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Drive Against Shell Companies - A cul-de-sac!


TIOL - COB( WEB) - 612
JUNE 21, 2018

By Shailendra Kumar, Founder Editor

FOR the Modi Government, last four years are history. And all its Cabinet Ministers recently talked about 'mega' achievements of their respective Departments or Ministries during this period. The Ministry of Finance also did the same. And two of its major claims are - the introduction of GST and a sustained war against the menace of black money. Though most fiscal 'historians' agree on the FIRST CLAIM about GST but a large number agree to disagree on the efficacy of a phalanx of policy and legal measures taken against the black money malaise. True, it is a contentious and debatable issue. But, a lot depends on one's perspective and the radius of the 'key hole' through which one may be affording a leisurely look for oneself.

From the common man's perspective, the Modi Government has indeed sustained its high-steam war against the phenomenon of black money, and this is in itself an unmatched record. No government at the Centre has ever, in the past, given so much of uninterrupted attention to this issue. Starting with the constitution of the Special Investigation Team (SIT) which may not appear to have made a big-bang contribution to the ongoing war but enforcement agencies do admit that the SIT's contribution has been tangible, meaningful and useful on many occasions. The enactment of the Black Money Act is one of them. The Government also launched an Income Declaration Scheme (a sort of not-so-attractive amnesty scheme), enactment of a brand-new Benami Transactions (Prohibition) Amendment Act with many sharp teeth and finally, the demonetisation scheme. Though one may voice one's loud opinion about the failure of all these measures but such an opinion would be akin to stating only the half-truth. All these Schemes and Enactments were almost unavoidable stages of 'enlightment'!

So, what reflects such 'enlightment'? Having analysed the muted response and half-success of many of these measures taken since 2014, the PMO was instrumental in setting up a 'Task Force' headed by the Revenue Secretary, to zero in on LETTER BOX companies which were largely and occasionally used to launder ill-gotten or untaxed money. The evidence to this effect had eminently emerged during the demonetisation period. A good number of such paper companies were found to be 'reactivated' out of their deep slumber and ugly quantum of money was allowed to pass through their bank accounts. Though almost the entire demonetised banks notes came back to the banking system and it was seen as a huge political embarrassment for the Government but the sinister apparatus of money launderers was enormously exposed to the law enforcement agencies. And this evidently gave birth to the STARTING POINT for the Task Force which roped in all the economic and other intelligence agencies to share their filtered data. And it turned out to be a mega delight for the data scientists hired by the Government. The unstructured data and some of the vital filters took some time to be analysed but a laborious mining by data analysts revealed sensational findings.

As per the first preliminary findings, as many as 2.26 lakh registered companies were found to be not complying with even the basics of compliance matrix notified under the Companies Act. They were neither filing financial statements nor annual returns for several years but were occasionally assisting black money 'mortars' to park and transfer unaccounted money. The Task Force immediately recommended that their names should be struck off the Register under Section 248 of the Companies Act and their Directors numbering over three lakhs were notified to be disqualified to become a Director in any company. The banks were also intimated to freeze their accounts and not to allow any transactions through them. After several months of analysis when the Task Force is ready with another set of mega lot of dormant or suspect companies, a bad news has come to the Government from the banking system - details of operators of a good number of such accounts cannot be known unless the investigators share the correct PAN details with them. And what is more excruciating for the Government is that PAN furnished to the RoC is not found to be matching with the data of the Income Tax Department.

Netizens may recall that the CBDT had recently entered into an MoU with the Ministry of Corporate Affairs for automatic exchange of data similar to the OECD Model framework for exchange of tax information between two tax jurisdictions. One quick benefit of such exchange of data has come out in the form of furnishing of incorrect PAN details. This fundamentally means that the route chosen by our investigators has turned out to be a cul-de-sac! The probe masters now do not know where to go from here? Even the banks are not cooperating as they also have the same arguments that unless they have the correct PAN details, they are not in a position to help much! The banks, it is largely believed by experts, had failed the demonetisation and is likely to fail even the ongoing probe into the accounts of suspect companies. Whether banks can really not do anything now, is to be discussed with the RBI or individual banks, the facts remain that the Government would have no choice but to de-register a large number of companies based on incomplete evidence or may even change the parameters applied to declare them suspect.

Meanwhile, another legal hurdle that may slow down the pace of the SECOND DRIVE scheduled to be launched in the current fiscal is the conspicuous absence of definition of a 'shell company'. Since no economic law has defined it, the Government is now thinking of first amending some of the laws and incorporating a definition, perhaps with some retrospective effect. Whether such an amendment would be legally sustainable or not is to be seen later but first, a suitable definition, better suited to the Indian politico-economic-legal context, is to be finalised. The only two options are the UN and OECD definitions. And both are to be tweaked or straight-jacketed for the Indian conditions.

Undoubtedly, the Government is sitting over piles of precious data which may even lead to exposure of some political parties and politicians but the fact remains that our enforcement agencies have never, in the past, bothered to give due importance to the correctness of data being submitted by filers. If we look at our income tax data, it never received more than seven lakh corporate returns whereas we always had close to 15 lakh companies registered with the RoC. A large number of these companies never filed any returns as they did not do any business or did short period transactions only. Although the Income Tax Act makes it mandatory for all to file returns but those who did not file also got away by not filing. Now that the CBDT is matching their data with the RoC data, and also GSTN data, too many interesting findings have tumbled out of them! But to make use of such data, serious homework is required for effective results. All legal pitfalls must be avoided to get embroiled in litigation - avoidable pressure on our judiciary.

Before I wrap up it is pertinent to mention here that a major amendment was proposed in this year Budget to ensure that all registered companies mandatorily file their returns. The earlier provision exempting companies from filing returns if the tax liability was less than Rs 3000, has been omitted. A large number of LETTER BOX companies used to abuse this provision to remain outside the radar of the authorities. From April, 2018 all the companies are required to comply with the amended provision or face prosecution. I am sure the outcome of all these measures may not finally translate into political capital for the Modi Government but the economy would certainly reap their benefits in the long-run besides enhancing the transparency index for the country as a whole.


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