Battling black money: 10-point criteria for identifying shell firms on the cards

The government is working to formalise a 10-point criteria for identifying shell companies that are used for tax evasion and money laundering purposes, officials familiar with the development have said.

“The first step towards cracking down on dubious companies will be to define shell companies, which are different from dormant or defunct companies,” a government official said on the condition of anonymity. The criteria will include red flags such as the share capital of a company not being proportional to its turnover; company income not being proportional to its turnover; money inflow followed immediately by an outflow of the same amount; minimal fixed assets and employees; among other aspects.

“The rules will be fed into an automated system that is being developed. Enforcement officials will begin investigating once a suspect list is created,” another official said.

The government is also working towards creating a seamless exchange of information between the ministry of corporate affairs, tax department and enforcement directorate (ED) to identify and probe shell companies formed solely to facilitate tax evasion and money laundering. “Once the Registrar of Companies (RoC) identifies such dubious companies, the information will be sent to the tax department or ED – so they can conduct a probe and begin prosecution,” the official said.

While the RoC can scan the books of companies under section 206 of the Companies Act-2013, it does not have the powers to probe tax evasion and money laundering (which lies in the domain of the tax department and ED respectively). As per available data, over 17 lakh companies were registered in India as of December 2017.

A task force led by finance secretary Hasmukh Adhia and co-chaired by the corporate affairs secretary is working towards this goal. “Defining shell companies is a much-needed move to regularise the system. The OECD (Organisation of Economic Cooperation and Development) is looking at indentifying harmful tax practices across the world, and India’s definition of shell companies will definitely lead the way in checking this…” said Girish Vanvari, founder of Transaction Square, a tax advisory firm.

The task force set up under Adhia in February 2017 has pulled up 2.26 lakh companies for non-filing of annual returns for a period of two years or more. The government recently said that it has identified another set of 2.25 lakh companies that did not file their returns since 2015-16.

This task force was created after the demonetisation drive of November 2016 to check the menace of shell companies or firms that exist only on paper, and to speed up action against them.