New Delhi: Stock market operators taking trade reversal route in equity derivatives to evade tax have come under the scanner of tax authorities.
The Income Tax (I-T) Department suspects massive tax evasion as it has found reversal of trade in around 14,000 entities in the illiquid derivative segment of BSE. In case of reversal of trade in the equity derivative segments, profit and loss shift. Many a time what happens is that someone making profit shifts the gains to someone else making loss. The tax liability also shifts. This way, traders launder black money even as they pay Securities Transaction Tax (STT) and short-term capital gains tax (STCG) on the profit.
“For this, operators trade, particularly in penny stocks. In the process, they launder black money into white, while settling the manipulative transactions in cash. This is illegal as somebody is making profit while trading has actually not happened,” said a senior income tax official. “These types of transactions are done with the sole motive of evading tax,” he added.
The I-T Department is learnt to have sought trade data from market regulator Securities and Exchanges Board of India (SEBI) to ascertain the manipulative tactics. It has also discussed the issue with the Central Board of Direct Taxes (CBDT). While capital market helps companies access the much-needed funds for business expansion, many crooked investors use it to launder black money and evade tax using shell companies. The I-T department had last year detected bogus capital gain of about Rs 80,000 crore.
A few years back, the Director General of Income Tax, Kolkata, had prepared a report detailing how penny stocks were used for evasion of long-term capital gains. The market regulator, however, gave clean chit to entities listed in the I-T report. Sebi had then maintained that they were concerned only with price manipulation and not tax evasion as the latter comes under the I-T department’s preview.
The I-T department had earlier issued notices to over 80 stock brokers after it found tax evasion by them through client code modifications on National Stock Exchange (NSE) in 2010.
“There are a lot of fluctuations in the derivatives. So, what happens is that suppose X made a profit and somebody else, say Y, wants that profit, brokers can change the code during certain hours,” the I-T official quoted above said.
