End capital gains to curb money laundering

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CA Mayur Joshi
CA Mayur Joshihttp://www.mayurjoshi.com
CA Mayur Joshi is a Forensic Accounting evangelist in India. He is the co-founder of Indiaforensic and is author of 7 books on forensic accounting, fraud investigations and money laundering.

Long term capital gains are paid when an Individuals makes profit on sale of long term asset. The tax rates for long term capital gains are lower than the normal tax rates applicable to any other income. This has become the tool of money laundering due to low or no tax rates.

The modus operandi of the people, who have claimed such long term capital gains, was to purchase physical shares, mainly of penny stocks (thinly traded shares), along with backdated bogus purchase bills, which showed that the shares had been purchased at very low prices.The prices of these shares were then artificially raised through circular transactions of sale and purchase of these shares—financed through black money.

These shares were then dematted and sold on the stock exchange platform at a peak, with the beneficiaries booking fictitious long-term capital gains.

Bombay Stock Exchange on Thursday called for ending exemption of capital gains tax on securities to contain various entities using capital markets to evade taxes and launder money.
The government should rethink the exemption on capital gains taxes on traded securities, which is enjoyed by listed companies, in order to avoid misuse of the trading platform to launder money and evade taxes, BSE managing director and chief executive Ashishkumar Chauhan said here on Thursday.

He admitted that multilevel “checks and balances” at exchanges alone will not be able to end money laundering.

Mr Chauhan said that the BSE, which celebrated 140 years of trading on Thursday, is working on a proposal to be submitted to the government which would make it difficult for companies to seek exemption on capital gains tax.

One such proposal is to identify those companies which fail to play fairly in the market and then prevent them from availing of capital gains tax exemption, he said.

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