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Sham Transaction

Updated on July 18, 2023

Sham transactions pertain to arrangements or dealings intentionally crafted to deceive tax authorities. These transactions lack genuineness and legitimacy, aiming solely to exploit tax benefits or evade tax liabilities. Sham transactions involve creating fake structures or changing the nature of a transaction without any valid business reason. The main goal is to manipulate the taxes owed or the outcomes of the transaction. Tax authorities consider these transactions as a form of cheating and do not recognize them for tax purposes.

What are the implications of sham transactions?

A few implications of sham transactions are highlighted below.
Sham transactions involve tax evasion and can attract increased scrutiny from tax authorities and can also lead to financial instability.
Such transactions are not recognised by tax authorities for tax purposes.
Engaging in sham transactions can result in penalties and legal consequences for the participants of such transactions and the benefits associated with sham transactions may be lost in the process.
Tax authorities can recharacterize or reclassify sham transactions based on their true substance.
Sham transactions can damage an individual’s or business’s reputation.
Engaging in sham transactions increases the risk of being selected for tax audits as they can amount to a violation of legal and ethical compliance requirements.