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India figures amongst the top nations so far as stashing the black money abroad is concerned. It is estimated that one fifth of our GDP is there running parallel in the economy which translates to a very big figure. The citizens’ bank deposit in tax heavens is reported to be as high as $1.5Trillion. India had tried by bringing seven voluntary disclosure schemes since 1951 but these have not met with great success.

In earlier years till the start of seventies the tax rates made it impossible to show the entire income earned by the business houses as it translated to huge payment of direct taxes which had combined tax effect of seventy to eighty percent of income even more on account of income tax, wealth tax, gift tax and estate duty in the past. This led naturally to hiding of reportable income by the individuals, business enterprises as also the multi nationals. The scenario has changed over the years and even if the tax rates are low these days or comparable to other countries tax rates yet the propensity to avoid taxation is there by even the high net worth income tax payers besides the technology companies’ hugely paid managers the bureaucrats too, the list has over grown from politicians, film stars and businessmen to highly paid managers and technocrats, bribery seekers bureaucrats and accumulators.

The unaccounted money that largely is transacted in cash is the outcome of tax evasion taking place in the business and trade as also tax avoidance measures that occurs within the framework of law with the aid of the proficient tax advisors and planners besides big business houses hiring them for continuously dodging by looking for loop holes in tax laws. The case of Vodafone is one such big ticket adventure who by entering in to the sale purchase of shares outside India had ultimately gained control over the assets of the Indian company which had telecom spectrum rights of substantial value. Many such cases the department is tapping and reopening even had amended its deeming income Sections 9 read with explanations further read with Section 5 and 6 of the Income Tax Act, 1961. There are almost 30765 cases in India where information has been collected by Financial Intelligence Unit that liaisons with its counterpart in other countries under Global Financial Task Force on black money. The fraudulent transactions have resulted in the disclosure by black money hoarders to the tune of Rs.430 Crore on receipt of classified information by the Income Tax department under DTAA in respect of stashed funds. Treaty shopping or forum shopping is generally adopted by the foreign companies’ worldwide.         

Agriculture and Nursery Income:

There are many activities that are prone to plough back of the ill gotten income that escapes the tax net by dubious means. One such field is the owning of agriculture activities by having the agriculture land on lease or getting it let out on lease basis to be receiver of rent or revenue derived from land situated in India and used for agricultural purposes. The owning of the agricultural land is convenient to undertake activities as cultivator or undertaking agriculture operations to become eligible for exemption under S.2 (1A) of the Income Tax act, 1961. The income generated by means of agricultural activities is exempt and even the income derived or generated from saplings or seedlings grown in a nursery and selling the same have been legislated as deemed to be an agriculture income with effect from assessment year 2009-10 to result in tax free activity.

There is soft and lax tax legislation on the income generated from coffee, tea and rubber plantation activities under the Income Tax Act, 1961 read with Rules 7, 7A, 7B and 8. There is huge investment of unreported income that escapes taxation in to this activity and one can under value the investment in such land and show investment hiding a large sum which might have been spent underhand in owning of the agricultural land and if white money is the hassle then entry business also flourishes side by side being helped by financial wizards at some interest charge which would help in showing loan funds to own such lands. There is tax on sale of urban land falling in specified municipal area and specified distance beyond such area. But the gains again could be deployed if long term in to residential house property under S. 54F or S.54B investing capital gains in any land used for agriculture purposes arising from sale of land used for agricultural for immediate two preceding years before the date of transfer or S.54EC investment made in specified bonds arising from capital gains on transfer of any long term assets thus minimizing tax effect to a large extent.

Real Estate Activities:

There is all kind of taxation on this sector from income tax, service tax and capital gains besides levies by states too yet this one sector gobbles up the most tax escaped income in the same fashion as the investment in agriculture land by undervaluing the properties and investing the ill gotten money in to the real estate. There is under reportage of buy and sell transaction in almost all the privately owned properties except one that is sold by the housing boards and corporations where too there is lot of such unreported income generated on allotment and resale and subsequent purchase. The under reporting of values is also done to avoid the impact of registration charges and municipal taxes levied on valuation. There is the implication of S.53A of Transfer of Property Act for Income Tax purposes under capital gains and taking the registry value as the sale consideration if the same is reported below such value still, the loopholes exist largely besides the amendment made under S.56 in respect of transfer of immovable properties without consideration having done away with inadequate consideration thereof under that section. There is also tax wrangles in respect of valuations made on under the accounting standards and renting of house properties under service tax though largely settled by treating the activity as deemed service.    

