SHELL COMPANIES, TAX EVASION, AND THE LEGAL FRAMEWORK IN INDIA

AUTHORS – SHISHIR TIWARI* & DR AXITA SHRIVASTAVA**

* LL.M (BUSINESS LAW), AMITY UNIVERSITY, LUCKNOW.

** ASSISTANT PROFESSOR AT AMITY UNIVERSITY, LUCKNOW.

BEST CITATION – SHISHIR TIWARI* & DR AXITA SHRIVASTAVA, SHELL COMPANIES, TAX EVASION, AND THE LEGAL FRAMEWORK IN INDIA, INDIAN JOURNAL OF LEGAL REVIEW (IJLR), 5 (5) OF 2025, PG. 922-932, APIS – 3920 – 0001 & ISSN – 2583-2344

Abstract

This paper provides a comprehensive analysis of shell companies and their role in facilitating tax evasion within the Indian context. It examines the legal and financial characteristics of these entities, differentiating between their legitimate and illegitimate uses. A significant challenge identified is the absence of a specific statutory definition for “shell company” in the Companies Act, 2013, creating regulatory loopholes. The paper details various tax evasion methodologies employed using shell companies, including layering, fictitious invoicing, round-tripping, and treaty shopping. It further analyses the existing legal framework – encompassing the Companies Act, 2013, the Prevention of Money Laundering Act (PMLA), 2002, the Income Tax Act, 1961, SEBI regulations, and the Benami Transactions (Prohibition) Amendment Act, 2016 – and evaluates its effectiveness. Landmark judicial pronouncements on lifting the corporate veil are discussed to understand how courts interpret corporate identity in cases of fraud and evasion. The significant economic impact, including revenue loss, financial system distortion, and increased inequality, is highlighted. Finally, the paper reviews government measures to combat this menace, summarizes key findings, and offers recommendations for strengthening the regulatory framework, emphasizing the need for a clear legal definition, enhanced beneficial ownership transparency, robust inter-agency coordination, and international cooperation.