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Brokers to Get I-T Notices in Client Code Changes Case

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UNDER SCRUTINY: Rs 56,000 crore worth of trades monthly from 2009 to 2011 

The case of client code changes in the stock market is set to haunt stock brokers again. The income tax (I-T) department is preparing to send notices to more brokers for the assessment year 2010-2011and 2011-12 when the practice of changing client codes within 30 minutes after market close to rectify punching errors was common.

The tax department felt brokers resorted to this practice to avoid paying taxes as client code modifications constituted ` . 56,000 crore worth of trades every month between 2009 and 2011. Gains and losses were transferred from one account to another under the guise of rectifying errors.

In the past, tax notices have been served on over 100 brokers at the start of 2016 for assessment year 2009-2010 but the same were pending for the following two assessment years, said a senior IT official in Mumbai.

The review for 2009-2010 will be complete by December and another set of notices will be issued in the next couple of months. The Central Board of Direct Taxes came to know of the huge tax evasion by brokers and their clients through code changes due to mismatch in reported trade, income and collection of statutory levies.

In October 2011, the Securities and Exchange Board of India disclosed that client code modifica . 120 crore every tions fell by 99% to ` month after the regulator issued strictures against the practice.

That same month, Sebi also revealed the outstanding recoveries of securities transaction tax (STT) and other levies running into thousands of crores. The regulator said its collection was difficult because the reported trades were being declared as punching errors.The tax official said large foreign institutional investors told the department that certain transaction data were not related to them, even if deals were done using their code and in their accounts. The department found discrepancies between the trade data provided by brokers and equity trading income reported by FIIs and STT collected by stock exchanges. Several FIIs who issued off-shore derivative instruments did not maintain proper know-your-customer documents, as this was not mandatory then. 

23RD NOVEMBER, 2016 THE ECONOMIC TIMES , NEW DELHI

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