MUMBAI: In this world, nothing is certain, except death and taxes. That was Benjamin Franklin in 1817, who may have been compelled to use taxes in the same breath, as there was no Panama or ‘Paradise’ and shell companies were unheard of then. Much water has flown under the bridge since, and companies and individuals have devised ways and means to avoid taxes, and hoard black money, which is nothing but all income on which taxes aren’t paid.
Several governments are making efforts to reduce black stash and the NDA government’s demonetisation was a step in that direction. Sadly, it unearthed little and drove home the point that much of the shadow economy isn’t represented in cash, but in physical assets like real estate and gold, strengthening the argument that demo was a failure. But, wait. An Enforcement Directorate’s report, breaks this myth, confirming that half of the illicit cash in the country or 48 per cent of it is actually parked in shell firms. Agreed, real estate accounts for about 35 per cent as per the same ED report, but it’s worth noting that the money to mop up real estate is routed, again, through a maze of shell firms.
This, perhaps, underscores the genesis behind the recent crackdown on shell firms, the single-largest conduit for black money hoarder.Of the 15 lakh registered companies, less than half, ie., 6 lakh file annual returns. If in the past three decades, a mere 1,155 entities were detected as shell firms for over 22,000 beneficiaries and concealing Rs 13,300 crore, the war waged on black money through a blunt tool like demonetisation stirred it up to unbelievable proportions.
According to the Ministry of Corporate Affairs, a staggering 2.24 lakh companies have been struck-down for being inactive for two years. Of this, it was found after demo, that nearly 35,000 companies deposited and withdrew Rs 17,000 crore between November, 2016 and March, 2017. In one case, a company with a negative opening balance on November 8, 2016, deposited and withdrew Rs 2,484 crore following demo. Another company was found to have as many as 2,134 bank accounts!
The ED report is based on a nation-wide search, started before demo, in 16 states, covering 110 locations in cities like Kolkata, Mumbai, etc. in respect of shell firms and related professionals. In Kolkata alone, officials busted a massive black money racket identifying 64,811 beneficiaries and shell companies involving bogus tax exemption of nearly Rs 38,000 crore through listed entities.
Estimates peg the country’s parallel economy to be roughly Rs 15 lakh crore and Rs 30 lakh crore, or 10-20 per cent of the GDP, which stood at Rs 150 lakh crore in FY17. Following demo, experts say, significant amount entered the banking system from the parallel economy, and with 99 per cent of the cash returning the banking system, the movement of cash from hereon will be easily tracked and traced.Much before, demo, the government also constituted a task Force on shell companies’ including revenue secretary and secretary, Ministry of Corporate Affairs in February, which has already met five times.
As we speak, it is preparing a comprehensive digital database of shell firms and their associates, file prosecution complaints in criminal courts in respect of non-genuine transactions and efforts are on to sync Director Identification Number (DIN) with PAN and Aadhaar to check the role of directors.Following the striking off of defaulting companies, restrictions were imposed on their bank accounts, besides sale and transfer of moveable and immoveable properties.Shell firms are created merely to hide the assets of very rich, but barring such entities from securities market alone may not be a strong deterrent in itself and much more needs to be done.
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