Shares & Stock and Commodity Exchanges/Markets:

There is flow of illicit or black money to this trade by means of fictitious accounts, trade in derivatives and there is scope for the black money being converted in to legal or white by false trades and this being actively done by the trading community involved in the broking business. There is sale and purchase of shell companies or investment companies which virtually own income generating large assets or costly assets which forms the basis of sale/takeover by another company or business enterprise at the book value which is substantially low due to losses over the years to render the book value minimal on which the transaction would eventually be made and even the trading and listed companies are also manipulated by small trades through the brokers. He real worth of the assets owned is more and the transfer by book value of shares undergoes other part of the transaction underhand. This channelizes the black money into the main stream.  

The listed companies are also involved to speculate their shares in days nearing to their capital issues by over trade to manipulate prices to garner large chunk of public money in the public issues. There is tendency to show better positions during the period nearing the period close to public issues by unfairly showing high sales or receivables and cash sales incomes or income under other other-income head in the revenue statements. The issue price then is brought at a unwarranted premium which is utilized later on in various dubious ways for private gains by the promoters. The case of vanishing companies is a pointer in yester years and even now companies are converted in to losses by accounting manipulations over a period of time and even may eventually wound up or liquidated for various arrears of taxes, borrowings or wages or may be delisted.   

False export sales by technology companies or by non technology companies take place to plough back illicit income from abroad. This is done by over invoicing exports to shell companies many times more than the real cost of the goods and merchandise in tax heaven jurisdictions. The Mauritius route is also famous for avoiding of capital gains on sale/purchase of shares and securities as also flow of income from that country which mostly is through entities that re-route the illicit income by such dubious means. TIEA-Tax information Exchange Agreement had been signed lately with many such jurisdictions but these don’t go beyond the current effective dates and signed prospectively and not of much assistance for retrospective transactions that have already been entered in to. More recently exports have been reported at   substantial figures marking an increase of 79% but that does not respond to the actual data of 11% as per one equity firm’s research report for engineering including metals and automobiles taking in to account the figures BSE 500 companies despite the fact of slow-down in Europe and US. There is a big $20 billion gap and even government admits to the error of computer of $ 9 billion. There are cases of mis-declaration of exported goods or export of contra-banned goods to evade taxes or gain drawbacks besides the cases of over invoicing or under invoicing in export trades which is an activity that the bankers patronizes and prioritizes.         

There are 1500 crore involved in litigation in tax evasion cases in India in respect of MNCs that is on account of transfer of profits abroad by means of transfer pricing manipulations. Transferring of the profits from high tax jurisdiction to tax heavens or low tax jurisdictions is the norm of multinationals all over the world. In some tax heaven jurisdictions, the company’s physical presence may not be necessary and their registered office locations with lean staffing is all that qualifies for its operations there.      

The role of participatory note too is also very fundamental to owning illicitly the money by investing in these PN as the real owner is not named and it is like a bearer document available for sale or exchange in the same in off shore transactions between the entities.     

Accounting Frauds & Manipulations:

The detection of accounting frauds is the responsibility of the management and the auditors do not hold themselves responsible for the same unless these are apparent which could be unearthed by normal diligence of the auditors as that happened in the case of Satyam Computers where huge pile of cash and bank balances, some Rs.5040 crore against Rs. 5361 crore in books could not be tracked by the auditors which could be done just by simple third party confirmations to be sent to them directly than rely on the false certificates or forged ones handed over to these auditors by the management.

