Shell Companies

Syllabus: General Studies Paper 3

The Serious Fraud Investigation Office (SFIO) has arrested a man who had masterminded the incorporation of a large number of shell companies linked to China and provided dummy directors on their boards to run the fraudulent businesses. 

The arrest was part of the crackdown on Chinese shell companies that are allegedly into serious financial crimes in India.

What are shell companies?

• Shell companies are companies without active business operations or significant assets.
• Shell companies can be set up by business people for both legitimate and illegitimate purposes.
• Illegitimate purposes include hiding particulars of ownership from the law enforcement, laundering unaccounted money and avoiding tax.
• With the shell company as a front, all transactions are shown on paper as legitimate business transactions, thereby turning black money into white. In this process, the business person also avoids paying tax on the laundered money.
• All shell companies are not illegal. Some companies could have been started to promote start-ups by raising funds.

Indian laws to deal with shell companies

• Benami Transaction (Prohibition) Amendment Act 2016
• The Prevention of Money Laundering Act 2002
• The Companies Act, 2013.

Serious Fraud Investigation Office (SFIO)

• The Serious Fraud Investigation Office(SFIO) is a fraud investigating agency. It is under the jurisdiction of the Ministry of Corporate Affairs, Government of India.The SFIO is involved in major fraud probes and is the coordinating agency with the Income Tax and CBI.
• The Government approved setting up of this organization in 2003 on the basis of the recommendations made by the Naresh Chandra Committee which was set up by the Government in 2002 on corporate governance.
• As per the Companies Act 2013, SFIO is a multi-disciplinary organization under the Ministry of Corporate Affairs, consisting of experts in the field of accountancy, forensic auditing, banking, law, information technology, taxation, etc. for detecting and prosecuting or recommending for prosecution white-collar crimes/frauds.
• The SFIO conducts investigations on receipt of a report of the Registrar or on intimation of a special resolution passed by a company, request from any department of the Central Government or a State Government or in the public interest.
• SFIO is headed by a Director as Head of Department in the rank of Joint Secretary to the Government of India.
• The Headquarter of SFIO is in New Delhi, with five Regional Offices in Mumbai, New Delhi, Chennai, Hyderabad & Kolkata.

Tax evasion vs. Tax avoidance

• The objective of Tax avoidance is to reduce tax liability by applying the script of law whereas Tax evasion is done to reduce tax liability by exercising unfair means. Tax planning is done to reduce the liability of tax by applying the provision and moral law.

Common tax avoidance techniques include:

• Deducting a charitable donation
• Deducting Health Savings Account contributions
• Putting money into a 401(k)
• Using a student loan interest deduction