I-T dept uncovers tax evasion of Rs 38,000 cr

Issues notices to 147 promoters, investors, who could face penalty at rate of 200% on evaded tax

The Income Tax (I-T) Department has unearthed cases of tax evasion worth about Rs 38,000 crore involving around 1,000 entities, and has issued notices to 147 individuals, a senior official of the I-T department said.

The amount has been arrived at through investigation of cases of stock manipulation in the past two years, the official added.

Most of the individuals hail from Mumbai, Kolkata, Ahmedabad, Surat, and Delhi, officials said. These cities account for most of the trading volumes in the cash segment of the stock market.

Prosecution against these entities, who face penalty at the rate of 200 per cent on the evaded tax, will start soon, said the official. However, some of the entities involved had declared unaccounted wealth in the central government’s recently concluded Income Declaration Scheme and will get immunity as a result.

To evade tax, some entities claimed long-term capital gains by showing a fake back-dated purchase of shares at lower prices, explained a tax officer.

Others used a more sophisticated method, involving allotment of shares under the so-called preferential route.  However, in a majority of the cases penny stocks were used to evade tax. Penny stocks are typically shell companies whose shares are thinly traded. As there is little interest in these stocks, manipulating their prices is easier.

For example, an individual buys a penny stock at an early stage for Rs 1 lakh. The stock prices are increased several fold through manipulation over a period of time. After about a year, the individual sells the shares for Rs 5 crore, which is then considered legitimate income. There is no tax levy (long-term capital gains) on this income as the holding period is more than a year. The same amount of black money is used to pay counter-parties to buy the stock at a later stage.

The revenue department and the Central Board of Direct Taxes (CBDT) had earlier this year carried out a thorough analysis of such transactions in penny stocks listed on stock exchanges. The analysis was based on data obtained through the market regulator Securities and Exchange Board of India (Sebi).

Sebi had debarred 1,000 entities from the market that were suspected to have misused exchanges for tax evasion and referred the matter to tax authorities for further investigation. Sources said Sebi had provided details of around 2,000 entities who have provided exit to preferential allottees for trade value of around Rs 3,900 crore. These entities allegedly traded beyond their disclosed income limits.

CASE STUDY

• Tax evasion was done through trades in penny stocks
   
• So far, show-cause notices have been sent to 147 individuals
   
• In Mumbai, tax evasion of Rs 8,000 cr has been found
   
• Over 1,000 entities found to be trading beyond their disclosed income
   
• Tax evaders hail mainly from Kolkata, Ahmedabad, Surat, Mumbai and Delhi