Misuse of exemption on Long Term Capital gains
tax for money laundering (Reference p. 82-84 of the Third SIT Report)
This issue was deliberated by SIT during
a series of meetings held on 7th January, 14th March, 08th
April and 30th April. In this regard, it is pertinent to mention the
observations of the Committee headed by Chairman, CBDT on “Measures to tackle
Black Money in India and Abroad” which submitted its report in 2012 and which
read as follows :-
“3.22 Investments are
made in the secondary share markets with a view to capturing gains. In this
market, out of nearly 8,000 listed companies, several scrips are not traded
regularly. With the collusion of promoters, some brokers arrange for price(s)
with purchase of such scrips at nominal costs, and sales at exorbitant prices,
with a view to receiving money on sale as ‘capital gain’ when the long term
gain is subjected to a ‘nil’ or nominal rate of tax. The advantage for
manipulative taxpayer is that he can launder such sale receipts through payment
of no tax.”
SEBI has
recently barred more than 250 entities, including individuals and companies,
from the securities market for suspected tax evasion and laundering of black
money through stock market platforms. In one such instance price of a scrip
rose from Rs. 10.20 to Rs. 489 in 150 trading days – a rise of 4694%. The SIT
obtained the background details of these cases and studied them. A typical
pattern is observed to be followed in such cases.
·
A
company with very poor financial fundaments in terms of past income or turnover
is able to raise huge capital by allotment of Preferential allotment of shares
is made to various entities.
·
There
is a sharp rise in price of scrip once the preferential allotment is done. This
is normally achieved through circular trading of shares among a select group of
companies. These groups of companies often have common promoters/directors.
·
The
scrips with thus artificially inflated price are offloaded through companies
whose funding is provided by the same set of people who want to convert black
money into white.
There is an
urgent need for having an effective preventive and punitive action is such
matters to prevent recurrence of such instances.
We recommend the
following measures in this regard:
·
SEBI
needs to have an effective monitoring mechanism to study such unusual rise of
stock prices of Companies while such a rise is taking place. We understand that
SEBI has a strong IT infrastructure which can generate red flags for such
instances. Such red flags could be built upon trading volumes, entities which
contribute to trading volume, financial background of firms through their
annual returns and any other indicators SEBI may develop. We believe that with
effective and timely monitoring by SEBI a significant number of such instances
can be checked in time.
·
Once
such instances are detected, SEBI should invariably share this information with
CBDT and FIU.
·
Barring
such entities from securities market would not be of strong deterrence in
itself. In case it is established, that stock platforms have been misused for
taking LTCG benefits, prosecution should invariably be launched under relevant
sections of SEBI Act. Section 12A read with section 24 of the Securities and
Exchange Board of India Act 1992 are predicate offences.
·
Enforcement
Directorate should then be informed to take action under Prevention of Money
Laundering Act for the predicate offences.
Misuse of Participatory
notes for money laundering (Reference p. 79-81 of Third SIT Report)
The Report of the Committee headed by
Chairman, CBDT on “Measures to tackle Black Money in India and Abroad”
submitted in 2012 observed as follows:
“3.43 A Participatory
Note (PN) is a derivative instrument issued in foreign jurisdictions, by a
Foreign Institutional Investor (FII)/sub-accounts or one of its associates,
against underlying Indian securities. PNs are popular among foreign investors
since they allow these investors to earn returns on investment in the Indian
market without undergoing the significant cost and time implications of
directly investing in the India. These instruments are traded overseas outside
the direct purview of Securities & Exchange Board of India (SEBI)
surveillance thereby raising many apprehensions about the beneficial ownership
and the nature of funds invested in these instruments. Concerns have been
raised that some of the money coming into the market via PNs could be the
unaccounted wealth camouflaged under the guise of FII investment. SEBI has been
taking measures to ensure that PNs are not used as conduits for black money or
terrorist funding. As per SEBI regulations, PNs can be issued to only those
entities that are regulated by an appropriate regulator in the countries of
their incorporation and are subject to compliance of “Know Your Client” norms.
