CBDT to probe futures trading frauds

by Our Special Correspondent
New Delhi : Probe has been initiated by Central Board of Direct Taxes (CBDT) on the massive tax fraud.  Many have committed  large scale Tax evasion  manipulating the loopholes in the existing regulations in  futures trading.  According to a rough estimate the fraudulent trade practices in the commodity futures trading have cost the national exchequer over Rs 45,000 crore a year. In India the commodity futures trading is regulated by the government and futures trading can be performed only through the government recognized exchanges those function under the scrutiny of Forward Markets Commission (FMC), the market regulator. FMC is directly governed by the Ministry of Food and Consumer Affairs.

The investigation has been initiated on the basis of a detailed report from the enforcement wing of FMC which conducted a year long probe into the fraudulent practices of one of the national level commodity exchanges.  According to source K. Madhavan Nair, Member (Investigation), CBDT) has  constituted a special tem to probe this massive tax fraud

Though the, market regulator, on specific information, conducted investigations against the exchange and found it guilty of fraudulent practices the matter got hot up only after Dr T N Seema,  Member of Parliament from Kerala, 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.”

Admitting  that  regulated commodity futures trading platforms are  being used for tax evasion  FMC said early this year  “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 also admitted,  the  occurrence of CCM (Client Code Modification) was very high in trades worth Rs14, 570 crore.

Experts believe, making use of clause (d) of the IT Act 43 (5) the regulated commodity futures trading platform  is being increasingly misused used for tax evasion and recycling unaccounted money. 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 from its platform.

In a statement to the media in March last year, CEO of a national level exchange had said nonchalantly “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.  This statement is self explanatory.