Regulator Sebi is mulling tightening its investigation and enforcement mechanism to check misuse of stock market platform for generating “bogus” long-term capital gains to launder black money.
The markets watchdog has also come across cases wherein fraudulent tax benefits have been claimed through trades in some blue-chip stocks, as against the common perception of only penny stocks being used as vehicles for such frauds, a top official said.
While the rules provide exemption from long-term capital gains through stock market trades, the government in this year’s Budget, announced steps to limit such benefits only to “genuine trades” as part of a concerted effort to clamp down on tax evasion through “sham transactions”.
The regulator is now looking at further steps to ensure such benefits are available to genuine investors only as they are aimed at encouraging long-term investment culture in the country, the official said, while adding that some changes are required in the surveillance and enforcement mechanism to weed out “bogus lTCG gains” by misusing this provision.
The modus operandi in such cases typically involved stock market dealings aimed at evading long-term capital gains tax (lTCG) and showing the source of income as legitimate from stock markets. Besides, bogus losses are also created through stock trades to offset the same against capital gains.
While penny stocks have been known as being among the most preferred vehicle for such misdeeds, the regulator is now looking into possible misuse of lTCG benefits by trading in blue-chip stocks.
While there have been suggestions from some quarters about totally doing away with the lTCG exemptions, there is a buzz that such a drastic move could actually send a wrong message as such benefits are given to promote investments.
While steps have been taken to check any unnatural rise or fall in share prices -- as seen in penny stocks misused by tax evaders -- the regulator is now also looking into cases of blue-chip stocks as the data suggest that 80-90 per cent of the lTCG exemptions being claimed are for larger companies.
Sebi and the tax department, along with various regulatory and enforcement agencies, are looking into thousands of cases where exemptions from long-term capital gains tax have been misused to declare unaccounted income.
last year, Sebi identified approximately 32,000 entities for further examination on suspicion of violating securities law to evade taxes.
While interim penal action has already been taken by Sebi against hundreds of those entities, it has forwarded a large number of such cases to the tax department and other agencies for further investigation and necessary action at their end.