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Recommendations of SIT on Black Money as Contained in the Third SIT Report

Dated:- 24-7-2015 - Misuse of exemption on Long Term Capital gains tax for money laundering (Reference p. 82-84 of the Third SIT Report) This issue was deliberated by SIT during a series of meetings held on 7th January, 14th March, 08th April and 30th April. In this regard, it is pertinent to mention the observations of the Committee headed by Chairman, CBDT on Measures to tackle Black Money in India and Abroad which submitted its report in 2012 and which read as follows :- 3.22 Investments are .....

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h sale receipts through payment of no tax. SEBI has recently barred more than 250 entities, including individuals and companies, from the securities market for suspected tax evasion and laundering of black money through stock market platforms. In one such instance price of a scrip rose from ₹ 10.20 to ₹ 489 in 150 trading days - a rise of 4694%. The SIT obtained the background details of these cases and studied them. A typical pattern is observed to be followed in such cases. A compa .....

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anies whose funding is provided by the same set of people who want to convert black money into white. There is an urgent need for having an effective preventive and punitive action is such matters to prevent recurrence of such instances. We recommend the following measures in this regard: SEBI needs to have an effective monitoring mechanism to study such unusual rise of stock prices of Companies while such a rise is taking place. We understand that SEBI has a strong IT infrastructure which can g .....

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rket would not be of strong deterrence in itself. In case it is established, that stock platforms have been misused for taking LTCG benefits, prosecution should invariably be launched under relevant sections of SEBI Act. Section 12A read with section 24 of the Securities and Exchange Board of India Act 1992 are predicate offences. Enforcement Directorate should then be informed to take action under Prevention of Money Laundering Act for the predicate offences. Misuse of Participatory notes for m .....

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s on investment in the Indian market without undergoing the significant cost and time implications of directly investing in the India. These instruments are traded overseas outside the direct purview of Securities & Exchange Board of India (SEBI) surveillance thereby raising many apprehensions about the beneficial ownership and the nature of funds invested in these instruments. Concerns have been raised that some of the money coming into the market via PNs could be the unaccounted wealth cam .....

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s are required to submit to SEBI a monthly report which includes details of subscribers and details of securities underlying PNs. Though, the information sought from FIIs issuing PNs are being submitted regularly, the reporting requirements mandated by SEBI presently do not capture details of ultimate beneficial owners of these instruments. As per SEBI (Foreign Portfolio Investor) Regulations, 2014, Foreign Portfolio Investors (FPIs) can issue ODIs to only those entities that are regulated by an .....

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slands, USA, UK, Mauritus and Bermuda contributing to 31.31%, 14.20 %, 13.49 %, 9.91 % and 9.10 % respectively of total ODIs outstanding. It is clear from above than a major chunk of outstanding ODIs invested in India are from Cayman Islands i.e. 31.31 %. This translates to roughly ₹ 85,006 Crores. The Cayman Islands had a population of 54,397 in 2010 according to Wikipedia. It does not seem conceivable that a jurisdiction with a population of less than 55,000 could invest ₹ 85,000 c .....

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/ODIs are known. The information of beneficial owner with SEBI should be in form of individual whose KYC information is known to SEBI. In no case should the KYC information end with name of a company. In case a company is the holder of P notes/ODIs, SEBI should have information of its promoters/directors who exercise effective control over the company. In case of Companies/Trusts represented by service providers like lawyers/accountants SEBI should have information on the real owners/effective c .....

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n Foreign Portfolio Investor (FPI) instead of buying from a P note holder. Shell Companies and beneficial ownership (Reference p. 73-76 of the Third SIT Report) The Report of the Committee headed by Chairman, CBDT on Measures to tackle Black Money in India and Abroad submitted in 2012 observed as follows: 3.4. The primary method of generation of black money remains suppression of receipts and inflation of expenditure. The suppression could be over a range of businesses and industrial activities .....

