GST Frauds: Several & Severe Forms

The Indian taxation system was completely unorganized and had multiple tax systems, such as excise duty, service tax and value-added tax (VAT), which resulted in chaos and complications. To streamline the entire tax system, The Goods and Services Tax (GST) was introduced and implemented in India on 1st July 2017. This indirect tax system was a significant reform that aimed to bring uniformity in tax rates nationwide. GST has become an effective way to centralize taxation in India.

However, as rightly said, a coin has two sides, and GST implementation also has its benefits and loopholes. The implementation of GST led to many GST frauds, and the percentage of fraud rates started to increase once people were comfortable enough to understand the system completely. Increasing GST fraud has been a significant challenge for the Indian government’s efforts to curb tax evasion.

What is GST Fraud?

GST fraud refers to the malpractices which are intended in order to avoid taxes. There are various areas in which one can attempt fraudulent activities. Any individual, business or legal entity can carry out these frauds. The reason behind carrying out these fraudulent activities is to avoid or reduce tax liability. GST fraud can be very reactive to the Indian economy and have serious consequences. Tax is one of the main sources of revenue for the government, and malpractices in this may affect the Indian economy on a serious note.

What are the areas where GST frauds are prevalent in India?

1. Input Tax Credits Frauds

2. Circular Trading

3. Export Fraud/GST Refunds

4. Misclassification of GST

1.  Input Tax Credits Frauds:

Input Tax Credit (ITC) is a very important part of GST which acts as an income source for many businesses to claim the credit on the taxes paid by them on the services or goods provided to any third party. The main reason behind implementing the entire ITC mechanism was to support the supply chain by maintaining a credit flow in the market. But, repeatedly, it has been used to claim false ITC, thereby increasing fraud.

ITC frauds are a practice where a businessman claims credit on the basis of fake invoices. The number of frauds has gradually increased since everyone has become aware of the loopholes in the GST system. Claims of ITC showing payment of minimal or no tax have affected the government’s revenue system.

a. Fake Invoicing:

Fake Invoicing is one of the most common GST frauds registered in India. Fake invoicing is only raising an invoice against the goods or services not provided and shown only in the books of accounts. The sole reason for fake invoicing is to claim ITC or reduce tax liability.

Fake invoicing is a process that includes two business parties collaborating to generate invoices against the goods or services which have not been provided. Only invoices and fake bank entry transactions have also been made to make it look like a real trade. 

2.  Circular Trading:

Circular trading is a process that includes two or more businesses in the chain that conspire to work in a way that helps them to reduce taxes or to claim ITC. It is a sophisticated form of GST fraud where each business in the chain issues an invoice of goods or services provided to the other business and makes fake bank transactions to show a complete transaction. The receiving business also makes the entry of goods or services received for the issued invoice. 

After that, the final business generates an invoice for the same goods or services provided to complete the entire chain of transactions. By this, the businesses try to evade tax or claim ITC for such fake transactions to avoid tax liability.

This has lately increased a lot. This has led to an increase in cash flow in the market, but on the contrary, the source of government income has decreased. The government is taking steps to curb this situation before it spreads wide.

3.  Export Frauds/GST Refunds:

The Indian government has been promoting exports for a long time by issuing various export schemes, duty drawbacks and lesser taxes on a few of the export segments. This has led to a drastic increase in exports from India for all major product segments. The government is taking such strong transformations to make every business self-sufficient; meanwhile, on the other hand, Indian businesses are trying to take undue advantage of the same by finding ways to deceive the government into reducing tax liabilities.

Export frauds are when an export business falsely claims GST refunds on goods that were never exported. Like domestic frauds, export frauds can also involve issuing fake invoices, generating fake post-shipment documents, bribing port officials for original export documents for the shipment never exported, etc. Exports frauds are a major threat to the Indian economy as they involve foreign currency transactions. Huge losses have been registered due to such export frauds by various businesses.

Apart from falsely claiming GST refunds on goods never exported, another form is claiming GST refunds for the goods exported but not eligible for GST refunds. There are certain conditions and shipments under which one can claim GST refunds, like shipments that should be carried out in a specific time frame or refunds for specific goods that fall under specific HSN codes or certain documents required for claiming the GST refunds, etc. To claim the GST refunds, businesses falsify the documents or mention the HSN code of other products and ship other products, hence claiming refunds for such shipments. Various settings are being done with the port officials in order to manipulate and generate fake documents.  

