FAKE INVOICES AND GST FRAUDS (PART-2)

[Dr. Sanjiv Agarwal]

This part of the article on Fake Invoices and GST Frauds covers GST frauds through fake invoices, circular trading, use of artificial intelligence and Data Analytics and steps to curb tax evasion.

GST frauds through fake invoices

Based on the cases of fraud emanating from issue and use of fake invoices, following assertions can be made:

1. The Input Tax Credit (ITC) involved in the fraud cases usually reaches a large sum in a short timeframe. Some reported frauds are in hundreds of crores.
2. Fake invoice cases involve fabrication of invoices which is an offence under Indian Penal Code. The Investigating Authority has to take call regarding how to get this part of the case investigated. Issues of legality, jurisdiction are involved.
3. In a number of cases, E-way bills have been generated without the corresponding filling of returns. The lack of real time connectivity between E Way Bill system and GSTN is being exploited by fraudsters.
4. The frauds usually involve a large number of GSTIN entities spread over States.
5. Some of the entities would fall under the jurisdiction of the CGST authorities while the connected entities fall under the jurisdiction of the State authorities.
6. Data adequacy and availability has become another challenge. The capability of invoice matching is yet to be provided. In multi-jurisdictional investigations, Tax administration do not have access to supplies in other jurisdictions, even though data resides in the GSTN.
7. In many cases, dummy firms are created/floated to commit the fraud. The addresses are often incorrect/incomplete and the details revealed in the registration forms are often false. As entry barrier is very low, and there is a lack of a proper system of scrutiny and verification of registration data, fraudsters are able to commit frauds with impunity.
8. There is another class of dummy companies with verifiable facts but no assets or means to do business; they act as surrogate for other large companies to camouflage their activities.
1. Connivance with transporters to get bogus bilty/consignment note to show movement of goods on paper and creating fake e-Way billswith fake/wrong vehicle registration details without the supply of any goods. There is no system in place to see if vehicle registration data is correct or not.
10. Fly-by-night operators are used to get GSTIN and generate large number of tax invoices and e-Way bills in the first few months and disappear. In this way the fly-by-night operators help other large companies to supply and transport their goods without invoice and paying taxes.
11. Encashment of Input Tax Credit (ITC) availed on fake invoices by obtaining IGST/ Input Tax Credit (ITC) refunds especially in case of free shipping bills raises the issue of valuation of export goods. Further Customs GST coordination with regard to such fake invoice cases requires to be looked into.
50. Supplies made and GST collected but not paid i.e. GSTR-1 is filed but GSTR- 3B is not filed. In some cases both GSTR-1 and GSTR-3B are not filed.

Circular Trading

Circular trading is a fraudulent transaction that creates an artificial trading activity by issuance of sales invoice amongst a close group without an actual supply of goods. In simple words, circular trading refers to the transaction of selling and buying of goods (without actual movement of goods) through shell companies.

Circular trading refers to issuing of invoices in transactions among multiple companies without actual supply of goods. This is done to use input tax credit in the GST regime, meaning Circular Trading is a type of cycle that takes place when a company tries to create a flow of fake sales transaction with its colluding parties by producing fake invoices.

The objective of circular trading is for inflating turnover of the business. However, through circular trading, companies may also aim to:

• To increase the valuation of the company/business
• To bring in black money into the system
•  To avail fake input tax credit.
• To divert or siption out funds

Section 132(1)(b) of the Central Goods and Service Tax Act, 2017 covers the situation, wherein, the person issues invoices without actual supply of goods (i.e., circular trading).

Section 132(1)(c) also covers the situation, and wherein the person avails input tax credit based on the invoice so issued without actual supply of the goods.

The provisions of GST for circular trading are very harsh and are covered under serious offense as non-bailable and cognizable offense.

Use of Intelligence against Tax Evasion

The use of intelligence is for identification of tax evasion through the help of Artificial Intelligence and Data Analytics in order to stop the leakages in revenue collection. Its goal is to make a targeted approach to counter the leakages. It wants to ensure the process of red-flagging the tax evaders thereby making calculated steps to avoid harassment or overreach to genuine taxpayers.

CBIC officers are using latest IT tools, digital evidence and also collecting information from other government departments to catch the fraudsters. Along with legislative and procedural changes in the law, the nationwide drive has contributed to better compliance and revenue collection. During the drive, cases of fake input tax credit availment against some well-known companies were also booked.

CBIC has also decided to take the following steps in order to curb tax evasion:

1. A mechanism and machinery for disseminating inter-departmental data among various agencies like GSTC, CBDT, CBIC, FIU, DOR, DGGI and State Tax Administrations etc. in order to achieve efficiency in curbing evasion and augment revenue collection.
2. Constituting a Committee of Centre and State officers to examine and implement quick measures in a given time frame to curb fraudulent refund claims including the inverted tax structure refund claims and evasion of GST. The Committee will come out with detailed SOP within a week, which may be implemented across the country.
3. Considering fraudulent IGST refund claims, to link foreign exchange remittances with IGST refund for risky and new exporter.
4. All major cases of fake Input Tax Credit, export/import fraud and fraudulent refunds shall also be compulsorily investigated by investigation wing of the Income Tax Department.
5. MoU among CBDT, CBIC and GSTN to exchange data through API, from CBDT to GSTN and CBIC and vice-versa. This data should be shared on quarterly basis, instead of being shared on yearly basis.
6. Sharing data of cases involving evasion and fraudulent refund detected by CBIC with CBDT and vice versa, so that proper profiling of these fraudsters could also be done.
7. Verification of unmatched Input Tax Credit availed by taxpayers.