CBI unearths 339 shell companies

The Central Bureau of Investigation has unearthed 339 shell companies operating in India for diverting funds and undertaking fraudulent activities such as false invoices, routeing funds, etc.  It has filed a charge sheet against the bank officials, borrowers and shell companies under the Companies Act, Money Laundering Act and Benami Transaction Act.

What is the main motive of Shell Corporations?

Shell companies act as a transactional vehicle for a variety of firms by increasing their efficiency and brand image. This makes them a legal entity. It is an organisation that doesn’t produce anything or employ anyone and exists solely on paper.  But they are sometimes used illegitimately as a tax avoidance medium for shady business dealers, public sector enterprises, etc.

In India, a lot of infrastructure companies enter into a deal with shell companies as they have to pay a large amount of cash as a bribe to local politicians and other third parties. Black money can be easily converted to white and vice versa. A party can sign a cheque to a shell company, and this is accounted as payment. The shell corporations then return the money in cash to the party, which is used as a bribe.  

Analysis

There are 15 lakh registered companies in India, but only six lakhs of them file their annual returns. To check the future black money generation from shell companies, the government has made it compulsory for Aadhaar- based KYC registration.  With the amendment to the Benami Transactions (Prohibition) Act 2016, the government has the power to confiscate benami assets, which are assets bought in the name of a person and paid by another. So, if a person buys property in the name of his parents, then he would be declared a benami and the property can be confiscated by the government.

Assessment

Companies set up shell corporations abroad to take advantage of looser tax codes which result in tax evasion. Money put into a shell company is an investment, and since only profitable income is taxed, money kept overseas thus becomes tax-free.

By the amendment made to the Benami Act, the unaccounted wealth in shell companies can be bought out of the limelight and can be punished with an imprisonment of seven years and a fine.  Stricter laws need to be put in place to prevent companies from setting up shell corporations only for the purpose of diverting funds.  This step of the CBI may help to curb black money and tax evasion activities in the country.