Won't allow stock market to be misused for tax evasion: BSE Chief

Stock markets cannot be allowed to be misused by manipulators for evasion of taxes and the BSE has put in place a strong surveillance mechanism to check any such misdeeds, the exchange's CEO Ashish Chauhan has said.

He also urged the government to have a fresh relook at the laws for further tightening of rules and removing the loopholes in the capital gains tax exemption framework to completely stop any tax evasion through stock market trading.

In an interview, Chauhan also said there is a widely held perception that only penny stocks are manipulated for tax evasion, but there was a need to study whether larger stocks are also used for such misdeeds as 80-90 per cent of capital gains tax exemption being claimed were from the larger companies.

In the annual budget this year, the government announced a major step to check tax evasion through penny stocks by limiting the long-term capital gains tax exemption only in stocks in which purchase securities transaction tax (STT) was levied.

In case of shares purchased off-market or without levy of STT, the incentive would now be limited to only some genuine transactions such as IPOs and a few other cases.

Chauhan said it was a move in the right direction as such exemption would not be available any more for preference shares that were mainly used for evasion of taxes, but some more steps are required to fully check the loopholes.

There have been several cases that have come to light in recent years where penny stocks were used for tax evasion through manipulation in shares of thinly traded companies.

The BSE has been as such proactive over the years for delisting of stocks were no trades have taken place for a long time, after giving due time to those companies for compliance.

Talking about the menace of penny stocks, Chauhan said, "One thing is price manipulation and the other is the tax evasion. So, we have taken up it with the government that since you have this regulation of capital gains tax exemption after one year, which is promoting this kind of tax evasion behaviour, you should stop having this exemption."

"You should stop this exemption and that would stop price manipulation based on tax evasion. Then the normal price discovery would happen," he added.

Irrespective of any loopholes, Chauhan said, the stock exchanges cannot allow themselves to be misused for tax evasion and the BSE was very serious about this.

"All the exclusive stocks (listed only on its platform), BSE would continue to apply tougher price bands on a quarterly or annual basis, compared to what the regulator prescribes.

"Traditionally, we have had a lot more penny stocks than others, so we need to be much more careful. We have ensured and we will continue to ensure that such issues don't come up in the future," Chauhan further said.

Assuring that the BSE will keep taking up the issue of capital gains exemption with the government, he said "it is happening because of this reason and by allowing capital gains tax exemption, how much more capital has come into the markets, that also needs to be analysed".

"Whether the purpose has been served or not, some analysis needs to be done and also study the pros and cons of all this," he said.