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Last Updated : Sep 16, 2019 06:36 PM IST | Source: Moneycontrol.com

Now, I-T Department turns gaze on client code modification to counter tax evasion

The Central Board of Direct Taxes (CBDT) believes that of the many client code modifications taking place on exchanges, a few may not be genuine.

Tarun Sharma @talktotarun









The Income Tax Department has sent letters to stock exchanges, asking them to look more closely into cases of client code modifications to help spot tax evasion tactics.


Sources told Moneycontrol that the letter follows the Central Board of Direct Taxes' (CBDT) thinking that too many client code modifications take place on exchanges and that at least some may not be genuine.The source added that starting today (September 16), exchanges have started asking institutional investors the reason for any such modification. This disclosure was being sought for non-institutional investors since July.

The tax department’s letter also says that exchanges should also look into whether requested client code modifications are intended for genuine purposes.

The department’s renewed glare on client code modifications as a method to evade taxes comes after it its success in plugging another loophole on illiquid options.

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Modifications in client code – a unique trading id given to all clients -- are required in cases of a manual error on the part of investor or broker while punching in the client code at the time of order. For instance, a broker may have mixed up an order for Client A with that of Client B.

They are more commonplace in the institutional segment when a broker transacts on behalf of a client, only to transfer the securities to the client later. Another case may be when an asset management company purchases a stock for a particular scheme but later decides to allocate it to another scheme, points out a source.

But for years, it has also been an underhand method to evade taxes. For instance, an investor who has a loss on his book can transfer his position to another who wants to book a bogus loss (to set it off against capital gains).

Over the years, authorities have looked to tighten this loophole by seeking greater disclosures. In fact, in 2012, SEBI had let off NSE with a warning after observing that the exchange failed to provide an explanation for the number of client code modifications on its platform – to the tune of Rs 55,000 crore.

As per current regulations outlined by SEBI, exchanges levy a penalty of 1 percent of trade value on all cases of client code modifications.



But data with the intelligence and the criminal department of I-T shows that the current framework is not much of a deterrent and that client code modifications in the system are unusually high.Even so, exchange officials, Moneycontrol spoke to said the current penalty structure is enough of a deterrent – in that it puts a sufficient watermark that becomes difficult to clear, and thus disincentivises tax evasion.











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First Published on Sep 16, 2019 06:35 pm
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