GST FRAUDS THROUGH FAKE INVOICES

GST Fraud Modes and through Fake Invoices

Major fraud practices for GST evasion by traders / taxpayers can be grouped into following broad categories:

1. Input tax credit related, one of the most significant source of tax evasion and frauds, often linked to fake invoices menace.
2. Issuance of fake invoices, often resorted to for availing wrong or fraudulent input tax credit and are also linked to fake e-way bills, non-existent transactions and parties.
3. Fake registrations by suppliers of goods and services using forged Aadhar numbers, forged PAN numbers and non-exsistant suppliers at registered premises, i.e., suppliers not traceable at given addresses.
4. Identity theft by causing stolen identities (such as Aadhar /PAN) and using for registering fictitious firms on portal.
5. Creation of dormant / sleeping / shell companies or businesses entities to issue tax invoices without physical supply of goods.
6. Circular trading by generating multiple or series of fake invoices to artificially inflate turnover or claim illegal or bogus input tax credit
7. Fraud / evasion prone sectors such as online gaming, BFSI etc.

Based on the cases of fraud emanating from issue and use of fake invoices, following assertions can be made:

1. The Input Tax Credit (ITC) involved in the fraud cases usually reaches a large sum in a short timeframe. Some reported frauds are in hundreds of crores.
2. Fake invoice cases involve fabrication of invoices which is an offence under Indian Penal Code. The Investigating Authority has to take call regarding how to get this part of the case investigated. Issues of legality, jurisdiction are involved.
3. In a number of cases, E-way bills have been generated without the corresponding filling of returns. The lack of real time connectivity between E Way Bill system and GSTN is being exploited by fraudsters.
4. The frauds usually involve a large number of GSTIN entities spread over States.
5. Some of the entities would fall under the jurisdiction of the CGST authorities while the connected entities fall under the jurisdiction of the State authorities.
6. Data adequacy and availability has become another challenge. The capability of invoice matching is yet to be provided. In multi-jurisdictional investigations, Tax administration do not have access to supplies in other jurisdictions, even though data resides in the GSTN.
7. In many cases, dummy firms are created/floated to commit the fraud. The addresses are often incorrect/incomplete and the details revealed in the registration forms are often false. As entry barrier is very low, and there is a lack of a proper system of scrutiny and verification of registration data, fraudsters are able to commit frauds with impunity.
8. There is another class of dummy companies with verifiable facts but no assets or means to do business; they act as surrogate for other large companies to camouflage their activities.
9. Connivance with transporters to get bogus bilty /consignment note to show movement of goods on paper and creating fake e-Way bills with fake/wrong vehicle registration details without the supply of any goods. There is no system in place to see if vehicle registration data is correct or not.
10. Fly-by-night operators are used to get GSTIN and generate large number of tax invoices and e-Way bills in the first few months and disappear. In this way the fly-by-night operators help other large companies to supply and transport their goods without invoice and paying taxes.
11. Encashment of Input Tax Credit (ITC) availed on fake invoices by obtaining IGST/Input Tax Credit (ITC) refunds especially in case of free shipping bills raises the issue of valuation of export goods. Further Customs GST coordination with regard to such fake invoice cases requires to be looked into.
12. Supplies made and GST collected but not paid i.e. GSTR-1 is filed but GSTR-3B is not filed. In some cases both GSTR-1 and GSTR-3B are not filed.

Possible measure for curbing tax evasion / frauds

1. Rationalization of tax rates including reduction in number of swaps
2. Checks and balances in the system including GST portal.
3. If timely and effective scrutiny of GST returns and GST audits.
4. Strengthening of anti-tax evasion, revenue intelligence and inspection / investigation wings.
5. Curbs on cash transactions and promoting digital transactions.
6. Further strengthening e-way bill system and Invoice Management System (IMS) to through red flags promptly and timely.
7. Check on corrupt business practices.
8. To check and penalize fake registrations.

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