New Delhi, March 16, 2017

The audit report examined several cases involving suspicious dealers from the publicly available list published by Maharashtra Sales Tax Department since 2011

Although the government has repeatedly vowed to prosecute shell companies for their role in money laundering, especially during the demonetisation period, the audit report prepared by the comptroller and auditor general (CAG) for FY 16 paints a bleak picture of the income tax department’s (ITD) ability to investigate and bring to book these companies. “Audit noticed the failure of the ITD to effectively use various tools at its disposal to carry out suo motu detailed investigation of the facts and take up cases for scrutiny in order to bring to book severe economic offenders,” the CAG report on direct taxes said.

Shell companies are often involved in issuing bogus invoices or bills to show inflated cost for the final beneficiary. The inflated expenses reduces the profit made by these companies thus evading legitimate taxes and creating black money. Such a practice also involves the ‘hawala’ operators.

The audit report examined several cases involving suspicious dealers from the publicly available list published by Maharashtra Sales Tax Department (MSTD) since 2011. “At present the list contains around 2,059 dealers who had issued invoices involving tax evasion of more than R10,640 crore (including the maximum VAT at the rate of 12.5% in Maharshtra),” the report said.

However, despite several requests, the ITD didn’t share any data pertaining to assesses whose names figured in the MSTD list as having issued bogus accommodation invoices. Subsequently, the CAG undertook verification of assessment record of the suspicious entry providers and their beneficiaries from the MSTD list.

The report found several discrepancies in the ITD’s handling of these cases including its inability to fully follow the information provided by their own investigation wing. “The ministry’s reply reflects the perfunctory approach of the ITD as the assessing officer did not use the information available with their investigation wind while checking the bank accounts nor made any attempt to establish the flow back of funds to the beneficiaries. The possibility of higher taxable income escaping assessment cannot be rules out against the assessed income,” the report said.

Similarly, in some other cases, the assessee could not be traced by the ITD and the department had failed to establish the money trail and the final beneficiaries of bogus purchase despite having the list of such dealers for four years. The inordinate delay on the part of ITD led to permanent loss of revenue, the audit report said.

In many cases the ITD restricted its assessment to the assessment record of the concerned entities only instead of cross-linking the whole chain of such fake transactions with forward and backward linkages so as to find out the ultimate beneficiaries and tracing the money trail to establish the flow back of funds to the beneficiaries, the report said.

[The Financial Express]