There is no binding effect for unscrupulous investment to be made by the company’s board either in the entities owned by them vicariously in family owned firms or in closely associated enterprises or unlisted companies owned by them or relatives. These investments are running in to huge sums and made in loss making unlisted companies either in India or abroad with no questions asked as to earning to be made out of these investments. This generally happens in the case of many listed companies also generally mid-sized companies where the auditors may not have addressed it. In the time of boom there is scope for new issues and floats where the promoters escalates the project costs by getting inflated invoices from the suppliers to siphon off funds later on from the money received or borrowings secured from bankers.  The companies make acquisitions at a very high value in respect of their own entities to divert funds in to their closely held or owned companies. The proceeds of these issues or the loans raised are partly off loaded by advances to these companies or loans with less chances of recovery. There is normal practice by many business houses in making investment in equities or debentures of group companies or unlisted promoter companies without adequate returns. An Investment by Satyam Computers of $1.6 billion in Maytas and group companies was resisted to by the shareholders being an investment in the unrelated business that of properties than the one in which the company was engaged being the technology company just to own agriculture lands so as to substitute fictitious assets with the real ones. But this is easily observable in many listed companies also and this form of investment will most likely appear in the balance sheet. Sterlite of promoter Anil Aggarwal struck restructuring plan which would have reduced minority stake holders’ stake in core assets in exchange of a piece in Vedanta’s copper mine in Zambia whose assets were not held proven as yet but for the legal action that was proposed by the institutional investors this could have been done to dodge the minority investors who really rarely participate actively.  

Companies also superficially value their receivable and inventories to raise working capital loans or even long term loans and splitter it away to the firms and closely held companies by making loans or advances or even entering in to other business transactions unrelated to the market conditions which may be difficult to decipher. The companies inflate the fixed assets values to raise more loans or show better picture by revaluation of fixed assets and raise money by issue of debentures. There may be fictitious receivables or cash on books which due to very large scale operations may not be detected by auditors in sampling methods.

There is well founded practice to inflate expenses by outsourcing of services in respect of sales and distribution and advisory services or compensate to a large extent by making payment for effecting sales by giving commission on sales. The expenses could be booked to siphon off the funds as was the case in the well known fraud case of the technology company where actual employees were different or even non-existent.

There may be off balance sheet liabilities which are not shown purposely to inflate profits like in Satyam an amount to the magnitude of Rs.1230 crore liability was under stated stating the same as funds arranged by the directors.  

There may be falsity in the income booked by raising false debtors or cash sales to augment the profits or bring in the flow of black money. There is no problem in issuing a cash memo for a sale without naming the debtor or even booking a name with incomplete address. This can happen in any retail sale counters of the company or in a restaurant and it is easier for a technology company by showing sale or supply of service or by a company over invoicing its product or manipulating production of goods and inventories. This is even done by some PSUs like the MMTC which sells gold to any buyer in cash. Gold or silver or the diamond is the other form of converting cash ill gotten. There is large scale evasion of taxes and unbilled transactions in gold or silver or precious metals’ trade.

Income resulting from accrued interest was booked by Satyam to inflate profits though the same was non- existent. There may be cases where to inflate profits the company may show expenditure as prepaid in the balance sheet instead of its booked in the revenue account proper. There can be cases where ensuing year sales or receivables being booked in current year during the year end closing to show higher revenues and profits. Similarly, future income that is yet to accrue to be brought in the current year on the basis of right to accrue arising in the current year. The income may be deferred to next year on the same basis stating that the right to receive the said income has not yet become final.      

The distinction between revenue and capital expenses is distorted to suit the purpose of the enterprise or the promoters in order to report higher profits which might not be there. The expenditure on R&D may be capitalized instead of being revenue nature not being developmental to show profits or being capital shown as revenue expenditure to show lower profits to avoid taxes. The policy to set off such expenditure over a period of ten years may be diverted from to suit the management policy in that regard.

The accounting frauds had been detected of like nature in Worldcom (US) where the management overstated the profits and assets by capitalizing the operating expenses to the tune of $9 billion. Founder Bernard Ebbers got $400 million in off the book loans. Likewise Enron sowed superficial profits and hid its debts of $1 billion by using partnerships improperly. Quest Communications (US) a company also indulged in improper accounting in respect of long term deals and using its funds improperly in related party transactions. In Satyam like case a company Parmalat (Italy) carried a false bank account in the financial statement for an amount of $3.9 billion which never existed.

There are accounting standards that permit the alternatives to be adopted which may be skillfully deployed to distort the financial statements as mark to market losses was not mandatory which saved the scalp of the banks and many business houses which had invested in foreign exchange denominated assets or investments. There may be non reportage of impairment of assets by the companies which may be far lower than their values carried in the balance sheets.  

The expenditure that may be required to be deferred might be booked in the very year to deflate the profits or the deferment of expenditure may be done to show more profits to declare dividends to the promoters who are the owners of the large chunk of shares or may be done to fulfill other objectives that the company management might have in view.  

