Policy Makers on Right Track to Curb Financial and Taxation breaches

Taxation Frauds - Taxscan

The financial and taxation frauds are the most dreaded virus for any economic growth of any country. Whether the guilty gets the required punishment always remain a question. The best way to minimise such instances is to improve the system and internal controls. Did our government took any such steps to put the house in order to prevent further leakages? The article attempts to answer such questions.

  1. LRS reporting by banks: Under Liberalised Remittance Scheme (LRS), all Indian resident individuals can freely remit $250,000 overseas every financial year for a permissible set of current or capital account transactions. Remittances are permitted for overseas education, travel, medical treatment and purchase of shares and property, apart from maintenance of relatives living abroad, gifting and donations. Individuals can also open, maintain and hold foreign currency accounts with overseas banks for carrying out transactions. The Reserve Bank of India has planned soft measures tightening methodology of sending overseas through the scheme.

Currently, transactions under the Scheme are being permitted by Authorised Dealer (AD) banks based on the declaration made by the remitter. As such, it is difficult for the AD banks to monitor/ensure that a remitter has not breached the prescribed limit by approaching multiple AD banks. With the objective of improved monitoring and ensuring compliance with the LRS ceilings, it has been decided by RBI to put in place a system for daily reporting of individual transactions by banks. This will, inter alia, enable the AD Banks to view the remittances already sent by an individual before allowing further remittance thus obviating the possibility of a remitter breaching the LRS limit by approaching multiple AD banks. This in turn will result better control over money flowing from India under LRS scheme.

  1. Introduction of Single Master Form for Reporting of Foreign Direct Investment in India: Foreign Direct Investment in India, on a repatriable basis, is made by non-residents through eligible instruments such as Equity Shares, Compulsory Convertible Preference shares, Compulsorily Convertible Debentures, Share Warrants etc., issued by the investee company or by contributing to the capital of a Limited Liability Partnership (LLP). At present, the reporting of the above transactions resulting in foreign investment are in a disintegrated manner across various platforms/modes. The Reserve Bank plans to introduce an online reporting by June 30, 2018 via a Single Master Form (SMF) which would subsume all reporting requirements, irrespective of the instrument through which the foreign investment is made.

Prior to implementation of SMF, a window for Equity Master Form (EMF) will be provided to entities having foreign investment, to input the data on total foreign investment received from 28.06.2018 to 12.07.2018. The entities skipping this window will be treated as non-compliant under FEMA, 1999 and will not be able to further foreign investments. Going forward, SMF will subsume all the forms like FC-GPR, FC-TRS, LLP-I & II. This integration will result into better analytics abilities with the regulator and will simplify the reporting procedure.

  1. Disclosing more than two layers of subsidiary companies: MCA vide its notification dated 20th September, 2017 introduced the Companies (Restriction on Number of Layers), Rules 2017 under the proviso to section 2(87) of the Companies Act, 2013. The Rule was brought into effect for the purpose of restricting the maximum number of layers a company can hold based on the prescriptive power provided under the said proviso.

In terms of the said Rules, companies are restricted from having more than two layers of subsidiaries except one layer of wholly owned subsidiary(ies) which has been excluded from such a limit. Further, companies have been allowed to acquire (which shall include a new incorporation too) a company incorporated outside India with subsidiaries beyond two layers as per the laws of such country.

The companies were required to comply to these rules and make disclosures in Form CRL-1 by Feb ’18 and not to increase the number of layers. Recently, MCA has come hard for the compliance and ‘show cause notices’ have been issued to errant companies.

The Rules further provide that a contravention shall attract punishment on the company and every officer of the company who is in default by way of fine, which may extend to ten thousand rupees and where the contravention is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which such contravention continues.

This is being perceived as right tool to curb ‘benami’ and shareholding jargon created to avoid disclosure of ultimate beneficial owner (UBO).

All these recent developments in turn means, Indian regulatory authorities now or will have robust information system in place, wherein susceptible transactions can be better traced. We believe the steps laid out are in right direction and the actions will have good results in times to come.


Saurabh Gupta is a practicing Chartered Accountant having qualified post qualification course in “Master in Business Finance” from ICAI. He has over 14 years of experience in finance and accounts domain.