FIIs are also required to declare that these PNs have not been issued to Indian
residents or non-resident Indians. Entities issuing PNs are required to submit
to SEBI a monthly report which includes details of subscribers and details of
securities underlying PNs. Though, the information sought from FIIs issuing PNs
are being submitted regularly, the reporting requirements mandated by SEBI presently
do not capture details of ultimate beneficial owners of these instruments.”
As per SEBI (Foreign
Portfolio Investor) Regulations, 2014, Foreign Portfolio Investors (FPIs) can
issue ODIs to only those entities that are regulated by an appropriate foreign
regulatory authority subject to compliance with ‘Know Your Client” norms. SEBI,
vide its circular dated November 24, 2014 has further listed set of criteria
for the subscribers of P notes or Offshore Derivative Instruments (ODIs).
SEBI has
informed that the outstanding value of Offshore Derivative Instruments (ODIs)
at the end of February 2015 stood at Rs. 2.715 lakh crores. SEBI has further
informed that the top five locations of end Beneficial owner of ODIs were
Cayman Islands, USA, UK, Mauritus and Bermuda contributing to 31.31%, 14.20 %,
13.49 %, 9.91 % and 9.10 % respectively of total ODIs outstanding.
It is clear
from above than a major chunk of outstanding ODIs invested in India are from
Cayman Islands i.e. 31.31 %. This translates to roughly Rs. 85,006 Crores. The
Cayman Islands had a population of 54,397 in 2010 according to Wikipedia. It
does not seem conceivable that a jurisdiction with a population of less than
55,000 could invest Rs. 85,000 crores in one country.
The main
point of the above elaboration is just that it does not appear possible for the
final beneficial owner of ODIs originating from Cayman Islands to be from that
jurisdiction.
The following
recommendations are made in this regard:
·
It
is clear that obtaining information on “beneficial ownership” of P notes is of
crucial importance to prevent their misuse. SEBI needs to examine the issue
raised above and come up with regulations where the “final beneficial owner” of
P notes/ODIs are known.
·
The
information of “beneficial owner” with SEBI should be in form of individual
whose KYC information is known to SEBI. In no case should the KYC information
end with name of a company. In case a company is the holder of P notes/ODIs,
SEBI should have information of its promoters/directors who exercise effective
control over the company. In case of Companies/Trusts represented by service
providers like lawyers/accountants SEBI should have information on the real
owners/effective controllers of those Companies/Trusts. not end with name
·
P
notes are transferable in nature. This makes tracing the “true beneficial
owner” of P notes even more difficult since layering of transactions can be
made so complex so as to make it impossible to track the “true beneficial owner”.
SEBI needs to examine if this provision of allowing transferring of P notes is
in any way beneficial for easing foreign investment. Any investor wanting to
invest through P notes can always invest afresh through an Foreign Portfolio
Investor (FPI) instead of buying from a P note holder.
Shell Companies and
beneficial ownership (Reference p. 73-76 of the Third SIT Report)
The Report of the Committee headed by
Chairman, CBDT on “Measures to tackle Black Money in India and Abroad”
submitted in 2012 observed as follows:
“3.4. The primary method
of generation of black money remains suppression of receipts and inflation of
expenditure. The suppression could be over a range of businesses and industrial
activities which are covered by what may be called ‘primary’ enactments to
regulate sale receipts, actual production, charging amount in excess of
statutory amounts, etc.
3.6. However, as
manipulation of income is not always possible by suppression of receipts,
tax-payers may try to inflate expenses by obtaining bogus or inflated invoices
from ‘bill masters’, who make bogus vouchers and charge nominal commission. As
these persons are of very modest means, upon investigation, they tend to leave
the business and migrate from the city where they operate. This is one of the
reasons for a proportion of income tax arrears attributed to ‘assessee not
traceable’.
3.7. Similarly, there
are other categories of small ‘entry operators’, who provide accommodation
entries by accepting cash in lieu of cheque/demand draft given as loans/advances/share
capital, etc and thereby launder large sums of money at miniscule commissions.
