Fraud is defined to be an intentional act by an individual or a group of them, who are charged with governance (who are in authority), or third parties, involving the use of deception to obtain an unjust or illegal advantage. A fraud could take the form of misstatement of information (financial or otherwise) or misappropriation of the assets of the entity.
A fraudster would always find an illegal way to take undue advantage of provisions of the tax law and thereby enrich himself by such unlawful means. GST is no escape for such fraudsters.
Major Areas Where GST Frauds Evolved
- Input tax credit and Invoices
Input tax credit and Invoices:
In the last three and half years, we have witnessed a large number of GST fraud cases around the use of fake invoices for invalid availing of Input Tax Credit (ITC), This ITC is further used to pay GST on outward supplies, and/or for claiming refunds. Sometimes this works as a tool for inflating the turnover of the supplier.
Invoice system misused under the GST Regime:
a) Issue of invoices without the supply of goods or services: Taxpayers have worked out a way to issue invoices without actually supplying the goods/services. Here, the payment of tax is made with Input Tax Credit which is not available to the issuer of invoice. The issuer of the invoice would merely issue a fake invoice and show the payment of tax with the non-existent input tax credit. This results in actual loss of revenue when the buyer of the invoice avails inadmissible credit for the payment of his/her tax. There have also been instances where no GST has been paid even though ITC by the issuers of the fake invoice.
b) Shell Companies: Creating shell companies is another form of fraud under GST. The fraudster would route multiple invoices through dummy entities and transfer the input tax credit from one company to another in a circular fashion to increase the turnover.
c) Utilising zero-rated supply category: Some taxpayers have attempted to find loopholes in the systems and tried to sell goods/services without issuing invoices. The sale proceeds are later adjusted with the invoices issued to taxpayers making zero-rated supplies. In other words, these adjustments happen without an actual supply (to taxpayers with whom the adjusted is done) so that ITC refund can be claimed.
d) Taking credits of inward supplies on which credit is not allowed is often seen.
e) Under-billing for outward supplies is also one of the widely used fraud techniques under GST.
Potential Motives For Creating Fake Invoices
Following are a few illustrative motives for issuing bogus invoices:
- Availing undue ITC,
- Saving GST (cash) by payment of tax liability using undue ITC,
- Clandestine supply without invoices and payment of taxes,
- Shifting ITC from exempted supplies to taxable supplies,
- Transferring of ITC to those who can utilise it and charging commission from such person or sharing the benefits proportionally,
- Encashment of ITC by way of refunds on zero-rated supply or inverted duty structure,
- Availing higher credit limit/Overdraft from banks,
- Improving valuations for IPO or sale of the stake,
- Obtaining contracts including Government contracts,
- Showing reduced profit margins and higher expenses,
- Avoiding payment of Income-tax by reducing net profit.
In GST, the unutilised amount available in the electronic credit ledger and cash ledger (on the GST portal) after payment of taxes and other payments can be claimed as a refund in accordance with the provision of section 54 of the CGST Act, 2017.
The techniques used to deceive here are:
- Issuing fake invoices for zero-rated supply of services (export of services): With these fake invoices, the taxpayers claim a refund of the unutilised GST on the export of services, without actually making such supplies. Under other laws, this becomes an act of money laundering,
- Accepting/taking fake/fictitious inward supply bills to inflate the claim of ITC refunds.
Department Initiatives To Control Frauds Under GST
The Government has issued Standard Operating Procedures and mandated the implementation of E-invoicing for the identification and mitigation of fake invoice frauds under GST. The GST department has initiated the levy of penalties.
In the Standard Operating Procedure, the GST department has given the following 3 methods:
a) Identification: Here, the department attempts to trace:
- Taxpayers using sensitive commodities. Shared email address, common mobile numbers, common business/postal address, common authorised signatories, common promoters for multiple GSTIN, etc.
- Mismatch between the premises declared and the volume of goods transacted.
- Sudden increase/decrease in the outward/inward supplies.
- Mismatch in the information declared in the GST and Income Tax Returns.
Once the officer has a reason to believe that there is a potential risk of tax evasion, he has the power to:
- Survey the premises of such person,
- Issue notice to call for the records and information,
- Conduct search at any or all his premises,
- Interrogate him to seek further clarification and information.
c) Action after detection:
- Proceedings under section 74 of the CGST Act, 2017 will be initiated against such registered persons.
- He would be subject to the penalty provisions (under the GST act). The quantum of penalty for the person who has committed fraudulent activities shall be equal to 100%, i.e. an amount equivalent to the amount of tax evaded or short deducted subject to a minimum of INR 10,000.
- Further, when a person, not being a taxable person:
- Abates in committing fraud,
- Acquires goods or services knowing that these are against the provisions of GST,
- Fails to issue a genuine invoice,
- Fails to maintain or vouch for the books of accounts,
- Fails to appear before the relevant authority upon a summons issued in his name, will also be liable to pay a penalty of INR 25,000.
Also, he would be subject to prosecution proceedings based on the quantum of the tax evaded.
- When the amount of tax involved is up to INR 50 lakhs, the person has to serve a term of 1 year in jail. The applicable penalty will also have to be paid.
- When the amount ranges between INR 50 lakhs to INR 100 lakhs, then, the imprisonment term will be three years along with the penalty.
- When the amount exceeds INR 100 lakhs, the term of imprisonment can be up to 5 years along with the penalty.
- An offence database module is created on the GSTN. The GSTIN of the entity will be flagged for ‘fake invoice’ or any other fraud. This will enable automatic identification of taxpayers who have defrauded with fake invoices. Furthermore, the GSTN is working on providing automatic alerts on the GST Application/Portal for further verification by the respective officers.
Steps To Safeguard Interests
- Post the cancellation of registration, the re-registration of such persons should be dealt with differently than regular registrations. Such applications for re-registration should be flagged to alert the officers concerned, and there should be no deemed registration in such cases. Physical verification should be a must for such cases.
- The entities which have availed ITC based on fake invoices will be identified, and a show-cause notice will be served to recover the unauthorised ITC claimed by such recipients.
- If there is an involvement of directors in effecting the GST evasion, the bank accounts/properties of directors may be liable for attachment.
- Blocking of ITC of such persons, including their beneficiaries, to not allow the person to get away with undue credit is also possible.
- E-way Bills can help to control and check the correctness and genuineness of transactions. As per the law, every sale (of goods) above INR 50,000 should be subject to e-way bill provisions. If the e-way bill is missing, it is an immediate red flag for the officer to evaluate the transaction to mitigate the risk of tax evasion.
Not every error can be considered as fraud:
No proceedings under any law can be concluded without giving the parties an opportunity of being heard. While any error in reporting of a transaction can be suspected to be an intentional act to evade tax, we need to accept that; not every time there would be an intent to do so. There could be clerical errors, which lead to misreporting of the transactions (before the tax authorities). In such cases, the taxpayer should honestly accept the error and produce the relevant documents and proofs before the authorities to prove the genuineness of the error that had happened while reporting the transactions.
CA Sumith Rathi
Vamsi Yadav Golla