Question

Direction: The passage given below is followed by a set of questions. Choose the most appropriate answer to each question.

With an aim to check flow of black money and evasion of taxes through stock market, market regulator SEBI has decided to impose hefty penalty on brokers facilitating such transactions from tomorrow. The regulator recently came across a loophole in its existing regulations, which was being abused by stock brokers for facilitating tax evasion and flow of black money through fictitious trades in lieu of hefty commissions. To remove this anomaly, SEBI has asked stock exchanges to penalize the brokers transferring trades from one trading account to another after terming them as ‘punching’ errors. The penalty could be as high as 2% of the value of shares traded in the ‘wrong’ account, as per new rules coming into effect from August 1. In a widely-prevalent, but secretly operated practice, the people looking to evade taxes approach certain brokers to show losses in their stock trading accounts, so that their earnings from other sources are not taxed. These brokers are also approached by people looking to show their black money as earnings made through stock market. In exchange for a commission, generally 5-10% of the total amount, these brokers show desired profits or losses in the accounts of their clients after transferring trades from other accounts, created for such purposes only. The brokers generally keep conducting both ‘buy’ and ‘sell’ trades in these fictitious accounts so that they can be used accordingly when approached by such clients. In the market parlance, these deals are known as profit or loss shopping. While profit is purchased to show black money as earnings from the market, the losses are purchased to avoid tax on earnings from other sources. As the transfer of trades is not allowed from one account to the other in general cases, the brokers show the trades conducted in their own fictitious accounts as ‘punching’ errors. The regulations allow transfer of trades in the cases of genuine errors, as at times ‘punching’ or placing of orders can be made for a wrong client. To check any abuse of this rule, SEBI has asked the bourses to put in place a robust mechanism to identify whether the errors are genuine or not. At the same time, the bourses have been asked to levy penalty on the brokers transferring their non-institutional trades from one account to the other. The penalty would be 1% of the traded value in wrong account if such trades are up to 5% of the broker’s total non-institutional turnover in a month. The penalty would be 2% of trade value in wrong account if such transactions exceed 5% of total monthly turnover in a month.

Which of the following options is true according to the given passage?

Options

• The existing regulations were fool proof and there were no instances of tax evasions.

• As per new rules the penalty of tax evasion could be 5% of the value of shares traded in the 'wrong' account.

• The penalty would be 2% of trade value in wrong account.

• The regulations do not allow transfer of trades in the cases of genuine errors.

Answer 1

The penalty would be 2% of trade value in wrong account.

Explanation:

Only the penalty would be 2% of trade value in wrong account is true as per the given passage. It is given in the last sentence of the last paragraph. 

The existing regulations were foolproof and there were no instances of tax evasions and  As per new rules the penalty of tax evasion could be 5% of the value of shares traded in the 'wrong' account is distorted information given in the first paragraph. 

The regulations do not allow transfer of trades in the cases of genuine errors is also a distorted piece of information given in the second sentence of the fourth paragraph.