Due to frequent migration, such entry operators escape prosecution under the
Income Tax Act. The appellate tax bodies also tend to tax their income at
nominal rates. There is no effective deterrence, except for taxing commission
on such bogus receipts and tax in the hands of beneficiaries. Providing fake
bills and entries need to be dealt with strongly and as criminal offence under
the tax laws.”
Use of shell
companies to provide accommodation entries to launder black money has been
observed in a number of high profile cases investigated or under investigation
in the recent past.
The strategy to curb
this menace has to be twofold:
·
Proactive
detection of creation of shell companies: This would involve intelligence
gathering through regular data mining and dissemination of information gathered
to various law enforcement agencies for active surveillance.
·
Deterrent
penal action against persons involved in creation of shell companies and
providing accommodation entries.
The following
recommendations are made in this regard:
·
Proactive
detection of creation of shell companies: Serious Frauds investigation office
(SFIO) under Ministry of Company needs to actively and regularly mine the MCA
21 database for certain red flag indicators. These red flag indicators could be
based on common DIN numbers in multiple companies, companies with same address,
same contact numbers, use of only mobile numbers, sudden and unexpected change
in turnover declared in returns etc. These indicators are illustrative in
nature and the SFIO office can prepare a set of indicators based on its own
experience and consultation with other law enforcement agencies like CBDT, ED
and FIU.
·
Sharing
of information on such high risk companies with law enforcement agencies : Once
certain companies are identified through data mining above, the list of such
high risk companies should be shared with CBDT and FIU for closer surveillance.
·
In
case after investigation/assessment by CBDT, a case of creating accommodation
entries is clearly established, the matter should be referred to SFIO to
proceed under relevant sections of IPC for fraud. SFIO should also refer the
matter to Enforcement Directorate for taking action under PMLA for all such
cases of money laundering.
·
It
has also been observed that in many cases of creation of shell companies the
shareholders or directors of such Companies are persons of limited financial
means like drivers, cooks or other employees of main persons who intend to
launder black money. Section 89(1) and 89(2) of the Companies Act, 2013
provides for persons to declare if they have “beneficial interest” in the
shares of the Company or not. Section 89(4) enjoins the Central Government to
make rules to provide for the manner of holding and disclosing beneficial
interest and beneficial ownership under this section. The Ministry of Company
Affairs may frame such rules at the earliest.
Action under PMLA for Trade Based Money
laundering:
Section 132 of the Customs Act has been
made a predicate offence through the Finance Bill 2015. Section 132 of the
Customs Act reads as follows:
“132. False declaration, false documents,
etc.—Whoever makes, signs or uses, or causes to be made, signed or used, any
declaration, statement or document in the transaction of any business relating
to the customs knowing or having reason to believe that such declaration,
statement or document is false in any material particular, shall be punishable
with imprisonment for a term which may extend to 1[two years], or with fine, or
with both.”
Thus any declaration of
mispriced goods is a punishable offence under this Act.
SIT realizes that Trade Based Money
laundering through mispricing of imports/exports is a major means of taking
money out of this country. A strong deterrent action is needed to curb this
menace. The SIT thus recommends that all cases of Trade based money
laundering detected by DRI where violation of section 132 of Customs Act ,above
the threshold provided for in Part B of Schedule of PMLA, has been found must
be shared by DRI with the Enforcement Directorate to enable ED to take action
under Prevention of Money Laundering Act.
Use of cash in Black economy (Reference p. 4-6
of Third SIT Report)
Suggestions, made in Paras: 4 & 5 at Chapter: III of the
Second Report of SIT, are reproduced as under:––
(i) “4. It is suggested that for
regulating the possession and transportation of cash, particularly putting a
limitation on cash holdings for private use and including provisions for
confiscation of cash held beyond prescribed limits, provision in the Act should
be made. It is to be stated that a number of European countries bar any cash
transaction above a particular limit. This can be done in India too. Again,
while implementing the suggestions, to ensure that small transactions, which
make a bulk of common man’s daily transactions, are not affected and for that,
a threshold limit could be kept.
