Delhi witnessed the maximum tax evasion by individuals and companies which falsely claimed exemptions on long-term capital gains tax arising from stock market transactions.
The income-tax department estimates that evaders across the country may have avoided paying taxes of around Rs600 crore by using this route. The corresponding number for Delhi alone is Rs110 crore, and income-tax officials detected this amount from eight cases they investigated.
Individuals and companies do not need to pay tax on income (or gains) earned from the sale of shares if these have been held for a year. The exemption on long-term capital gains arising from this was introduced in 2004-05; and the income-tax department says tax evasion through this route has increased since then.
Income-tax officials also claim that Lucknow may soon overtake Delhi in terms of tax evasion as the department is still investigating transactions valued at over Rs250 crore involving false claims of long-term and short-term capital gains, loans and gifts in the city.
The transactions in Lucknow have been traced to a single sub-broker with the Delhi Stock Exchange who was found to be maintaining 50 false bank accounts of two companies. Similarly, over 500 persons are on the radar of the tax department in Agra; the amount of tax evaded in the city is estimated at over Rs66 crore.
The department has also discovered tax evasion of Rs8 lakh in Ghaziabad, Rs11 lakh in Dehradun, Rs3 crore in Pune and Rs39 lakh in Chandigarh. And it has also unearthed instances of evasion in Ahmedabad, Jaipur, Bangalore, Kolkata and Mumbai. Nearly 42 individuals and companies in Mumbai, and 13 in Kolkata, are being investigated.
The amounts detected are in addition to the evasion of Rs200 crore the department had already unearthed.
According to an official at the tax department who did not wish to be identified, there are two sets of people—operators and beneficiaries—involved in the process.
The operator in the share market takes control of the share capital of a company with low paid-up equity capital whose shares are trading at a low price in the market; such scrips are called penny stocks in market parlance. The prices of these stocks would be ramped up 20-30 times their original value through circular trading involving the operator’s associates.
After hiking the price, the operator gives the physical shares to the beneficiary (for a consideration) along with a backdated contract or bill showing the sale of shares to the beneficiary at an earlier date at less than a rupee or just a few rupees per share.
India does not allow shares to be traded in their physical form; the beneficiary, therefore, sends shares to depositories for dematerialization, or conversion into electronic format. Once this conversion is done, the beneficiary sells the shares in the secondary market at the artificially ramped-up price and receives a cheque payment. In the process, the beneficiary manages to convert unaccounted money into white money. In most cases, the backdated entry on the contract note allows the beneficiary to show the gain as a long-term capital gain and pay no tax on the same.
By tracking down people who have claimed exemptions on long-term capital tax arising from trading in the stock market, and by investigating their transactions, the tax department has been able to differentiate between legitimate stock market investors and people using the bourse to launder their money.