CAG pulls up I-T Dept. on shell companies


  1. The CAG has pulled up the Income Tax Department for not putting to use the tools at its disposal for effective action against shell companies that conceal unaccounted-for income and generate black money, specifically with respect to Maharashtra Sales Tax Department findings
  2. Background: The auditor had sought details from the I-T Department in Mumbai on the assessees and the ultimate beneficiaries, but despite reminders, the data were not provided
  3. In 2008-09, the MSTD had informed the Bombay High Court that it had investigated 1,555 hawala operators involving 39,488 beneficiary dealers who had passed on an input tax credit of ₹1,333 crore in three years
  4. The accused claimed and got input tax credit against the declaration of fake tax invoices without actual transactions involving the sale and purchase of goods
  5. To evade detection, payments were made against the invoices by cheque or bank transfers and the amounts were later withdrawn from the accounts of hawala operators
  6. Problems pointed out by CAG: CAG relied upon the MSTD data for analysis and found that the Income Tax Department had not even scrutinised all the assessees featuring on the list
  7. The information regarding bogus purchases was not passed on to assessing officers
  8. The current provisions have not acted as a deterrent as there are no disincentive for giving and receiving accommodation entries
  9. Established companies have also resorted to the practice of obtaining bogus purchases, which shows that the present system of gathering evidence and acting thereon is ineffective
  10. Inflated expenses: The shell companies are used to generating bogus bills showing inflated expenses on various counts
  11. They receive payments through the banking channel to project the transactions as genuine, and then return the rest to the ultimate beneficiaries after charging a commission
  12. Unscrupulous tax consultants and chartered accounts are also involved in the setting up of such entities
  13. Recommendations: In cases of false disclosure, the department should have moved the Settlement Commission for withdrawal of immunity to the applicants
  14. Interestingly, the Finance Ministry — under which the I-T Department functions — told the CAG that there was no loss of revenue as each bogus purchase involved bogus sales also

Note4students:

Know the issue broadly; technical details are not needed.

Back2basics:

What is a Shell Corporation?

  1. It is a corporation without active business operations or significant assets
  2. These types of corporations are not all necessarily illegal, but they are sometimes used illegitimately, such as to disguise business ownership from law enforcement or the public
  3. Legitimate reasons for a shell corporation include such things as a startup using the business entity as a vehicle to raise, funds, conduct a hostile takeover or to go public
  4. These are used by large well-known public companies, shady business dealers and private individuals alike
  5. For example, in addition to the legal reasons above, shell corporations act as tax avoidance vehicles for legitimate businesses
  6. They are also used to obtain different forms of financing.
  7. However, the tax avoidance is sometimes seen as a loophole to tax evasion, as these corporations have been known to be used in black or gray market activities

Reasons to Legitimately Set Up a Shell Corporation

  1. Important reason for a domestic company to set up a shell company is to realize a tax haven abroad
  2. This is the process of “offshoring” or “outsourcing” work that was once conducted domestically
  3. To remain within legal bounds internationally, American corporations will set up shell companies in the foreign countries in which they are offshoring work
  4. This is legally allowed by the United States, and some say that it’s the U.S. tax code itself that’s forcing domestic companies to create shell corporations abroad
  5. Another way that shell companies help with taxes surrounds the need for financial institutions to conduct financial activity in foreign markets
  6. This allows them to invest in capital markets outside of domestic borders and realize potential tax savings

Ways That People Abuse Shell Companies

  1. Even though there are legitimate reasons to set up a shell company, many wealthy individuals abuse shell companies for personal gain
  2. Progressive taxation within the United States, that is, tax brackets, slowly caused people to seek personal tax havens
  3. Significantly high earners set themselves up as shell companies in one or many locations, like the Cayman Islands
  4. This is a gray area of tax evasion where people funnel earnings through shell companies in such a way that it isn’t counted toward personal income

Projects cleared faster in 2015: CAG

  1. Source: A report tabled in Parliament by the Comptroller and Auditor General (CAG)
  2. Delays in granting environmental clearance (EC) to projects fell in 2015 after consistently rising between 2011 and 2014
  3. Also 62 projects examined by it had “irregularities” in the way they garnered public consent
  4. Reasons for delay (2011-14): Moving documents from the Central
  5. Registry sections to the impact assessment divisions
  6. Opening specific files for submitting to the Member Secretary concerned
  7. Insufficient skilled hands
  8. A glut of projects for clearance between 2011-2014
  9. Insufficient information and clarification from project developers
  10. Change: After the NDA government came to power, Environment Minister Prakash Javadekar introduced a provision, whereby project developers could submit their applications online

Note4students:

Note the reasons for delays. Analysis can be quoted in mains answer.

CAG to undertake audit of demonetisation fallout

  1. The Comptroller and Auditor General of India will soon begin an audit of various aspects of demonetisation announced by Prime Minister Narendra Modi on November 8, 2016
  2. CAG Jurisdiction: Demonetisation per se is a banking and money supply issue and as such, outside the CAG’s audit jurisdiction
  3. Public exchequer: But the CAG is well within its rights to seek audit of fiscal impact of demonetisation, largely its impact on tax revenues. That way the issue gets linked with the public exchequer
  4. Linkages: Other linkages of demonetisation with the public exchequer that will also be covered by the audit
  5. These would be “expenditure on printing of notes, RBI dividend to the Consolidated Fund, etc
  6. The huge amount of data generated by banks and the Income-Tax Department in the wake of demonetisation would also be covered
  7. Audit can look into various risks, such as errors and omissions in identifying the potential tax evaders, failures to pursue the identified suspects, selective and arbitrary pursuance of leads and consequences thereof
  8. Other development: Recently, the GST Council deleted section 65 of the preliminary draft that authorised CAG to audit GST (Goods and Services Tax)

Note4students:

Good time to revise CAG’s powers of audit, structure and function from polity book.

Centre owes Rs. 80,000 crore to States, says CAG report

  1. News: The Centre owes the States over Rs. 80,000 crore from its net proceeds of the period between 1996 and 2015
  2. Context: The CAG report on Compliance of Fiscal Responsibility and Budget Management Act, 2003
  3. It could significantly impact the finances of most States, because most of them could end up getting a few thousand crores each
  4. Article 279 of the Constitution: The CAG is required to ascertain and certify the ‘net proceeds’ (any tax or duty the proceeds thereof reduced by the cost of collection), whose certification shall be final

CAG might audit RBI

  1. Comptroller and Auditor General (CAG) of India said there is a need to consider whether financial regulators need to be audited
  2. Financial regulators of India include the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI)
  3. CAG mentioned how the Federal Reserve in the US and the Bank of England in the UK had both come under greater scrutiny over the last few years

SC refuses plea for CAG audit of intelligence agencies

  1. Context: An NGO had raised a question mark over the functioning of the IB, RAW and NTRO on the ground that there was no statute to govern them
  2. Model: The intelligence agencies in the United Kingdom were put to independent audit of their accounts
  3. News: The SC refused a plea by an NGO to subject intelligence agencies to audit by the CAG and other independent scrutiny
  4. Reason: The court should refrain from interfering in their functioning, otherwise it can create a dent into our security

Rs. 1.4 lakh crore cess money lies idle : CAG report

The funds collected can be used only for the designated purpose and cannot be diverted.

  1. More than Rs. 1.4 lakh crore of funds collected by the government under various cesses for purposes as varied as higher education, road development are lying unutilised.
  2. It has already levied a 0.5 per cent Swachh Bharat cess and is proposing a 2 per cent regional connectivity cess in aviation and increasing the cess on sugar production.
  3. CAG report has found that a whopping Rs. 64,288 crore collected during 2006-15 under the Secondary and Higher Education Cess (SHEC) is lying unutilised.
  4. The National Clean Energy Fund, the R&D Cess Fund, the Central Road Fund, IT Welfare Fund, Customs & Central Excise Welfare Fund have Rs. 14,500 crore lying unused.

Let’s know more about ECHS?

  1. ECHS is a health scheme, introduced in April 2003.
  2. To providing healthcare on a cashless basis through a network of 426 polyclinics, service hospitals and empanelled hospitals across the country.
  3. It currently has around 47 lakh beneficiaries.

CAG audit finds irregularities in implementation of health scheme

The first ever CAG audit of the ambitious health scheme for ex-servicemen has found serious irregularities and deficiencies in its implementation, resulting in financial loss to the government.

  1. For auditing the Ex-servicemen Contributory Health Scheme (ECHS), CAG had selected some units and formations based on a criteria matrix for the years 2012-13 to 2014-15.
  2. The CAG listed several shortcomings in the implementation.
  3. This includes short supply of medicines to the polyclinics, raising of 2 claims for the same patient, irregular payment towards unaccounted bills of empanelled hospitals etc.
  4. The audit report also highlighted unethical practices adopted by the empanelled hospitals, like raising inflated bills.

CAG to audit projects cleared by National Security Council

Making sensitive agencies and organisations more accountable.

  1. CAG is working on a special audit of projects cleared by the National Security Council (NSC), which is headed by the Prime Minister.
  2. This is the first time the CAG would audit the NSC’s projects.
  3. Just like the report for the CAG’s special audit of the National Technical Research Organisation (NTRO), which commenced in 2010.
  4. The NSC audit report would be submitted only to the Prime Minister’s Office (PMO), and not placed in Parliament like routine audit reports.

Make CAG accountable to Parliament: PAC

May recommend amending 1971 Act that governs the CAG.

  1. Public Accounts Committee (PAC) of Parliament could recommend legislative changes, a Constitutional amendment for CAG.
  2. PAC suggested that the Committee should be consulted before the appointment of the CAG and it should be part of the legislature like in the U.K. and Australia.
  3. This move may spark a debate on the Constitutional guarantees and autonomy provided to the CAG.
  4. Parliamentarians have always held that Parliament is supreme. But, actually it is the Constitution that is supreme.

‘PAC needs more teeth and transparency’

  1. The Public Accounts Committee “needs more teeth and greater transparency in its functioning,” its Chairman and MP K.V. Thomas said.
  2. The All-India conference would see PAC chiefs from across the country deliberate on issues such as how to make the government implement the recommendations of the committee and whether PAC meetings should be held with the media in attendance.
  3. The PAC is expected to table its final report on the 2G spectrum allocation and the Commonwealth Games scam in the winter session of Parliament.

Can you dig out more about functions of PAC? Why there is need of more power and transparency?

Mid-Day meal scheme draws CAG’s flak

  1. CAG said that Mid-day meals were not served on the prescribed number of days in both primary and upper primary schools.
  2. Besides, the food also lacked nutritive standards.
  3. Service providers did not obtain mandatory licenses and there was non-availability of buffer foodgrain stocks.
  4. CAG recommended strengthening of the monitoring mechanism by regular inspections of schools and kitchens, and yearly review of the status of enrolment of children.

CAG pulls up AERB for not preparing nuclear safety policy

  1. Board is yet to develop 27 out of the 168 safety documents despite recommendations by two panels in 1987 and 1997.

CAG said – “There were no proper mechanisms in place to ensure/verify that: radioactive waste had actually been disposed of safely after utilisation.”

Specifically, the CAG observed that 91% of the medical x-ray facilities in the country were not registered with the AERB.



:( We are working on most probable questions. Do check back this section.







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