Further,
for holding of cash/currency notes also, there should be a limit, by
prescribing a reasonable threshold, may be Rs.10 lacs or Rs.15 lacs. This would
control holding of unaccounted money to a large extent. This would also control
transfer of unaccounted cash from one destination to other, which at present is
rampant, may be by Angadias or by other means.
5. The
aforesaid suggestion is also in conformity with the observations in the case of
Rajendran Chingaravelu vs. UoI, in CA No.7914 of 2009; ORDER DATED November 24,
2009 (320 ITR 1)) by the Hon’ble Supreme Court. Therein, it had been observed
that “The nation is facing terrorist threats. Transportation of large sums of
money is associated with distribution of funds for terrorist activities,
illegal pay offs, etc. There is also rampant circulation of unaccounted black
money destroying the economy of the country.”
This
is known to all concerned and, therefore, suggestion made above, be
implemented.”
(ii) On the
afore–quoted suggestions, the response, given in the aforesaid Office
Memorandum of CBDT, is reproduced as under:––
“The recommendation has
been referred to Department of Economic Affairs (DEA) for taking appropriate
action and submitting feedback to the SIT. It was ascertained from Shri Manoj
Joshi, Joint Secretary concerned on 7th April 2015 that the proposal
has been sent by DEA to various Departments/Ministries (including MHA) for
inputs which are awaited.”
(iii) SIT is awaiting the response
of the concerned Departments, as the large cash amount is normally used in
illegal transactions such as, those involving, payment for drugs/narcotics
deals, corruption/bribery, cricket betting and use of huge cash during
elections, etc.
(iv) According to SIT,
if holding of cash is restricted and regulated, to a large extent, it would
control circulation of black money within the country and discourage stashing
of money abroad.
(v) In the meeting
held on 30th April, 2015, the concerned Joint Secretary, Mr. Manoj
Joshi remained present and he stated that the aforesaid issue would be decided
as early as possible.
Generation of black money in education sector
and through donations to religious institutions and charities (Reference p.
84-86 of the Third SIT Report)
SIT sought the response of the Government
through the Revenue Secretary on the following points:––
§
“It is a known
fact that well–known schools and colleges are accepting large donations by
cash. That cash normally would be unaccounted money. For controlling such
transactions, there should be specific provision that donation shall not be
accepted by cash and whosoever accept it, would be punishable under the Prevention
of Corruption Act, as if he is “deemed to be a public servant”.
§
Large
amount is donated to various religious institutions or charities. Nobody can
object for charity donation but at the same time, that when large amount is
donated, it should be only accounted money and that payment should be by
account–payee cheque to the charity or the institution. Even if gift of jewelry
is made to the charity or institution, it should be by mentioning donor’s name
and his PAN Number.”
CBDT
informed on details of searches/surveys conducted by them with respect to above
points related to Education sector and Trusts. In short, the substance of the
brief findings of searches/surveys conducted by the Department of various
entities engaged in area of education through the Trust reveals that large
unaccounted amount is accepted as donation and in a number of cases, such
donations are used for personal benefits and also for tax evasion which results
into generation of black money. The report of the said searches in short is at Annexure:
A to this report.
As stated
earlier, the person who accepts the donation and the donor requires to be
prosecuted under Prevention of Corruption Act. For this, it would require
legislative change which is necessary because now–a–days, donation to
educational institutions which are in demand, is rampant. In some cases, it
goes to Rs.1 crore and more. This would go long way in curbing the generation
and circulation of black money.
Further,
considering the aforesaid report, it appears that in number of cases,
assessment is not finalized. Hence, CBDT should take appropriate action for
expeditious finalization of the assessment, and if required, punitive action
may be taken.
CBDT
shall also share the aforesaid report/information with the concerned agencies
so that other agencies can also take appropriate action under the relevant law.
Necessity for establishment
of additional Courts for deciding the pending cases under the Income Tax Act,
1961 (I.T. Act) (Reference : Page IV of Executive Summary of Third SIT report
and extracts from First and Second SIT reports)
(a) In Para: 4 at Chapter:
VI of the First Report dated 13th August, 2014, it was inter–alia
reported that,
“… … approximately 4,939
cases are pending for disposal before the Metropolitan Magistrate, Mumbai since
more than 10 years. If these cases are decided immediately, it would have its
own deterrent effect. For this purpose, Additional Chief Judicial Magistrates
are required to be appointed, as there is heavy work load in the Metropolitan
Magistrate Courts, Mumbai.
