AIR spotlight summary on “Task force to weed out shell companies”.

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AIR spotlight summary on “Task force to weed out shell companies”.


Introduction

  • The government announced a crackdown on shell companies, used largely for tax evasion and money laundering, after it found strong evidence of misuse of these firms over the last few months during demonetisation. The Centre announced the setting up of a task force, co-chaired by secretaries in the revenue department and corporate affairs ministry, to weed out the shell companies.
  • In order to create a credible deterrence a ‘whole of government approach’ will be adopted through coordinated efforts by different government departments, Enforcement Directorate etc and by leveraging technology.

Need for Tackling Shell Companies

  • The Special Investigation Team setup by the Supreme Court gave a report in November 2015 which said the shell companies need to be tackled very strictly. Over 2600 people are directors in more than 20 companies which can’t be the case practically.
  • The Serious Fraud Investigation Office (SFIO) has also filed criminal prosecution for cheating the exchequer after investigation by it showed that entry operators, who accept cash and route it through several companies to avoid detection, were involved in running a group of 49 shell companies.
  • A small sample analysis has revealed deposit of Rs 1,238 crore cash into these entities during November-December. Separately, an official statement said that 559 beneficiaries had allegedly laundered Rs 3,900 crore with the help of 59 professionals. These professionals are qualified Charted Accountants, Law Professionals etc. This shows the problem which exists even among professionals.
  • Official data showed that there are around 15 lakh registered companies but only 6 lakh file their annual returns, leading to suspicion that a large number may be involved in financial irregularities.
  • Typically, shell companies have nominal equity base with low turnover and assets but have high reserves and surplus as they issue shares at a premium, invest in unlisted companies, do not earn dividend, the shares are closely held apart from nominal expenses. The problem of shell companies is not limited only to India, it is seen in countries like US and there is global coordination regarding this.

Need of the Hour

  • A database of such companies and their directors should be built by pulling in information from various agencies. The database must also capture Aadhaar number of individual directors in the companies. Any investigating agencies like IT department or Enforcement Directorate (ED) can investigate based on the information in the database.
  • Shell companies are not getting caught because of the loopholes which allow them to do money laundering and go for tax evasion. The government must ensure that every company discloses the information to the tax department even if they have zero income.
  • The entire concept of shell companies could be the result of the complex corporate structure that exists in India. There is a need to simplify the entire corporate structure in terms of legal obligations.
  • The moment government publishes data through media about the money laundering by the shell companies, it creates deterrence. The government must create an institutional body which must collect the data on a daily basis about the investigation and the results of it must be looked at the top level like Prime Minister’s Office. This creates a serious deterrence; the results will send a strong message to stop money laundering.
  • The government wants to ensure Ease of Doing Business and so it provides an opportunity to register a company within 24 hrs. This facility should not be allowed to be misused.
  • Create a permanent body under Ministry of Corporate Affairs which oversees all the agencies so that a better coordination can be achieved. The IT return filing system should be simplified. Any government action must not come in the way of honest business houses.