APN News

Massive Tax-Evasion through CFT: Nation lost Rs 30, 000 crore a year

by Our Special Correspondent

New Delhi : Commodity Futures Trading (CFT) is being blatantly misused for massive tax evasion. This was revealed by none other than the commodity market regulator FMC (Forward Markets Commission). The Regulator in a recent note has cautioned the exchanges and operators who are into wash trading- an illegal practice where simultaneously buy and sell orders are executed through different brokers. Wash trading which is illegal according to the regulator norms is used for large scale tax evasion and the estimated loss to the national exchequer a year by way of this operation is a minimum of Rs 30,000 crore. Also known as P&L, wash trades thrives through the commodity futures exchanges in the country.

FMC has admitted “The incidence of wash trades, circular trades and trades of a non-genuine nature rise steeply during February-March, presumably for the purpose of evasion of taxes, particularly in illiquid contracts.”

Chairman of the market regulator Mr. Ramesh Abhishek had recently said, “The occurrence of CCM (Client Code Modification) was very high in trades worth Rs14, 570 crore. With a three per cent volatility in prices, an additional sum of Rs450 crore was generated by just changing the client code. This helped evade around Rs150 crore of various taxes, at the applicable rate of 30 per cent.”

The latest turnover and trade data available indicate that the FMC’s warning has made little impact. Experts confirm the commodity futures trading platform has been increasingly used for tax evasion and recycling unaccounted money,  making use of clause (d) of the IT Act 43 (5) that came into effect from 1-4-2006. This clause permits offsetting of speculative business profit against speculative loss. Through commodity futures trading platform losses and profits are transferred to different accounts created according to convenience.  Such transactions are generally known as Profit& Loss transactions or P&L. P&L  are carried out through inactive or illiquid contracts (the commodity contracts that hardly have any participation) to evade any trading risk. Illegal trading cannot be performed without the direct involvement of the commodity exchange(s). The trading platform is provided, controlled and monitored by the exchange. Without the knowledge of the exchange no trading activity can happen.

One of the commodity exchanges which has been under the Regulator’s scanner for such activities is clocking a weekly turnover of over Rs20, 000 crore as per the data made available by the exchange. Interestingly, hardly couples of commodities are actively traded in the said exchange platform and the total genuine turnover a week from these active contracts cannot exceed Rs. 700 crore. But as per the data available from the exchange as many as 17 commodities are being traded on its platform.

In a statement to the media in last March, CEO of this exchange had said “we have found several members from across the country violating trading rules at the exchange. There are many types of violations by our members.”  The CEO had also admitted that 80% of the exchange volume was through such illegal trades.

Dr T N Seema, a Member of Parliament from Kerala who is also a member of the parliamentary standing committee for consumer affairs raised a question in the Upper House on the “blatant misuse of commodity futures trading platform for tax evasion and other illegal economic operations”.  She,  in a written question, had asked the minister for consumer affairs, food and public distribution (commodity market comes under the ministry),  “ (a) whether Government is aware of the reports that some of the commodity futures exchanges in the country are helping the tax evaders; (b) whether Government has carried out any probe into this allegation”. The minster, Prof. K V Thomas, in his written reply said, “The commodity futures market regulator, Forward Markets Commission, has received complaints regarding alleged artificial volumes and tax evasion transactions in respect of some contracts listed in one of the National Exchanges.”  The minister further stated “the investigation in respect of the same is underway.”

Talking to APN News Dr. Seema said that there were specific instances to prove that fraudulent practices are rampant in commodity futures market and those involved are hardly booked for the violations. “The chief of one of the national commodity exchanges had during  March last year openly declared in the media that more than 80% of the volume of his exchange was through fraudulent means and I raised this issue through a written question in the House. I am still to know from the minister what action was taken against the exchange.”

According to sources “FMC has conducted investigations into the fraudulent trading and found enough evidences to prove the guilt, but no action was contemplated. The exchange is the key accused in this fraud.  For, the exchange controls the trading platform and no trading action can be done without the knowledge and approval of the exchange.  The exchange is supposed to have a well set surveillance system to detect any fraud or manipulation in trading by its members. So, it is the exchange that has to be booked first for any such frauds and this has not been done. It is a fact; the exchange has made millions by facilitating such frauds.”

Is this what is happening in all the existing commodity exchanges in the country?  Are the volumes attained through fraudulent means?

In 2006-2007 it was Rs. 571,759 crores and the very next year the turnover surged to Rs. 2155 122. In 2008-2009 the total turnover was Rs 5248956.18 crore, in 2009-2010 Rs 7764754.05 crore and during 2010-2011 Rs.11948942.35 crore.  And till January 2012 the total turnover recorded is about Rs. 151 lakh crores. How genuine is the turnover of the commodity futures exchanges?  How much money the nation ost by way of tax evasion, through futures trading?  Why the taxmen are not probing these daylight financial frauds?

FMC Chairman Ramesh Abhishek had recently said, “The occurrence of CCM (Client Code Modification) was very high in trades worth Rs14, 570 crore. With a three per cent volatility in prices, an additional sum of Rs450 crore was generated by just changing the client code. This helped evade around Rs150 crore of various taxes, at the applicable rate of 30 per cent.”  Has the concerned authorities taken any action against the tax evaders? As Hon. Justice Saini pointed out in the Kanimozhi bail plea case  ”the entire community will be aggrieved if economic offenders who ruin the economy of the state are not brought to book.”


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