Taxman to get more power in crackdown on shell firms

The income-tax department will get wider powers to proceed against shell companies and errant non-governmental organizations (NGOs) once the proposals in the Union budget are approved by Parliament.

The department will then be able to prosecute companies that have not filed their tax returns and monitor all financial transactions conducted by NGOs as they have to mandatorily report their permanent account numbers (PANs).

The tax department will also be able to disallow profit-linked deductions, such as those available to infrastructure firms, in case of a delay in filing of returns.

These measures will expand the taxpayer base and act as a deterrent for tax evaders, Sushil Chandra, chairman of Central Board of Direct Taxes, said in an interview.

In the Finance Bill, 2018, the government has sought to remove a clause that allowed prosecution against companies only if there was a tax payable of more than Rs3,000. This meant that the tax department could not take any action against shell companies that did not file tax returns, since there was no tax payable. Out of the 1.5 million companies registered with the ministry of corporate affairs, only 730,000 filed their tax returns in assessment year 2016-17.

“Every company which is incorporated has to file a return. It is a statutory requirement whether there is profit, loss or no income. But we could not file prosecution since in some cases there was no tax payable. It is possible that the source of investment is not declared income or there is benami property,” Chandra said. “It is an anti-abuse provision. Many shell companies never filed returns. If we get returns, it is easier to track money laundering.”

According to the Registrar of Companies (RoC), 297,000 companies were identified as non-filers (those that did not file annual reports and financial statements with the RoC) in 2017-18 for two or more years and were prima facie not engaged in a business or operation. Of these firms, 226,000 firms were removed from the records as on December 2017, minister of state for law and justice and corporate affairs P.P. Chaudhary informed the Lok Sabha on 5 January.

Amit Singhania, a partner at law firm Shardul Amarchand Mangaldas and Co., said the Finance Bill has made special emphasis on tax compliance and has made non-filing of tax return a criminal offence even if no tax is payable.

Prior to the change, the department had to rely on its own sources of information such as transactions above a threshold that are reported by other entities, he said.

The budget also sought to make quoting of PAN mandatory for non-individual entities if financial transactions aggregate to more than Rs2.5 lakh a year as the tax department looks to intensify scrutiny on NGOs. It also proposed that all those acting on behalf of such entities, like managing directors, directors, partners and trustees, also have to submit their PANs.

“Many non-governmental organizations have not taken PAN. Their directors have also not taken PAN. We do not know who are running these NGOs. We want to know what are the activities of the entity, who are giving money and who are the beneficiaries. We want to track the entire ecosystem, including foreign funding,” Chandra said.

The budget also sought to tighten rules for firms that claim various profit-linked deductions like those available to infrastructure firms and those operating in special economic zones but do not file their tax returns on time.

“We are saying that they have to file within the prescribed time of the Income Tax Act or you will not get deductions. Some file tax returns very late. We are trying to reduce the time taken for completion of assessment from March to December to September. When we are reducing the time taken for assessment, we want that returns are filed on time and we can start the assessment process,” Chandra said, adding this provision will not be applicable to individuals claiming benefit of deduction on select investments, health insurance premium and healthcare costs.livemint