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d migrate from the city where they operate. This is one of the reasons for a proportion of income tax arrears attributed to assessee not traceable . 3.7. Similarly, there are other categories of small entry operators , who provide accommodation entries by accepting cash in lieu of cheque/demand draft given as loans/advances/share capital, etc and thereby launder large sums of money at miniscule commissions. Due to frequent migration, such entry operators escape prosecution under the Income Tax A .....

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strategy to curb this menace has to be twofold: Proactive detection of creation of shell companies: This would involve intelligence gathering through regular data mining and dissemination of information gathered to various law enforcement agencies for active surveillance. Deterrent penal action against persons involved in creation of shell companies and providing accommodation entries. The following recommendations are made in this regard: Proactive detection of creation of shell companies: Ser .....

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experience and consultation with other law enforcement agencies like CBDT, ED and FIU. Sharing of information on such high risk companies with law enforcement agencies : Once certain companies are identified through data mining above, the list of such high risk companies should be shared with CBDT and FIU for closer surveillance. In case after investigation/assessment by CBDT, a case of creating accommodation entries is clearly established, the matter should be referred to SFIO to proceed under .....

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e if they have beneficial interest in the shares of the Company or not. Section 89(4) enjoins the Central Government to make rules to provide for the manner of holding and disclosing beneficial interest and beneficial ownership under this section. The Ministry of Company Affairs may frame such rules at the earliest. Action under PMLA for Trade Based Money laundering: Section 132 of the Customs Act has been made a predicate offence through the Finance Bill 2015. Section 132 of the Customs Act rea .....

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punishable offence under this Act. SIT realizes that Trade Based Money laundering through mispricing of imports/exports is a major means of taking money out of this country. A strong deterrent action is needed to curb this menace. The SIT thus recommends that all cases of Trade based money laundering detected by DRI where violation of section 132 of Customs Act ,above the threshold provided for in Part B of Schedule of PMLA, has been found must be shared by DRI with the Enforcement Directorate .....

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t should be made. It is to be stated that a number of European countries bar any cash transaction above a particular limit. This can be done in India too. Again, while implementing the suggestions, to ensure that small transactions, which make a bulk of common man s daily transactions, are not affected and for that, a threshold limit could be kept. Further, for holding of cash/currency notes also, there should be a limit, by prescribing a reasonable threshold, may be ₹ 10 lacs or ₹ 1 .....

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rorist threats. Transportation of large sums of money is associated with distribution of funds for terrorist activities, illegal pay offs, etc. There is also rampant circulation of unaccounted black money destroying the economy of the country. This is known to all concerned and, therefore, suggestion made above, be implemented. (ii) On the afore-quoted suggestions, the response, given in the aforesaid Office Memorandum of CBDT, is reproduced as under:- The recommendation has been referred to Dep .....

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ruption/bribery, cricket betting and use of huge cash during elections, etc. (iv) According to SIT, if holding of cash is restricted and regulated, to a large extent, it would control circulation of black money within the country and discourage stashing of money abroad. (v) In the meeting held on 30th April, 2015, the concerned Joint Secretary, Mr. Manoj Joshi remained present and he stated that the aforesaid issue would be decided as early as possible. Generation of black money in education sec .....

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unishable under the Prevention of Corruption Act, as if he is deemed to be a public servant . Large amount is donated to various religious institutions or charities. Nobody can object for charity donation but at the same time, that when large amount is donated, it should be only accounted money and that payment should be by account-payee cheque to the charity or the institution. Even if gift of jewelry is made to the charity or institution, it should be by mentioning donor s name and his PAN Num .....

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y. The report of the said searches in short is at Annexure: A to this report. As stated earlier, the person who accepts the donation and the donor requires to be prosecuted under Prevention of Corruption Act. For this, it would require legislative change which is necessary because now-a-days, donation to educational institutions which are in demand, is rampant. In some cases, it goes to ₹ 1 crore and more. This would go long way in curbing the generation and circulation of black money. Fur .....

