccounted money.

In the recent past, SEBI proactively took some steps to curb the tax evasion through mergers and acquisitions of companies. It found that penny companies with a common board of directors often indulged in tax evasion, violating long-term capital gains rules. The capital market regulator also probed into companies whose stock prices rose or fell sharply for virtually no change in the fundamentals.

What to expect in future

The initiative taken by the Income Tax department demonstrates the seriousness of the Government on routeing out the creation and the circulation of black money. The pressure on tax evaders is likely to intensify in coming days. There are likely to be more 'surgical strikes' by the I-T department and the capital market regulator on the vaults of black money holders.

What investors should do?

While HNIs and ultra-HNIs indulge in malpractices to stash black money in stock markets, small investors too often do not disclose their short-term capital gains, thinking their profits are too thin to be noticed and their tax evasion is less severe than that of bigger players. However, in principal, both the practices are unethical and illegal.

PersonalFN is of the view that investors should consider stocks or equity-oriented mutual funds only to fulfill their long term goals. Ideally, one should have a time horizon of 3-5 years and high-risk appetite to invest in equity and equity-oriented investment options.

PersonalFN opines that you should declare all your income, pay all tax dues, and file your income tax return in time.

Add Comments