Moneycontrol
Dec 23, 2014 11:07 AM IST | Source: Moneycontrol.com

Tax evasion: Sebi needs to take on fake F&O trades next

Veteran brokers say this practice has been rampant for the past many years now, with many companies existing solely on paper and serving no other purpose than to help evasion of taxes/money laundering

Tax evasion: Sebi needs to take on fake F&O trades next

Moneycontrol Bureau


With tax revenues likely to be way off target because of a slower than expected economic recovery, the government appears to trying to partly make up for it by plugging existing loopholes.


On Friday, Sebi banned 260 entities, which included two companies, promoters, brokers, investors, for alleged misuse of the stock exchange platform to show fake long term capital gains.


Veteran brokers say this practice has been rampant for the past many years now, with many companies existing solely on paper and serving no other purpose than to help evasion of taxes/money laundering.


A high networth individual or corporate wanting to convert black money into white subscribes to a preferential allotment of say 1 lakh shares of a shell companies for Rs 10 a share. The shell company transfers this Rs 10 lakh through a series of transaction (known as ‘layering’ in tax parlance) to one of its group companies. A year later this group company buys the investor’s 1 lakh shares at the prevailing market price, which usually has been ramped in in connivance with brokers. So if the market price is Rs 30, the investor will make a profit of Rs 20 lakh by selling the shares to the arm of the shell company. The investor keeps his Rs 10 lakh, and passes Rs 20 lakh back to the shell company either in cash or through a series of layered transactions to another arm of that shell company.


If the investor wants to buy a fake loss, the market price of the shares will manipulated lower than the allotment price the following year.


Another commonly used technique for generating fake capital gains/losses is through fictitious options trades in the derivatives segment. Quite a few brokerages are said to be offering this ‘service’ to their high value clients. It is very profitable for the brokerages in two ways.


One, they charge a higher commission on these trades. Two, they loan funds to the clients as they (clients) have to deposit margins with the stock exchange on the trades.


Read how brokers have been helping their clients misuse the F&O segment for tax adjustments.


Taking action against the brokerages and investors using their services should be next on government’s agenda.


But there is always going to be a limit to how much Sebi can do curb such practices.
Ultimately it will be up to the Assessing Officers of the Income Tax department to decide whether the transactions are genuine or not.

Also read: GST will lead to lower costs; benefit supply chain biz: TCI

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