Income Tax Dept. Starts Investigation Against Unlisted Share Deals and Tax Evasion In OFS Transactions

The Income Tax (I-T) Department has launched a large-scale investigation into potential tax evasion linked to unlisted share transactions and Offer for Sale (OFS) deals.

The crackdown targets cases where promoters, anchor investors, and high-net-worth individuals (HNIs) acquired unlisted shares before a company’s public listing and later offloaded them through OFS, allegedly evading taxes.

Massive Tax Evasion Probe: Notices Sent to Investors Across India

In the last ten days, tax authorities have issued multiple notices to investors in various cities, demanding details of acquisition costs, valuation methods, and reported capital gains. Officials suspect that some investors have manipulated their acquisition costs by inflating the fair market value (FMV) rather than using the actual purchase price. This tactic could have allowed them to drastically reduce their taxable capital gains, resulting in significant tax losses for the government.

Uncovering the Tax Loopholes: Valuation Methods Under Scrutiny

Industry experts believe that the I-T Department is not just investigating capital gains understatement but is also delving into the nature of these transactions. The authorities are reviewing transactions conducted before February 1, 2018, where shares were later sold in companies that went public between early 2018 and July 2024. Recent amendments in the FY25 budget regarding cost calculation methods have intensified scrutiny, leading to possible reassessments of previously filed tax returns.

Cross-Checking Company Records and Investor Details

Officials have demanded company records, stock allotment dates, subscription payment details, and investor identities. The I-T Department is cross-referencing these allotment dates with data from the Ministry of Corporate Affairs (MCA) to determine whether these transactions received proper approvals from company boards. A tax official confirmed to The Economic Times that multiple inquiries are focused on capital gains declared under Section 55(2)(ac) of the Income Tax Act.

What This Means for Investors

With the government tightening its grip on tax evasion, investors dealing in unlisted shares should ensure compliance with tax regulations. Those who have engaged in questionable valuation practices or inflated acquisition costs may face penalties, tax reassessments, or even legal consequences.