Explained: How do frauds make use of fake GST invoices?

Tax officials said the use of fake invoices to wrongfully avail ITC credit has been gradually increasing and has become a concern for the government, especially at a time when revenue collection is depressed.

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Tax authorities have booked a number of fraudsters for using fake GST invoices. (Bloomberg Photo/File)

4 min readMumbaiDec 29, 2020 09:08 AM IST First published on: Dec 23, 2020 at 03:59 AM IST

In the last one month, the Directorate General of Goods and Services Tax Intelligence (DGGSTI) across the country has arrested over 100 people and booked 3,479 entities in 1,161 cases for illegally availing or passing on input tax credit (ITC) by using fake GST invoices, and causing loss to the exchequer. Tax officials said the use of fake invoices to wrongfully avail ITC credit has been gradually increasing and has become a concern for the government, especially at a time when revenue collection is depressed.

How did fraudsters cheat the government?

In a number of cases booked by the tax authority, fraudsters have been found to have floated multiple dummy firms, obtained GST registrations, issued fake GST invoices of goods and services without actual supply of services, and passed on ineligible ITC accrued from the bogus invoices to clients for a commission, who subsequently used it to make GST payments, causing losses to the government. For instance, on December 9, the Vadodara tax unit arrested an individual for operating 206 dummy companies in 10 states that illegally passed on ITC of Rs 154 crore to clients by issuing fake invoices of Rs 1,101 crore.

In some other cases, the tax department has found that promoters of certain companies have routed fake invoices through a series of shell companies and transferred input tax credit from one company to another in circular transactions to increase the turnover of the company. This helped them not only evade GST but also avail higher bank loans and credit facilities due to increased turnover. A case in point is a trading company in Mumbai that has been booked for an ITC fraud of Rs 220 crore. The probe agency has found that the firm did circular transactions with 22 related companies to inflate its turnover.

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What motivates fraudsters to use fake invoices?

Fake invoices are used because it not only helps evade GST on taxable output supplies by availing undue ITC and converting excess ITC into cash but also helps in inflating turnover using these invoices, booking fake purchases to evade income tax, diversion of funds and money laundering. According to official data, in 2018-19, the central GST authorities registered 1,602 cases of fake ITC involving an amount of Rs 11,251 crore and arrested 154 people. Between April and November 2019, the authorities booked over 6,000 such cases.

What is the reason for a surge in such cases?

According to tax officials one of the primary reasons for an increase in companies availing ITC fraudulently is the lack of due diligence during the GST registration. The process of registration was made easy and hassle free by the government so that businesses could be easily on-boarded to the system. However, this meant that a number of dummy companies too obtained the GST registration in the absence of scrutiny or physical verification of the registered address of the companies. Apart from this, officials said, lack of data exchange among the enforcement agencies and banks have also led to increase in fraud cases. “The existing GST system needs to be more robust to detect such frauds,” said an officer.

Will the tax department be able to recover the money from the fraudsters?

Tax officials who spoke on the condition of anonymity said in these cases recovery of money is unlikely as the money has already been siphoned and the companies involved in the fraud are only on paper with very little or no assets.

How is the government planning to curb such cases?

The government is planning to tighten the GST registration process and legal measures to deal with the rising cases of fake invoicing. Last month the legal committee of the GST Council met to discuss the tightening of the GST registration process and work out other legal measures including necessary law amendments required in the GST Act. Apart from this, the Directorate General of Analytics and Risk Management, the data wing of GST, has identified and issued a list of 9,757 companies that have either issued or availed fake ITC across the country between July 2017 and March 2020.