Bogus long-term capital gains by shell firms at Rs 80,000 cr: CBDT

Justifies tax on unlisted shares, to stop such firms from selling loss, LTCG; IPOs, ESOPs spared

Putting 'bogus' long-term capital gains by 'khoka' companies at Rs 80,000 crore, the tax department today said the levy of long-term capital gains tax on share transfer in unlisted companies is an anti-abuse measure and genuine investors, IPO investments and ESOPs will not be touched by the levy.

Speaking at a post-Budget seminar organised by Ficci, Central Board of Direct Taxes (CBDT) Chairman Sushil Chandra said 'khoka' (shell) companies are being used to evade taxes.

"So, we have done a lot of research and lot of work and I can tell you that last year... We detected bogus long-term capital gain of Rs 80,000 crore. It is not a small sum and how could it be done?" he said.

The modus operandi involves creation of a 'khoka' company, putting some worthless investment, showing great appreciation in that, listing the company on stock exchange and then quickly getting out of it by encashing the high valuation.

Against 1.5 million companies incorporated in India, only 680,000 file income returns, he said. "Many of the companies are being utilised by channel or khoka companies, bogus companies and persons through layering... Were converting black money into white."

"In last 2-3 years, we have found that this route of long-term capital gains was misused by a large number of persons. There were a lot of khoka companies. It became a mandi that you can buy a long-term capital gain, you can buy a loss, whatever you want to buy in the market, it was available. So, it was our challenge as to how to plug it," he said.

Finance Minister Arun Jaitley in his Budget for 2017-18 proposed 10 per cent long-term capital gains tax on those who acquired shares in unlisted companies after October 1, 2004, if they had not paid securities transaction tax (STT) at the time of purchase.

This provision, the CBDT chairman said, was brought to "stop such practices which are in vogue".

"Because the persons were predating their price of shares, they are back dating, purchasing in December, but they are taking from contractor note earlier so that they complete the one-year period and claim the bogus long-term capital gain. Only to plug that type of a thing, we have brought in this provision," he explained.

Securities transaction tax (STT), Chandra said, was levied in 2004 and capital gains made out of STT-paid listed stocks are exempt from long-term capital gains tax.

"For genuine investors, IPO, FPO, placement, ESOPs, other things will not be touched by that. It is an anti-abuse method, nothing else," he clarified.