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me Tax Act, 1961 (I.T. Act) (Reference : Page IV of Executive Summary of Third SIT report and extracts from First and Second SIT reports) (a) In Para: 4 at Chapter: VI of the First Report dated 13th August, 2014, it was inter-alia reported that, … … approximately 4,939 cases are pending for disposal before the Metropolitan Magistrate, Mumbai since more than 10 years. If these cases are decided immediately, it would have its own deterrent effect. For this purpose, Additional Chief J .....

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13 at Chapter: III of the Second Report (December, 2014), it was reiterated to constitute five additional Courts of Additional Chief Judicial Magistrate. Said Para is reproduced as under:- 13. As suggested in first report, at least 5 Additional Chief Judicial Magistrates Courts in Mumbai are required to be established for deciding approx. 5000 pending IT prosecution cases. It appears that without direction by the Hon ble Court, it would be difficult to establish 5 Courts as suggested. For the e .....

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ial Magistrate. Thereafter, Chairman, SIT, by a letter dated 26th March, 2015, requested the Hon ble Chief Justice of High Court of Mumbai, to look into the matter and give suitable administrative directions for expeditious setting up of the Courts which can continuously try the prosecution under the I.T. Act so that it would have its own deterrent effect. Action is awaited and it is submitted that if appropriate direction is issued by the Hon ble Apex Court, the suggestion would be implemented .....

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rosecutions within one year of their launching. This would have its own deterrent effect. Need for establishment of Central KYC Registry (Reference p. XVI of Executive Summary of the Third SIT Report) The Second SIT Report in it s third chapter had observed as follows: At present for entering into financial/business transactions persons have option to quote their PAN or UID or Passport number or driving license or any other proof of identity. However, there is no mechanism/system at present to c .....

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dering (Maintenance of Record) Rules have been finalized by the Department and have been sent to Legislative Department for vetting. The rules are expected to be notified shortly. This is expected to expedite the setting up of this Central KYC Registry which shall be an important office to tackle the menace of black money and money laundering more effectively. SIT insists that Central KYC Registry (CKYC) should be notified as early as possible. GENERATION OF BLACK MONEY DUE TO CRICKET BETTING (R .....

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India, only betting on horse racing, lotteries conducted by state governments and casinos in certain states are permissible. According to 2012 FICCI and KPMG report, betting in India is a INR 3,00,000 crore (Rupees Three Lacs Crores) market and if taxed at a rate of 20 percent, the exchequer can earn revenue of INR 12,000 crore to INR 19,000 crore every year. Cricket betting is widespread in the country. As there are no legitimate means on placing bets, hence, people resort to illegal channels s .....

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red by betting and spot fixing scandals and involvement of huge amount of black money. As per news reports, some of the players are paid more than the payment slabs prescribed by the Board of Control for Cricket in India (BCCI), with certain amount paid through legitimate means and some in black. During the IPL 2013 season, in a sport fixing scam, several cricketers were arrested for accepting money from bookies to throw away matches. In the aforesaid context, in the Judgment rendered in the cas .....

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ence in the BCCI but also own franchises and teams competing in the IPL format have left many a cricketing enthusiasts and followers of the game worried and deeply suspicious about what goes on in the name of the game. There is no denying the fact that lowers the threshold of tolerance for any wrong doing higher is the expectation of the people, from the system. And cricket being not only a passion but a great unifying force in this country, a zero tolerance approach towards any wrong doing alon .....

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t allow people to place a bet at any time and from any place, even after a cricket match has started, have all increased the potential for the development of corrupt betting practices… Involvement of huge illegal, unaccounted money in cricket betting has been noticed by ED, where betting was being done over internet or using electronic gadgets. It is also stated that some websites (may be outside the country) are providing online betting facilities for various sport events, such as cricke .....

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