In a move that could help curb evasion of taxes, the income-tax department has issued a notification to the stock exchanges to report changes in client codes done by brokerages in a specified format every month to the I-T department. This would be effective April 1.
Earlier, exchanges would furnish this information only when specifically asked for by the I-T department. The new notification would make the disclosure mandatory.
Brokerages are allowed to rectify client codes if there?s a mistake in punching in the codes. The practice, however, has been misused sometimes by brokerages and clients to evade taxes. Since a change in client code requires the consent of both the clients involved, typically it is the members of a family or close relatives which exploit this loophole to avoid capital gains tax.
According to market observers, it?s generally the smaller brokers that resort to this practice. ?Top professional broking houses don?t allow changing of codes unless there?s a genuine error,? said Jitendra Panda, senior VP ? retail, Motilal Oswal Securities.
In the past, capital market regulator Sebi has expressed its displeasure against the reckless changing of client codes. In a circular dated January 3, Sebi had said stock exchanges could permit modifications to client code post trade execution ?only in case of genuine error or wrong data entry made by trading members? and was to be used ?more as an exception rather than routine?.
The circular stated that stock exchanges were advised to set objective parameters for identification of client code modifications arising as a result of genuine error or wrong data entry. What?s more, exchanges had to impose monetary penalty in addition to disciplinary action against members who do not meet the laid down objective parameters.