I-T dept investigates tax evasion by commodity brokers

Sends notice to commodity exchanges seeking details of brokers? requests for client code modification

Smelling a rat in the tax evasion complaints against commodity brokers, the income tax (I-T) department has sought details of client code modification (CCM) done by brokers from commodity futures exchanges. The I-T department is investigating the possibilities of income tax evasion by modifying client code.

The probe is following investigation by the commodity market regulator, the Forward Markets Commission (FMC), for the January-March 2011 period.

This is the period when the brokers’ requests to exchanges for modification in clients’ codes were reported abnormally high. According to FMC sources, codes involving transaction worth Rs 14,570 crore were modified by various commodity exchanges acting on brokers’ requests in March 2011 alone. This is out of the Rs 30,000 crore of such changes done throughout the financial year 2010-11.

WHAT THE INCOME TAX SLEUTHS DETECTED

• Several commodity brokers were changing entries in clients’ accounts
   
• Transactions worth Rs 14,570 crore were involved in such practice in March 2011 alone, creating doubt the intention was tax evasion
   
• Tax evasion could be as high as Rs 150 crore
   
• After FMC introduced stringent penalties, client code modifications are negligible now

Officially, the CCM facility was allowed only for carrying out correction in cases of genuine punching error(s) in client codes, within 15 minutes of the closing of trading sessions. Normally, client’s code is modified by an exchange at the request of the respective member broker in the case of a typographical error or unintentional error. But, CCM was adopted by traders as a tool for frequent change in trading details which the commodity markets regulator considered as a possibility of tax evasion.

Understandably, the major objective of the abuse of CCM was assumed to be mostly for tax purposes, such as, transferring a speculative loss in commodities trading from one client to another, who could offset this against a speculative gain to reduce tax incidence on the gain.

The I-T department investigation assumes significance as FMC, on various occasions, raised traders’ intent for a change in CCM. FMC Chairman Ramesh Abhishek had recently said: “The occurrence of CCM was very high in trades worth Rs 14,570 crore in March this year.”

I-T dept investigates tax evasion by commodity brokers

With a three per cent volatility in prices, an additional sum of Rs 450 crore was generated by just changing the client code. This helped evade around Rs 150 crore of various taxes, at the applicable rate of 30 per cent.”

Confirming the development, Anurag Srivastava, director general (investigation), I-T department, said: “We did have sought information from commodity exchanges.” Srivastava, however, declined to share details.

An official with a leading commodity exchange, said: “We are not duty-bound to share generic details which the I-T department has asked for. There could be hundreds of clients with several thousands of listings on which modifications of codes must have been executed. Being the details voluminous in nature, it is difficult to share. We, however, are ready to provide client specific details.”

Commodity exchanges had shared data of clients’ codes modified on request to FMC as mandated under the Forward Contract (Regulation) Act.

To stop this menace, FMC issued unique client code for monitoring transaction being done by a member on all commodity exchanges. Also, the regulator had put in place a stringent penalty for CCM, if such requests were not backed by genuine requirements effective October 2011.

However, in January 2012, it reduced the minimum penalty for delay from Rs 25,000 to Rs 5,000, after the new norms resulted in drastic fall in CCM across commodity exchanges within two months. Today, CCM occurrence is almost negligible.