For expediting the
cases, if five additional Courts of Additional Chief Judicial Magistrate are
constituted which try the aforesaid pending cases under Income Tax Act, 1961,
the decision in the said cases would have its own impact. After deciding income
tax cases, cases under Customs & Excise Act, 1996 can be dealt with by the
said Courts……..”
(b) In Para: 13 at Chapter:
III of the Second Report (December, 2014), it was reiterated to constitute five
additional Courts of Additional Chief Judicial Magistrate. Said Para is
reproduced as under:––
“13. As suggested in
first report, at least 5 Additional Chief Judicial Magistrates Courts in Mumbai
are required to be established for deciding approx. 5000 pending IT prosecution
cases.
It appears
that without direction by the Hon’ble Court, it would be difficult to establish
5 Courts as suggested. For the establishment of 5 courts, Central Government
shall bear the entire cost.”
(c) In view of the
recommendations made by the SIT in the First and Second Reports, to constitute
five additional Courts of Additional Chief Judicial Magistrate; The Revenue
Secretary, DoR, MoF, GoI, vide D.O. Letter No.K–11022/27/2014–Ad. ED, dated 09th
March, 2015, requested the Chief Secretary, Government of Maharashtra to
consult the High Court of Mumbai for setting up of five additional Courts of
Additional Chief Judicial Magistrate.
Thereafter, Chairman, SIT, by a
letter dated 26th March, 2015, requested the Hon’ble Chief Justice
of High Court of Mumbai, to look into the matter and give suitable
administrative directions for expeditious setting up of the Courts which can
continuously try the prosecution under the I.T. Act so that it would have its
own deterrent effect.
Action is awaited and it is submitted that if
appropriate direction is issued by the Hon’ble Apex Court, the suggestion would
be implemented at the earliest.
In addition, in view of the SIT, a
suitable direction is required to be issued by the Hon’ble Apex Court to all
High Courts and State Governments to allocate suitable number of Judges in the
trial Courts trying the Income tax, Customs, Central Excise, Service Tax, PMLA,
FEMA, FERA cases to ensure that these cases are disposed off within one year of
filing the charge–sheet. Similar directions may be issued to trial Courts to
conclude the proceedings of all foreign asset related prosecutions within one
year of their launching. This would have its own deterrent effect.
Need for establishment
of Central KYC Registry (Reference p. XVI of Executive Summary of the Third SIT
Report)
The
Second SIT Report in it’s third chapter had observed as follows:
“At present for entering into financial/business
transactions persons have option to quote their PAN or UID or Passport number
or driving license or any other proof of identity. However, there is no
mechanism/system at present to connect the data available with each of these
independent proofs of ID. It is suggested that these data bases be
interconnected. This would assist in identifying multiple transactions by one
person with different IDs. A central KYC Registry should be established with
all law enforcement agencies, Registrar of Companies and financial institutions
having access to its database.”
The Department of Revenue has informed
that rules for the Central KYC Registry to be framed under Prevention of Money
Laundering (Maintenance of Record) Rules have been finalized by the Department
and have been sent to Legislative Department for vetting. The rules are
expected to be notified shortly. This is expected to expedite the setting up of
this Central KYC Registry which shall be an important office to tackle the
menace of black money and money laundering more effectively.
SIT insists that Central KYC Registry
(CKYC) should be notified as early as possible.
GENERATION OF BLACK MONEY DUE TO CRICKET BETTING
(Reference p.68 -71 of the Third SIT Report)
In the report (February,
2015) namely, “A study on widening of tax base and tackling black money”
of Federation of Indian Chambers of Commerce and Industry (FICCI), generation
of black money in various sectors of Indian Economy is discussed in detail.
