I-T dept launches probe on firms with false tax claims

I-T department is investigating 20 listed companies suspected to have falsely claimed long-term capital gains tax exemption

The income tax (I-T) department is investigating 20 listed companies that have allegedly been used to falsely claim long-term capital gains exemption.

It has written to the Securities and Exchange Board of India (Sebi) seeking information on trading patterns of these companies, said sources.

A senior I-T official, who did not want to be named, said about Rs 100 crore (Rs 1 billion) of taxes had been evaded by manipulating shares of these 20 companies.

Income from sale of shares for one year can be claimed as long-term capital gains exemption.

“We have sought transaction details of the firms that appear to have misused the trading platform for evading tax,” said the I-T official.

Typically, manipulators buy shares of shell companies, hold them over a year, ramp up stock prices, book gains and show these as legitimate income from stock markets.

An email sent to the Sebi on the matter remained unanswered.

“Proper surveillance is required to track such companies, as they are created solely for dubious transactions. There is no real on-ground activity,” said Sudhir Kapadia, national tax leader, EY.

Operators select companies with low paid-up equity capital that trade at a low price. Eventually, the prices of such shares are ramped up by 30-40 times. Once the price is hiked, operators give the shares to beneficiaries, along with back-dated bills, showing the sale of shares.

The beneficiary sends shares to depositories for conversion into the electronic format. The shares are sold in the secondary market at artificially raised prices.

“The back-dated entry allows the beneficiary to show the gain as a long-term capital gain and pay no tax on it,” said the official.

Rahul Garg, leader, direct tax, PricewaterhouseCoopers-India, said, “Sharp practices like this create distortion in the market. I think any attempt to curb such undesirable practices is good for the space and it will also give a level playing field for genuine tax payers.”

Recently, the Sebi debarred over 1,000 entities from capital markets after they were found to be misusing stock exchange platforms for tax evasion to the tune of more than Rs 15,000 crore (Rs 150 billion).