BREAKING BAD : BEWARE PROMOTERS, DIRECTORS & FACILITATORS OF SHELL COMPANIES !!

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Recently Central Board of Direct Taxes(CBDT) and Ministry of Corporate Affairs(MCA) identified that out of 15.27 lakh registered companies around 7,00,000 companies are shell companies. In the recent wave of demonetization, many irregular transactions were carried out in the bank account of these companies. And as we say in hindi,”Gahun ke saath Joo bhi pis gaya”, these companies though not the main target of demonetization, came into radar of CBDT and MCA.
So what is a shell company? What is their modus-operandi? How does it affect to common person? How it impacts the Indian Economy at Macro Level?
 
Basically, a corporate entity without active business operations or significant assets and often created to avoid taxes is a shell company. And many big companies create shell corporations to avoid taxes without attracting legal actions. We cannot say that shell companies are illegal. They are deliberate financial arrangements to avoid taxes. Shell Entity is not only restricted to company form of organisation, it can be an any kind of start-ups or small entities like sole proprietorship, partnership firm, a trust or a LLP, or any other form. But tracing other forms of organisation as shell is very difficult. 
Shell companies park black money, carryout illegal transactions and sometimes act as facilitators of money laundering. Often, shell companies remain untraceable and happen to be the vehicle of choice for money launderers, bribe givers and takers, tax evaders and financiers of terrorism. Not only in India, but throughout the world these entities are formed for vested interests.
Called the biggest leak in history, the 11.5 million documents involve world leaders as powerful as Russian President Vladimir Putin, British Prime Minister David Cameron, and Argentine President Mauricio Macri. At the center of the leak are 214,000 shell companies related to the Panama-based law firm Mossack Fonseca. The law firm with offices around the world has been reportedly tied to oligarchs and dictators.
A common man generally thinks that when he is transacting a company, it will be a genuine company, but it is not so always. And it is equally true that it is not so easy for a common man to find whether it’s a genuine or shell company.
Nearly 50% of companies are identified as shell (or sham) companies. So, this affects international investor sentiments as to whether investment must be done in the country or not? Ultimately affecting the economy at large.
Now the other side of the coin, not necessarily all shell companies are bad. Because many times shell companies are formed to promote the start-ups or the commercial operations of the company starts after a gestation period. So, this is the only point which supports the shell companies. Many times, a company is not a shell company, but its operations are not accounted for and reported ultimately leading to shell nomenclature.

Recent actions by Government and related agencies:

  • Government is increasing its attempts globally and nationally to check tax avoidance.
  • CBDT is examining several dubious companies and they would be removed from the website of MCA if found to be shell firms. “We will not allow any company to be operated as a shell firm. We will take action against such firms,” CBDT chairman Sushil Chandra said recently. “Each and every bank account is under our scanner to find out tax evasion. We urge people to come forward and declare their sources. If that does not happen, we have to take intrusive action against such persons who will then be called tax evaders,” he said. 
  • The government has involved all major revenue intelligence agencies in the exercise, besides the Security and Exchange Board of India, the RBI, the Intelligence Bureau and the corporate affairs ministry. The collected data includes information gathered from property registration, suspicious transaction reports shared by the Financial Intelligence Unit and foreign bank accounts. This data was further identified against PAN and registered address of suspected entities. 
  • Registrar of Companies(RoC) is creating a filter of companies based on the number of years that they have not been filing details for. And if the companies are de-recognized by the RoC, they will have to surrender their names and they will no longer able to run their business on that name.
So Promoters, Directors and Facilitators of shell companies be aware!!!
 
(Disclaimer: While every caution has been taken to provide my readers with most accurate information and honest analysis, please use your discretion before taking any decisions based on the information in this blog. Author will not compensate you in any way whatsoever if you ever happen to suffer a loss/inconvenience/damage because of/while making use of information in this blog.)

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