Substance of the said Report in relation to generation of black money due to “betting”
is as under:––
Betting in sports is
illegal in the country, and hence, creates a wide scope for black money
generation. In India, only betting on horse racing, lotteries conducted by
state governments and casinos in certain states are permissible.
According to 2012 FICCI and KPMG
report, betting in India is a INR 3,00,000 crore (Rupees Three Lacs Crores)
market and if taxed at a rate of 20 percent, the exchequer can earn revenue of
INR 12,000 crore to INR 19,000 crore every year.
Cricket betting is
widespread in the country. As there are no legitimate means on placing bets,
hence, people resort to illegal channels such as bookies/bookmaker that
facilitate gambling by setting odds, accepting and placing bets and paying out
winnings on behalf of other people. Illegal betting leads to malpractices such
as match–fixing or spot–fixing wherein the bookie fixes the outcome of the
event in his favor by having an illegal agreement with the sportsperson. This
leads to bettors being cheated at the hands of bookmakers, thereby enabling
them to earn huge sums of black money.
The Indian Premier League (IPL) has
been marred by betting and spot fixing scandals and involvement of huge amount
of black money. As per news reports, some of the players are paid more than the
payment slabs prescribed by the Board of Control for Cricket in India (BCCI),
with certain amount paid through legitimate means and some in black. During the
IPL 2013 season, in a sport fixing scam, several cricketers were arrested for
accepting money from bookies to throw away matches.
“1.1.3 Advancing technology and
increasing popularity have led to a substantial increase in the amount, and the
sophistication of betting on cricket matches. The development of new betting
products, including spread-betting and betting exchanges, as well as internet
and phone accounts that allow people to place a bet at any time and from any
place, even after a cricket match has started, have all increased the potential
for the development of corrupt betting practices…”
Involvement of huge
illegal, unaccounted money in cricket betting has been noticed by ED, where
betting was being done over internet or using electronic gadgets. It is also
stated that some websites (may be outside the country) are providing online
betting facilities for various sport events, such as cricket, football, etc.
Considering the aforesaid
discussions, it is apparent that illegal activity of cricket betting requires
to be controlled by some provisions which are deterrent to all the concerned.
It is true that betting in gambling
is a subject on which State Governments have to pass appropriate law, as it is
a State subject in the State List (Entry 34). However, considering the fact
that large amount of black money is generated and used in this sector, it is
suggested that some appropriate legislative directions or rules or regulations
are required to be put in place to curb the menace of such betting.
Empowerment of DRI under section 20,21 and 22 of
SEZ Act (Reference p. XVI of Executive Summary of Third SIT Report)
One limitation faced by Directorate
of Revenue Intelligence (DRI) in investigating cases of misinvoicing or
violations of Customs Act is that presently DRI is not empowered under
section 20,21 and 22 of the SEZ Act, to carry out investigation, inspection,
search or seizure in the Special Economic Zone or Unit without prior
intimation or approval of the Development Commissioner. Department of Commerce
has so far issued only entry passes for some DRI officers for certain SEZs.
Further, as per the Foreign Trade
Policy 2015-2020 announced recently, SEZ has been allowed to avail benefits of
Chapter 3 on par with Domestic Tariff Area Units. In effect, SEZ units would
avail export incentives available under (i) Merchandise Exports from India
scheme (MEIS) or (ii) Service Exports from India Scheme (SEIS). In view of the
same, now it has become even more imperative to notify the DRI under the 2nd
proviso of section 22 of the SEZ Act to safeguard the interest of Revenue.
SIT has been informed that this
matter has been taken up with the Ministry of Commerce by Revenue Secretary and
DRI in the past.
In light of above, it is recommended that
Ministry of Commerce looks into the matter urgently and issues necessary
notifications u/s 20,21 and 22 of the SEZ Act empowering DRI to carry out
investigation, inspection, search or seizure in the Special Economic Zone or
Unit without prior intimation or approval of the Development Commissioner.
MR. JUSTICE
M. B. SHAH (RETD.)
CHAIRMAN
DR. JUSTICE
ARIJIT PASAYAT (RETD.)
VICE–CHAIRMAN
*****
MAM/KA