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Catch the latest edition of The Cob(Web) by Shailendra Kumar GST – Fake Invoices – Mega Hole in Treasury; Time for Punitive Legislative Measures!

GST – Fake Invoices – Mega Hole in Treasury; Time for Punitive Legislative Measures!

TIOL – COB( WEB) – 668
JULY 18, 2019

By Shailendra Kumar, Founder Editor

WHEN the much-touted GST was introduced in July 2017, the Revenue knew that like all other taxes, a time would come when there would be GST-related frauds. But none in the corridors of power had any premonition that such a time would come so fast, and so early! It has indeed become a common headline in daily newspapers. Let’s take a look at some of the sample headlines – “GST Fraud Alert – With fake companies, fraudsters steal Rs 800 Cr …” and “Delhi Govt cancels GST registration of 1282 traders for fraud …”. Such headlines in hundreds have become so ubiquitous that the size of the tax evasion has assumed the proportion of a mega scam. As per official estimates, the ITC availment on fake invoices, IGST refund frauds and other types of evasion are speculated to have cost the Exchequer to the tune of Rs 48,000 Crore. This is much more than the sum of total NPAs of Rs 40,000 Crore reported by the RBI for the last fiscal! Such a scale of abuse of ITC facility which is further going to be liberalised vide Sec 43A, is certainly scarier for any Government! At the going pace it would be clocking close to Rs one lakh crore by the end of third year of GST.

Tax evasion has evidently acquired multiple dimensions or call them modus operandi – availment of ITC based on fake invoices; invoice being issued to X but goods being supplied to Y; overinvoicing of exports for claiming higher IGST refund; availment of blocked credit, fraudulent refund of accumulated ITC and splitting of a supply to reduce tax liability. A good example is the one where Casinos were found to be splitting the transaction value to minimise the GST outgo albeit they were found to be collecting full GST from their customers. And the magnitude of this case is, based on initial estimates, about Rs 6500 Crore!!

Let’s examine the magnitude and the modus operandi of IGST refund frauds. As per sources, between July 2017 to March 2019, over 31000 exporters have claimed refund of Rs 77000 Crore. With exporters mounting pressure on the Govt, the Revenue launched special drive and special windows to process such claims. But, a scrutiny of their profiles reveals that only about 55% of the claimants were regular exporters in the past three fiscals. The remaining 45% were found to be irregular in terms of having no exports records at all in one or two financial years. This clearly indicates that there was a concomitant growth in the number of fly-by-night operators with the increasing ease of claiming refunds sanctioned by the GST Council. A good number of exporters did inflate the value of their exports consignments for claiming higher refunds and the Customs made the cardinal error of not examining the consignments nor developing any risk parameters. It can also be speculated on this premise that some of the Revenue officials might have ‘washed’ their hands in the favourable flow of refund currents! Refunds were liberally sanctioned!

A detailed presentation on this issue was made before the Committee of Officers prior to the last GST Council meeting. And, as per some SGST sources, the key finding was that as against a rise of 8% in the number of shipping bills, there has been over 300% increase in IGST refund claims. A quick analysis of claimants’ profile further indicated that about 60% were non-companies such as firms and proprietorship entities. A quick dive into the data further stunned the analysts – a good swathe of refund was claimed by such proprietorship exporters who largely filed barely two shipping bills in a month. More interestingly, Delhi topped the tally of States which sanctioned maximum refunds. Unlike Maharashtra and Gujarat which ranked second and third, Delhi recorded 56% of total IGST refund sanctioned.

In this backdrop of grim scenario, the larger question is – What should be done to stop such abuse which has the potential to derail the evolution of GST. Obviously, administrative measures like raids, recovery and arrests alone would not be able to plug this leakage. It has to be a mixed basket of policy and legislative measures. The first step which should be taken is to tighten the process of scrutiny at the stage of Registration itself. Thankfully, Aadhaar is going to be made mandatory. Aadhaar with PAN would enable the GSTN or CGST or SGST officials who approve such registration within 48 hours, to quickly verify their income tax track records of last few years. Such verification would also indicate the kind of funds available in one’s bank accounts. If somebody has no verifiable track record of income tax or business or assets either in the name of new company or its Managing Director or partners, the Revenue should fix a threshold for ITC for certain periods. If somebody furnishes purchase order, advance payment details and some other documents, one may apply for raising the cap on one’s invoice which is the mother of rising ITC frauds. In such cases Revenue may even seek minimum bank guarantee (BG) to protect its revenue! Such a Rule should be applied very selectively only in case of taxpayers showing no track records. Secondly, the threshold may vary for a new company to an LLP to a proprietorship firm. Thirdly, banks should be integrated into the monitoring mechanism so that payment received against invoice raised is not withdrawn in one go or in a systematic manner to defraud the Exchequer. Such registrants should also not be allowed the benefit of ITC on provisional basis. For this purpose, an Explanation in the proposed insertion of Sec 43A may be added prior to passage of the Finance Bill 2019.

Let’s now move to some possible punitive measures. Going by the organised nature of ITC Fraud Syndicates, the possibility of making such offence a Predicate offence under the PMLA may be explored so that the properties or other assets created by utilising such funds are attached. More onus should be put on assessees in case of a fraud – suspension of registration and higher rate of interest on reversal of ITC or recovery of tax stolen. Similarly, greater onus should be put on Revenue officials who should do physical verification or risk assessment for all such claims which are above certain sum like Rs 10 lakhs. The rationale is to keep close watch on each claim filed. Depending on the risk scores, Special Audit under Sec 66 should come handy. A well-oiled verification unit should be kept ready in the field formations. A systemic alert should be generated if inward supplies are less and outward supplies are for exorbitant amounts. Chief Commissioners should be sensitised to keep a watch on high-value invoices raised by suppliers in their jurisdictions and the recipients are outside their jurisdictions. The possibility of fraud is more in such cases.

In a nutshell, if the bleeding of the Exchequer is to be stopped it has become inevitable to initiate a series of policy and legislative measures to make registration a carefully-verified activity. If need be, even physical verification of addresses may be resorted to but before it is done, a detailed SOP should be put in place to minimise the pain such an exercise necessarily causes to an assessee. All such measures would be efficacious and effective if they ensure that no honest or genuine assessee is troubled in the name of verification or it does not degenerate into a money-making machine! Let’s hope that only the genuine interests of the Exchequer are protected and it is not seen as a sunshine for making hay!

(To be concluded in Next Column)

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