Important Topic: Shell Companies in India

Important Topics for Competitive Exams

Important Topic

What are shell companies?

The Companies Act, 2013 has not defined what a ‘shell company’ is and as to what kind of activities would lead to a company being termed a ‘shell’. Shell companies are typically corporate entities which do not have any active business operations or significant assets in their possession. The government views them with suspicion as some of them could be used for money laundering, tax evasion and other illegal activities.

How to strike off a shell company from the records?

Companies can be removed from the rolls of the Ministry of Corporate Affairs by two means: strike off by Registrar of Companies (RoC) — (Section 248 (1) of the Companies Act, 2013) and voluntary strike off — (Section 248 (2) of the Companies Act, 2013). Voluntary closure can be done with the approval of the board and shareholders and the firm should have nil liabilities.

Scenarios leading to the Strike off:
The strike off happens in case of companies which have failed to commence business within a year of incorporation. Also, in case of companies that are not carrying on any business or operation for a period of two immediately preceding financial years and have not made any application within such period for obtaining the status of a ‘dormant company’ under Section 455 of the Companies Act can be struck off by the RoC unless cause is shown to the contrary. The RoC issues a show-cause notice to such companies and their directors seeking their response within 30 days. If the response is not satisfactory, the company’s name would be removed from the register.

India recently amended its Double Taxation Avoidance Agreement (DTAA) with Mauritius to plug certain loopholes. Now, a Mauritian entity will have to pay capital gains tax here while selling shares in a company in India from April 2017. Earlier, the company could avoid tax as it was not a ‘resident’ in India. It could get away from the taxman in Mauritius too, due to non-taxation of capital gains for its residents. As a result, many shell entities sprang up in Mauritius to profit from investments in India and get away without paying taxes anywhere.

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