Understanding the Rise in GST Frauds
In a recent twist, a modest auto-rickshaw driver from Pune found himself unknowingly at the center of a multi-layered GST scam involving 246 fake companies. This case, uncovered by the Directorate General of GST Intelligence (DGGI), highlights the worrying trend of GST fraud that is growing at an alarming rate across India. It is estimated that fraudsters orchestrated transactions worth between Rs 5,000 and Rs 8,000 crore with no genuine supply or payment of taxes.
The methods of GST evasion have evolved significantly. Fraudsters not only undervalue taxable goods and services but also exploit the system by using stolen identities, opening multiple fake bank accounts, and creating fictitious companies. The primary objective? Evading taxes without any real supply chain to back up transactions.
Major Types of GST Evasion
Authorities have identified four key categories of GST evasion:
- Undervaluation of Taxable Supply: Many businesses purposefully undervalue their goods or services to reduce GST liability. For example, plywood manufacturers in Jaipur were caught undervaluing their products by up to 70% last year, allowing them to significantly underpay taxes.
- Supply Without Tax Payment: Some businesses bypass paying GST entirely despite providing taxable goods or services. A notable case in Mumbai involved a taxpayer providing brand licensing services for an upfront fee of Rs 2,494 crore. The taxpayer avoided paying the applicable GST, resulting in an eventual recovery of Rs 382 crore.
- Fraudulent Input Tax Credit (ITC): The fraudulent ITC ecosystem has grown into a full-fledged marketplace. Fake companies and invoices are created to generate unwarranted ITC claims, which are then sold to businesses on a commission basis. This kind of fraud is often based on identity theft and makes it challenging for tax authorities to trace funds.
- Non-Payment Under Reverse Charge Mechanism: Some businesses fail to remit GST under the reverse charge mechanism, thereby evading tax payment.
The Complexity of Fake ITC Frauds
The fake ITC racket has expanded to include complex layers of deception involving multiple entities and forged documents. Authorities often find it difficult to fully recover the fraudulent credits as, by the time the scam is discovered, funds have already been moved through a convoluted web of companies.
For instance, Noida police recently exposed a three-tier scam involving fraudulent ITC worth Rs 5,300 crore, linked to 2,660 fake companies. Fraudsters used stolen identities to register fake GST accounts and issue false invoices to claim ineligible ITC. The modus operandi included frequent changes of SIM cards, fake addresses, and staying anonymous by moving between cities under false identities.
Recent Trends in GST Evasion: Insights from 2023-24
Data from the financial year 2023-24 reveals an alarming detection of GST evasion cases worth Rs 2.01 lakh crore, doubling the figures from the previous year. Fraudulent activities are widespread, with Mumbai topping the list with Rs 70,985 crore in detected frauds, followed by Delhi, Pune, and other major cities.
Certain sectors are more prone to fraud. For instance, real-money online gaming recorded Rs 81,875 crore in evasion, making it one of the most susceptible industries. Similarly, the metals sector, including iron, copper, and alloys, and consumer goods like tobacco and pan masala have emerged as hotspots for tax evasion.
Addressing the GST Fraud Issue
GST fraud not only threatens revenue collection but also undermines the very integrity of the taxation system. The government, in response, has ramped up investigations, employing advanced data analytics and working closely with Financial Intelligence Units (FIUs) to track fraudulent activities. However, the multi-layered nature of these scams means detection is often complex and time-consuming, making it crucial for authorities to stay a step ahead.
To combat such fraud, stricter KYC norms for business registration, increased inter-agency collaboration, and effective real-time monitoring are necessary. As fraudsters continue to innovate, regulatory authorities must enhance their capacity to detect and prevent these crimes swiftly.
Conclusion
The growing number of GST frauds, especially those involving fake ITC, reflects a deeper problem of systemic vulnerabilities. The authorities must not only focus on uncovering these scams but also on creating a robust framework that minimizes opportunities for evasion in the first place. As taxpayers, understanding these trends is vital to ensuring compliance and aiding the government in preserving the integrity of India’s GST system.