The government is taking measures to curb the situation by introducing new regulations and increasing scrutiny for export transactions.

4.  Misclassification of GST:

Misclassification of GST means wrongly representing the nature of goods or services than their original nature. This is a form of GST fraud where a business deliberately misclassifies the nature of goods or services to pay less or be exempted from paying GST. For instance, if a business provides goods from a luxury segment and classifies it wrongly to the essentials segment, such misrepresentation is known as the misclassification of GST.

What are the main reasons for the increasing GST fraud in our country?

1. Generating fake invoices to take advantage of ITC, transferring them to those who want such benefits, and charging a commission for the same activity.

2. To avail of higher Overdraft limits or Cash Credit from Banks or financial institutions.

3. To improve company valuation in order to apply for an IPO or, in case, to sell company stakes.

4. To obtain government or private contracts for manufacturing.

5. To reduce tax liability by showing higher expenses and reduced profits.

6. To avail of undue ITC.

What are the offenses which are penalized and bound to be registered as an offense?

Under Sec 122 of the GST Act, below mentioned offenses are considered penalized:

1.  Issuing bogus invoices.
2. Non-issuance of the invoice for the supplied goods or services.
3. Fraudulently obtains refund of tax.
4. Claiming ITC without any receipt of goods.
5. Manipulation of financial records.
6. Not taking GST registration to avoid paying taxes.
7. Providing tax officials with false information.
8. Providing taxable goods without any document.
9. Failure to maintain books of accounts.
10. Destroying or tampering evidence.
11. Destroying or tampering with seized goods.

What is the penalty for the offenses mentioned earlier?

The penalty for the offenses mentioned earlier is INR 10,000, or an amount equivalent to tax invaded,or the tax not deducted under section 51 or short deducted or deducted but not paid to the Government or tax not collected under section 52 or short collected or collected but not paid to the Government or input tax credit availed of or passed on or distributed irregularly, or the refund claimed fraudulently, whichever is higher. 

What are the conditions subject to prosecution proceedings for GST fraud?

• If the amount of tax invaded is between Rs. 1 Crore to Rs. 2 Crores, the person is liable to serve upto one year in jail. Apart from this, the applicable penalty will also have to be paid.

• If the amount of tax invaded is between Rs. 2 Crores to Rs. 5 Crores, the person is liable to serve upto three-year term in jail along with the penalty as applicable.

• If the amount of tax invaded is more than Rs. 5 Crores, the person is liable to serve upto five-year term in jail along with the penalty as applicable.

What are the government measures taken to control GST fraud?

The major transformation the GST department has brought in the era of increasing fraud is implementing the system of E-way bill and E-Invoicing. E-Invoicing is the system where the business will have to generate invoices online. Upload the invoice online, generate e-way bills when the goods are transported and file returns for the same. Every business has to compulsory go through all three stages in order to get verified. E-invoicing ensures that fake invoices are not generated and false claims of ITC are not registered. The invoice is generated and verified by the government to keep proper records. 

Apart from this, the implementation of HSN codes for various products has helped in a way to avoid the misclassification of GST. For the entities who falsely claimed ITC, a show cause notice will be served to take back the unauthorized ITC claimed by them. Increased scrutiny of returns and transactions also has helped the government control fraud. 

Conclusion

The GST regime has brought strict compliance, which we are bound to follow. Non-compliance with regulations may bind a person to pay high interest and penalties. However, not all GST frauds are intentional. Some may happen due to human or system errors. 

Every party responsible for the fraud has full right to being heard and submitting all the necessary original documents to prove himself right. Any unintentional act of tax evasion shall be heard and set free after verifying it with essential proof. Hence, businesses and the government must work together to make the GST system work more efficiently.  

Frequently Asked Questions:

1. What is the minimum amount of bills on which it is mandatory to prepare an e-way bill?

Answer: For any transaction or sale of goods of more than INR 50.000, applying for an e-way bill becomes mandatory.

2. Can I appoint a CA as my authorized representative in GST authorities?

Answer: Yes, you can appoint a CA as your authorized representative. Apart from CA, one can also appoint an Employee, a Lawyer, an Accountant, a Company Secretary, or any relative of the person also shall do.

3. What is the time period for showing up after receiving a show cause notice?

Answer: The recipient is required to respond to any show cause notice till it’s due date.

4. In the case of an LLP or HUF company, who shall be held liable for the offense?

Answer: In the case of an LLP or HUF firm, the director, the partner, and the company are held liable for the offense.