How a Sebi crackdown led to tax declarations of over Rs5,000 crore

Stockbrokers, market operators, penny stock company promoters and such entities being investigated by Sebi declared at least Rs5,000 crore of illegal income


Sebi, in its interim orders in 2014 and 2015, had suspended over 200 firms and barred close to 1,500 entities for using the stock exchange platform for evading taxes. Photo: Aniruddha Chowdhury/Mint
Sebi, in its interim orders in 2014 and 2015, had suspended over 200 firms and barred close to 1,500 entities for using the stock exchange platform for evading taxes. Photo: Aniruddha Chowdhury/Mint

Mumbai: The Securities and Exchange Board of India’s (Sebi) crackdown on entities that evaded taxes by showing bogus long-term capital gains on penny stocks was one key reason for the success of the income declaration scheme, said two income tax officials. 

Stockbrokers, market operators, penny stock company promoters and such entities who were being investigated by the capital markets watchdog declared at least Rs5,000 crore of illegal income, they said. This amounted to about 8% of the Rs65,000 crore declared in the income declaration scheme. DNA reported this first on Wednesday. 

Sebi, in its interim orders in 2014 and 2015, had suspended over 200 firms and barred close to 1,500 entities for using the stock exchange platform for evading taxes. The total illicit stock transactions value in these cases was estimated about Rs15,000 crore. 

“In August and September, the income tax department circulated a list of 84 listed entities and their promoters and brokers who traded in the scrip asking them to declare their income,” said the first income tax official. 

An income tax department follow-up of Sebi’s investigations found that these entities did about Rs4,000 crore of illicit stock market transactions. These, the tax department alleges, were booked as long-term capital gains that were a result of market manipulation. Currently, laws allow a tax exemption on any gains made in shares after holding them for one year. 

Here is how the scam worked: penny stock companies would allot preferential stock to non-promoters, who are seeking to evade taxes. Their associates would drive up the price of the stocks, whose ownership is concentrated in a few hands, through circular trading (buyers and sellers are connected). After a year, the preferential allottee cashes out at a much higher price. Typically, the entity buying the stock would be funded by the preferential allottee, thus allowing this entity to bring its black money into the system. 

“Sebi orders and investigations were a starting point for us to investigate in penny stocks that were being used to evade taxes. The list of 84 scrips includes stocks that were identified by Sebi and stocks that were independently investigated by us,” said the second income tax official. 

“There are promoters who had individually done illicit stock transactions of over Rs100 crore. We had directed them to declare their income in the ongoing scheme. By and large, all of them declared their incomes,” he added. 

The income declaration scheme, launched under the Income Tax Act, 1961, allowed Indian residents and companies to declare previously undeclared income at a one-time effective tax rate of 45% by 30 September.

It granted tax payers immunity from prosecution under the Income-tax Act and Benami Transactions (Prohibition) Act.

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