₹866 Crore GST Scam Busted: How Fake Firms Abuse the System
A major GST scam using fake firms has come to light, involving ₹866 crore in fraudulent Input Tax Credit (ITC). What’s shocking? The scamsters used daily wage earners and unemployed youth to float over 20 bogus entities across Gujarat and Maharashtra. Here’s a breakdown of how these frauds work — and how you can safeguard your business.
What Happened in the ₹866 Crore Scam?
As per DGGI (Directorate General of GST Intelligence), the accused:
- Created 20 fake firms using Aadhaar-PAN of labourers and unemployed youth.
- Filed fake GST returns to claim illegal ITC.
- Operated without actual goods movement or business activity.
- Registered firms using fake addresses, some linked to small towns.
Legal Action Taken
- Mastermind arrested under Section 132 of the CGST Act.
- ₹101 crore ITC traced to these entities already blocked.
- DGGI likely to pursue asset attachment under Section 83.
👉 Reference: PIB Press Release – dggi.gov.in
How Fake Firms Exploit GST Rules
These scams exploit the trust-based input tax system under GST, where ITC can be claimed based on self-declared invoices.
Key Loopholes Misused:
- Easy GST registration with minimal physical verification
- Misuse of Aadhaar authentication through proxies
- Layered fake invoicing to launder ITC
- Circular trading to inflate turnover and claim refunds
How to Spot and Avoid Fake GST Vendors
Whether you’re a taxpayer or CA, here’s how you can protect your business from falling into fake GST networks:
Check Before You Claim ITC
- Verify GSTIN of vendors on GST Portal
- Confirm they file GSTR-1 and GSTR-3B consistently
- Avoid suppliers without actual goods movement or suspiciously high turnover
Maintain Proper Documentation
- E-way bills, delivery challans, transport logs
- Signed purchase invoices with correct HSN/SAC
- Payment proof via banking channels
Red Flags to Watch
| Indicator | Risk Level |
|---|---|
| Vendor not registered on ICEGATE or e-way bill portal | HIGH |
| Only B2B supplies, no retail sales | HIGH |
| Registered with shared/temporary address | MEDIUM |
| Vendor under DRC-01A or DGGI radar | HIGH |
CBIC’s View: Tech Upgrades Coming
CBIC is working on risk-based registration, AI-based anomaly detection, and real-time invoice matching using e-invoicing data.
In Budget 2024, FM also hinted at a Central Fraud Analytics Unit to monitor circular trading and high-risk ITC claims.
Expert Tip: Do Vendor Due Diligence Annually
“Don’t rely on registration certificates alone. Get your vendors’ GST filing summary and audit trail reviewed each year.”
— Efiletax Compliance Team
Related Legal Provisions under CGST Act
- Section 16(2)(c) – ITC claim allowed only if tax is actually paid to the Government.
- Rule 86A – Allows blocking of credit ledger if fraud is suspected.
- Section 132 – Penal provisions include arrest for fake invoicing, even without actual movement of goods.
Final Thoughts
The ₹866 crore GST scam using fake firms is not just a fraud — it’s a wake-up call for all businesses. Staying compliant isn’t just about filing returns. It’s about choosing the right vendors, maintaining genuine transactions, and avoiding shortcuts.
Need help auditing your GST vendors or reviewing ITC claims?
Trust Efiletax to keep your business compliant and secure.
FAQ on Fake GST Firms and ITC Fraud
Q1. What happens if I unknowingly deal with a fake GST vendor?
If the vendor hasn’t paid GST to the government, your ITC can be denied under Section 16(2)(c). You may also face reversal with interest.
Q2. Can I check if my supplier is genuine?
Yes. Search their GSTIN on gst.gov.in, check return filings, e-invoicing records, and e-way bills.
Q3. What is the penalty for setting up fake firms under GST?
Section 132 allows for arrest and prosecution. In high-value frauds (over ₹5 crore), non-bailable jail term up to 5 years is applicable.
Summary
A ₹866 crore GST scam using 20 fake firms has been exposed by DGGI. Fraudsters used daily wagers’ Aadhaar-PAN details to claim fake ITC. Learn how such scams work, what the law says, and how to protect your business from being trapped.