New Delhi: Tax authorities have blamed the opaque practices in the real estate sector, all-cash deals by small scale producers, capital market regulator Sebi’s lack of reach on the ultimate beneficiaries of offshore instruments and informal stock trading outside the exchanges for the generation of black money.
In a report presented to the finance ministry last week, a panel led by the Central Board of Direct Taxes (CBDT) chairman has emphasised that the way business is done in these areas have dealt a serious blow to the economy not only by tax evasion but also by way of huge unproductive and speculative investment into gold and real estate, that are considered safe against inflation.
In a biting criticism about the practices in the real estate sector, the report said that some companies resort to subjective ways of recognising revenue. While some show income when a project is only 30% complete in order to get bank credit, the cash rich ones do not show income even when a project is 90% complete.
“Such accounting variations are larger in this sector of the economy than any other,” the report said. This is because accounting rule maker ICAI’s standard 7 advocating percentage completion method for construction contracts excludes real estate players.
The Income Tax Act is yet to recognise the standard for taxation purposes. Sourcing labour and raw materials from unorganised sector adds to the scope for inflating expenses, the report alleged. The panel pointed out that paying farmers in cash for land acquisition often smacks of laundering black money.
Unaccounted wealth is also created in the small scale manufacturing sector as many units are illegal and their sales are never reported. Generation of false invoices to misuse CENVAT is yet another significant way of tax evasion.
Tax authorities are also concerned that Sebi has no access to all the details of those who hold participatory notes — derivative securities issued by foreign institutional investors (FIIs) to overseas investors. Since these securities with underlying Indian assets are sold in foreign markets, these are often suspected to be misused for bringing back black money generated in India and has been stored outside the country.