What are shell companies? What are the government steps against them?

The government has launched a search and action initiative against companies who doesn’t report their financial details. Several of these firms, often called as Shell companies, are supposed to be engaged in money laundering and tax evasion activities. The present wave actions is a combined operation of the Ministry of Corporate Affairs and the Income Tax Department.

What are shell companies?

Shell companies are the ones that had not filed financial statements or annual returns for three straight years. In the corporate world, businesses use shell companies to evade taxes and use promoters for diverting funds from listed or unlisted companies. In the context of their opaque behavior, Ministry of Corporate Affairs has made several initiatives and the last one is against directors of these companies on August 12, 2017.

“The fight against black money shall be incomplete without breaking the network of shell companies. Possibility of using the shell companies for laundering the black money cannot be undermined,” the Ministry of Corporate Affairs, the nodal authority for initiating actions against shell companies cited the minister of state for corporate affairs PP Chaudhary.

An estimate about shell companies  

According to the Ministry of Corporate Affairs, there were around 2.09 lakh shell companies, of the total 10.2 lakh companies registered with Registrar of Companies (RoC).

  • Actions on these companies are initiated and the directors of the companies are barred from acting in the board of other firms.
  • The government instructed banks to ensure that the directors (present or former) or their authorised signatories are restricted from operating the bank accounts of the companies that were struck off. Directors were also warned of tough action if they have siphoned off any money even before the banks were alerted.

The Ministry of Corporate Affairs has brought a list of directors of shell companies in September 2017 warned follow up actions. They are identified on regionwise and 106,578 directors were banned from the boards of other firms. Maximum cancelled directorships were in Chennai (24,048), followed by Ahmedebad (12,692), Ernakulam (around 12,000), Cuttack (4,760) and Shillong (670).

Follow up investigations will be taken to varify whether these directors are proxies representing the interests of people who use shell companies to evade taxes or to launder money.

The Ministry indicated that professionals who colluded with such shell companies including chartered accountants, company secretaries and cost and works accountants are also will be penalized.

The new step is to improve statutory compliance by unlisted companies and to check abuse of the corporate structure for money laundering, and tax evasion.

Cooperation between Ministry of Corporate Affairs and Income Tax Department to nab shell companies

The current steps against shell companies were made possible because of the data sharing between the Income Tax Department (ITD) and the Ministry of Corporate Affairs (MCA). Both have signed a pact to regularly share data, including PAN and audit reports of firms, to crack down on shell companies on September 6, 2017. As per the pact, income tax department will now use audit reports of corporates and information from their I-T returns along with PAN data to MCA.

The data sharing agreement is aimed at curbing the menace of black money, black money and misuse of corporate structure by shell companies. Shared data and the obtained information will also be used for carrying out scrutiny, inspection, investigation and prosecution.

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