In a case the asset may be written off in the revenue account this had happened in the case of a foreign company which wrote off loan in the profit and loss account. Similarly an agreement that in fact involved huge liability of an investment bank with many subsidiaries overseas was left off the balance sheet as this was legally tenable as per GAAP in that country though in the subsidiary company’s country it called for a disclosure and the auditors just glossed over the fact completely.

Pledging the shares held by the promoters very common to raise money for expansion in other ventures by them and the bankers or NBFC like G. E. Capitals or India Bulls etc., would finance such transactions with margin being two to three times. This information is now made available to the share holders as per SEBI dictate as it may affect the shareholders who may not otherwise know of the urgency or the need or stringency of funds required either by the promoters or the corporate.

Misuse of Funds by the Corporate Abusing Interest of the Minority Shareholders: These may be adopted by the management for ulterior motive of gaining control or adding value to their private businesses or make out escape route to draw out funds from the investment in related companies.

Merger and acquisitions could be some times ill conceived for marring the interest of the investors. The promoters acquire their unlisted companies either to increase their stake in the profitable listed company after unjustifiable valuations or to increase the value of the private firms. This happened in the Indian scenario when the stocks of J. P. Associate got thrashed at the bourses on its decision to allot a huge stake in J P Infratech, a subsidiary of the promoters. Related party transactions remain largely unreported which are required to be at arm’s length. There are demergers and mergers which are effected through courts and not SEBI which overseas acquisitions therefore, the courts may not fully watch the interest of the minority shareholders like the regulators would supervise such transactions.      

The associated company transactions do take place to provide finance to the weak group company through a company which has huge surplus funds. Sometimes ESOPs may be issued to the directors or their relative close to promoters with a view to increase the share holding and voting rights in the company. The abuse of share holders is unabated by the large corporate who indulge in malpractices like the shares of Reliance Energy were transferred to Reliance Power just before the Initial Public Offer so that the share of Reliance Energy share holders would come down. Sometimes the funds are frittered away through multiplicity of interlinked group of companies or huge maze of such companies which run in large numbers so as to camouflage the transaction.  

Companies often delist when they find the going most favourable by offering low prices for buy back. This happened in the case of Bharti Telecom Limited which raised funds through public offering. Sometimes, a company delists in the bear run of the markets and relist at a premium when the market bounces back. This is discernible when promoters keep on increasing their shareholding in the company.

Manipulation takes place in profits and the inventory ratio by inflating the inventories to higher values in a bid to substantially increase the ratio over a short term period. The accrued expenditure may be deferred to show more profits. The assets might be depreciated at low rates to show more profits by increasing the useful life of an asset than is warranted.

There may be movement of debts receivables off from one company to another unlisted company. Similarly liabilities are also hidden or understated by companies say in case of pledge of shares securing debts due by the company.            

There is a common practice of rampant booking of raw material consumption in excess by false bills accounted for or over pricing the goods purchased and consumed to divert funds to other related companies or pocket the excess through supplier route. There could be over-invoicing of the raw material or showing more quantity than actually being received through suppliers and related parties who connive with these companies.

In many rolling companies there is large scale evasion of excise duties and value added taxes as these companies indulge in sale of unrecorded production by issuing computerized excisable invoices with the large fleet of carriers to substantiate the movement of goods but would tear off invoices as soon as the goods reach the destination leaving no trace of the transaction. This happens in many other industries. In the case of sugar mills there is large scale unreported clearances made and cash generations made under hand just by declaring lower than real sucrose content in the milled juice to affect real production and it is far more difficult to detect in depth. A company may sell its premium product at a lower figure in the books but takes the excess in cash and the distributor may have to adjust the excess so paid in some form of a charge may be warranties or loading or logistics.    

The goods meant for exports are sometimes sold in the domestic tariff area with the connivance of the authorities. Sometimes on account of least check on SEZ units there is escapement of duties and abuse of concessions in respect of transactions of sale to and purchase by such units in and outside the designated area.   

Some of the accounting methods may not directly result in black money but result in disproportionate profits which may be at the cost of the exchequer and to the disadvantage of the stakeholders at large.    

Vijay Kumar Kalia



The author of this article would like professional CAs to write back in case they are interested in joining me for my upcoming book on the subject and black money where I would acknowledge individually for their inputs if they wish. I would wish to meet for opinion of professional brothers in India. I would welcome CAs joining me in this task.  

Published by

Vijay Kalia
(Chartered Accountants)
Category Accounts   Report

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