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What is the Central Idea of the Passage? - English Language

Question

MCQ

Direction : The passage given below is followed by a set of question. 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 a 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 stockbrokers 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 the 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.

What is the central idea of the passage?

Options

  • SEBI aims to devise rules to check black money and tax evasion.

  • The misuse of punching errors by stockbrokers and their clients is being monitored by SEBI.

  • The practice of tax evasion through secret practices followed by brokers has been stopped.

  • SEBI has amended rules to check black money and tax evasion.

Solution

SEBI has amended rules to check black money and tax evasion.

Explanation:

The first line of the passage discusses the central idea. SEBI has introduced a hefty penalty on brokers who facilitate practices that show black money as earnings and that helps in tax evasion. The last paragraph also discusses how SEBI has tried to make amendments to check abuse of its rule.

SEBI has amended rules to check black money and tax evasion is the answer. 

SEBI aims to devise rules to check black money and tax evasion is incomplete because SEBI has already made
amendments to check black money and tax evasion. 

The misuse of punching errors by stockbrokers and their clients is being monitored by SEBI is rejected because SEBI has only formulated the rule of imposing the penalty. SEBI itself is not monitoring the process. The stock exchanges are responsible for identifying the authenticity of punching errors and for penalizing the brokers facilitating tax evasion.

The practice of tax evasion through secret practices followed by brokers has been stopped is incorrect as the passage only states that SEBI will be imposing high penalty on brokers facilitating tax evasion. Whether the practice of tax evasion has stopped or not is not mentioned in the passage.

Concept: Comprehension Passages (Entrance Exams)
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