Web-based Returns to Deter Attempts to Float Shell Companies [UPSC Notes]

The Indian government is introducing a new reporting system for corporations that will require companies to submit their annual returns, financial statements, and other necessary filings in web-based forms with improved security and authentication features. This measure aims to discourage the establishment of shell companies that evade taxes and prevent financial misconduct such as tax evasion, fund diversion, and money laundering.

This topic is important for the Indian Economy segment of the UPSC syllabus.

Web-based Returns to Deter Attempts to Float Shell Companies

Enhanced security measures and know-your-customer requirements:

• The government is taking measures to prevent the creation of shell companies with fake directors in the new reporting system by increasing security and know-your-customer requirements. 
• This move comes after the Serious Fraud Investigation Office took action against a company in Gurugram in 2022 for allegedly creating shell companies linked to Chinese entities.

Real-time oversight of statutory filings:

• The new system is designed to provide real-time oversight of statutory filings by 1.5 million registered active companies through technology. 
• The new filing system includes two-factor authentication, and the data entered on the form before submission will be verified in real-time with the government’s previous filings to prevent errors and improve compliance.

Rollout of new statutory forms:

• The Ministry of Corporate Affairs is planning to introduce about 40 new forms in the third version of its MCA21 portal, which has been built from the beginning. 
• On average, 7 to 7.5 million statutory forms are filed annually, and more than 7.5 million were filed on the portal in FY23, despite the transition to the new system being phased in.

Migrating annual return forms to the new system:

• The government plans to move the annual return forms to the new system for the upcoming filing season. 
• Companies need to file these forms within 60 days of their annual general meeting, which should happen within six months of the end of the financial year. 
• Despite some initial problems, the filings on the MCA21 portal were strong in FY22. 
• About 2.8 million forms were filed for the nine new web-based forms, which is more than the 2.65 million forms filed in the same period the year before.

Completion of transition to the new reporting regime:

• In the recently ended financial year, there were many filings done by corporations under the new reporting regime which shows that the government’s initiative towards e-governance is almost complete. 
• Additionally, in the previous year, there were more financial statements and annual returns filed compared to the year before.

Conclusion:

• The new web-based forms with enhanced security features and authentication requirements are expected to deter tax evasion by shell companies and prevent financial irregularities like the diversion of funds and money laundering. 
• The real-time oversight of statutory filings and two-factor authentication will improve compliance and prevent errors. 
• The rollout of new statutory forms and migration of annual return forms to the new system will facilitate a seamless transition to the new reporting regime for corporations.

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