Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
 
 
 
 
Popular Search: VAT Audit :: cpt :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: due date for vat payment :: VAT RATES :: Central Excise rule to resale the machines to a new company :: empanelment :: TAX RATES - GOODS TAXABLE @ 4% :: ARTICLES ON INPUT TAX CREDIT IN VAT :: ACCOUNTING STANDARDS :: list of goods taxed at 4% :: form 3cd :: ACCOUNTING STANDARD :: articles on VAT and GST in India :: TDS
 
 
News Headlines »
 How much income tax you should pay on investments in gold?
  Best ways to save tax in 2017
 8 unknown stocks that could yield huge returns
 Government may set threshold for probe into deposits to prevent harassment of taxpayers
 How to calculate capital gains tax
 April 1 still the target for GST: FM
 How to respond to CBDT’s tax compliance notice
 Goods & Services Tax (GST)(As On 01-01-2017)
 Excise, service taxpayers to migrate to GST portal by January 31
 Tax numbers belie slowdown: FM
 Income tax (1st Amendment) Rules, 2017

Rise of shell companies: Why tax authorities continue to wage a battle with them
September, 29th 2014

On March 16, 2012, then finance minister Pranab Mukherjee made his budget speech in parliament, like so many finance ministers had done before him, and as many will do in later years as well. However, that speech was to have one fairly unusual effect. In the two weeks following it, and before the beginning of the new financial year on April 1, thousands of small companies were incorporated across the country. ET Magazine estimates that the number of private limited companies formed in Kolkata alone, between March 16 and March 31, 2012, was around 3,173 (possibly more). The financial year which was to end two weeks after that budget speech was to set a record of sorts, with more companies being incorporated during that year than any other across India.

The Registrar of Companies (RoC) in West Bengal, under which companies domiciled in that state are incorporated, reported that 16,477 private limited, nongovernment owned companies were incorporated that year. Thus, a fifth of those were incorporated in just the last two weeks of March in Kolkata. On March 29 alone, around 416 companies were registered in Kolkata.

Why the sudden rush to incorporate so many new companies? And what purpose were these companies set up to serve?

Start-up Tax
One of the big highlights of Mukherjee's speech was what was to be later criticized as the startup tax. The FM had tightened income-tax laws that affect the way investors put money into new private limited companies. Any investments in those companies at a share price above what the law called 'fair market value' was to be treated as the income of the company and taxed. Little wonder then that start-ups and entrepreneurs were nervous as it was seen as hurting the flow of venture funding into new companies (however, the law did exempt investments by recognised venture funds).

In that respect the burst of new companies being formed seems perfectly understandable. Entrepreneurs rushed to incorporate new companies before April 1 to avoid being affected by the new law which would kick in on that date.

But this still left several questions unanswered, the main one being: Why Kolkata?

The city, known more for industries such as coal and steel, was hardly a thriving hub of start-up culture. And then there were other oddities. Of the 3,173 companies formed in those two weeks, around 294 were located in just one building, on one street in the city.

As an income-tax officer later termed it, those companies were a form of 'inventory' for an industry that is largely unknown, unless you happen to be an accountant, or a lawyer, or an executive wellversed in the ways that Corporate India manages money. Especially black money.

The Shell Company Business
Last year ET Magazine had written about what is blandly called the 'accommodation entry' business, or, to give it its colloquial Kolkata name, the 'jamakharchi' business. It has been around in one form or the other for decades, but began to get organized and streamlined into what in management-speak would be called a 'scalable' business in Kolkata in the '80s. Since then it has spread to other cities. However, Kolkata, at least till a couple of years ago, was its epicentre.

The jamakharchi business exists for one big reason — to help its 'customers' convert black money into white, or vice versa. Given that unaccountedfor money is a part and parcel of how Corporate India operates, it raises the very immediate problem of how that black money is to be created and converted. On the one hand, large listed companies with foreign investors have to report audited accounts and ostensibly account for each rupee spent. On the other, while the companies may run perfectly legitimate businesses, they often have to deal with entities that aren't very transparent and which would prefer to be paid, or pay, in cash. And this is just those companies which don't want to evade any tax at all.

The 'jamakharchi' business exists to make such transactions happen by the tens, or even hundreds or thousands of crores. "It's important to point out that the jamakharchi business is, strictly speaking, not a money laundering business, though they share similar aspects," says the tax official ET Magazine spoke to. While money-laundering aims to convert money earned from criminal activity into legitimate income, the jamakharchi business may deal in unaccounted-for money earned as part of a perfectly legal business.

One of the more common ways to do this, till the change in tax law in 2012, was as follows. If a company had black money, which it wanted to channel as seemingly legitimate investments back into itself or group companies, it would get in touch with one of many 'accommodation entry' operators in the country. Some of the largest ones manage a portfolio of thousands of companies, either on their own, or through 'sub-operators' whom they habitually do business with.

 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2017 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - About Us

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions