The Indian government is continuing its crackdown on shell firms
- Companies usually establish shell firms, which only exist on paper and do not have an office or employees, for the purpose of money laundering and tax evasion.
- In 2017-18, the corporate affairs ministry shut down 226,000 shell companies that had not filed tax returns or financial statements for a period of at least two years.
- This year, it plans to shut down an additional 225,000 shell companies while simultaneously working on a definition of what constitutes such a firm.
Indian companies and wealthy individuals usually establish shell firms, which only exist on paper and do not have an office or employees, to disguise the ownership of assets or to transfer funds illicitly and avoid taxes. They are structured in such a way to prevent officials from identifying the actual beneficiaries of transactions.
In the previous financial year, the corporate affairs ministry cancelled the operating licenses of 226,000 shell companies that had not filed tax returns or financial statements for a period of at least two years. This year, it planned to shut down an additional 225,000 shell companies. It has reportedly struck off 70,000 such firms in the year so far with another 100,000 expected to bite the dust soon.
And now, the Indian government has a new strategy to prevent the rapid growth of shell companies: geo-tagging.
The ministry of corporate affairs is reportedly planning to make it mandatory for companies to geo-tag their subsidiaries or associated entities. By giving the exact details of a subsidiary’s location, regulators will be able to pinpoint a number of different companies in one location. Prior investigations have revealed that companies usually register the location of their shell firms on the same premises as their registered offices.
The data on a company’s location will be fed into the ministry’s database, which will easily reveal companies using the same addresses, contact info and common managers. Additionally, the financial accounts of these companies will also be monitored to track drastic swings in revenue and profits.
In order to accelerate its crackdown on money laundering, the Indian government is also working on the precise definition of a “shell company”. The lack of a codified definition is proving to be a hurdle to the investigative process. Sharing an address with a subsidiary does not indicate illegal activity. For example, a lot of startups opt to work at the same location. Hence there is a need to identify a uniform set of traits that are common to all shell firms.