Tax dept to keep a tab on client code changes

K.R. Srivats New Delhi | Updated on March 14, 2011

The income-tax department has fired a salvo on the stock exchanges and the stock broking community.

To counter tax evasion through modification of client codes by brokers, the central board of direct taxes (CBDT) has now made it mandatory for all stock exchanges to furnish a monthly statement of all transactions in which client codes have been modified.

The CBDT has now come up with the format of a new Form 3BB for submitting information in respect of all transactions, covering both cash and derivatives markets, where client codes have been altered.

Stock exchanges allow brokers almost half an hour at the end of a trading day for rectifying “genuine” errors and mistakes that may have occurred during the trading hours. However, this facility was being used to transfer gains or losses from one person to another by changing the client codes, in the garb of correcting an error, the tax department had contended.

In recent times, income-tax department has come across several such malpractice, sources said.

To get a better understanding of such type of transactions and to ensure that there was no tax evasion, the tax department has now come up with the latest information filing requirement, sources in the broking community said.

Deal Details

Stock exchanges have to furnish the transaction ID, broker's name and ID, original client code, modified client code, name of the original client, PAN of the original client, name of the modified client, PAN of the modified client, scrip name, quantity, rate, total value of transaction, buy or sell and date of transaction.

All this information has to be furnished to the tax department in respect of all transactions where the client code has been modified during a month.

The SEBI had in early January issued a circular that said that stock exchanges can permit modifications to client code after trade execution only in case of a genuine error or wrong data entry made by trading members. “This facility has to be used more as an exception rather than routine,” the SEBI circular had said.

The capital market regulator had advised stock exchanges to set objective parameters for identification of client code modifications arising as a result of genuine error or wrong data entry. Stock exchanges were asked to impose monetary penalty in addition to disciplinary action against members who do not meet the objective parameters.

Stock exchanges were also asked to include verification of client code modification as a reporting item in internal audit report of the trading members.

In February this year, the NSE had come out with a monthly penalty structure for client code modifications in the capital market segment, equity derivatives segment and currency derivatives segment.

In addition to this penalty structure, suitable disciplinary action proceedings would be initiated in cases where value of modified trades of non-institutional clients is significant, the NSE circular said.

Published on March 14, 2011

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