The Goods and Services Tax (GST) scheme was implemented across India in 2017, leading to the creation of a single indirect tax structure regime for the entire country. It has ushered the country into a new era and has been considered good at helping businesses and manufacturers to carry on business hassle-free and with fewer complications.
However, the new regime has led to another major problem for the Indian Government in recent times and is a nightmare for tax authorities. The rise of the Input Tax Credit (ITC) scam is plaguing the GST regime, and the GST Investigation Wing of the Central Board of Indirect Taxes and Customs is trying hard to stop tax evasion by unscrupulous businesses and manufacturers. The Input Tax Credit scam causes huge losses to the government in a short time.
Some reported frauds are in hundreds of crores. Recently, Noida authorities busted a Rs 10,000 crore GST fraud, involving registering thousands of bogus companies using stolen and fake identities and then using them to raise e-way bills and avail input tax credit (ITC). Previously, the Karnataka Commercial Taxes Department of Bengaluru busted an ITC scam by scrap dealers amounting to Rs 64 crore.
Before we dig deeper into how these unscrupulous people avail the wrongful benefit of the Input Tax Credit claim and cheat the government, we need to understand the Goods and Services Tax (GST) structure and how it works.
What is Input Tax Credit Claim?
GST is a centralized and unified indirect tax regime for the entire country where revenue is shared between Central and State authorities as proposed under the rules. It helps in decreasing the number of taxes a manufacturer or business has to pay from acquiring raw material to supplying the goods and services, making the entire process seamless and hassle-free. To reduce double taxation, where the business pays double taxes on the same goods or services, GST offers the service known as Input Tax Credit claim, whereby the government returns the additional tax paid by the seller at output after the latter claims the GST return. If you haven’t understood a word, don’t fret. Keep reading as the further illustrations will clear your confusions eventually.
For example, let’s say there’s a manufacturer of T-shirts, which has a tax payable on the final product of about Rs 500. But he has already paid taxes for inputs when he obtains them from the supplier at the cost of Rs 300. This causes double taxation on the same item. The GST regime allows the manufacturer to claim input credit of Rs 300 by generating the invoice on the final product and submitting it to the tax authority. This process is called ‘Input Tax Credit’ claim. In simple words, ITC helps them to subtract the taxes already paid on inputs in the overall tax liability by the producer.
How has ITC become a way of a scam?
Unscrupulous businesses and manufacturers involved in GST fraud cases are using fake invoices and forged supply to avail input tax credit (ITC) from the government. By using fake invoices, these people effectively reduce their GST liability and avail ITC credit. For instance, the recently uncovered GST fraud scam in Noida highlighted the creation of registration of thousands of bogus companies by stolen and fake identities and then using these firms to raise e-way bills and avail ITC from the government. There are three ways in which such fake invoices could be misused in the GST regime, as per the Central Board of Indirect Taxes and Customs:
- Some issue invoices without actually supplying goods and services where payment is done by way of ITC, which is not available to the issuer of the invoice.
- Issue of invoices by persons where the invoice is issued to one person and the goods are diverted to some other person.
- Routing of invoices through a series of shell companies/dummy companies and transfer of input tax credit from one company to another in a circular fashion to increase turnover.
What are the benefits of these frauds?
- Help in evasion of GST on taxable output supplies by availing undue ITC or clandestine supply without invoices and without payment of taxes.
- Converting excess ITC into cash by transferring ITC to those who can utilize it or shifting ITC from exempted supplies to taxable supplies or encashment of ITC by way of IGST refund or unutilized ITC refunds.
- Inflating turnover for the purpose of availing a higher credit limit/overdrafts from banks, obtaining bank loans, improving valuations for IPO, or sale of stake and obtaining contracts, including government contracts.
The Central Board of Indirect Taxes and Customs is taking broad steps to stop tax evasion and GST fraud, though the challenge seems elusive and hard to control. Authorities are uncovering many cases of GST frauds across India that cause losses to the government in thousands of crores. Still, they are leaving no stone unturned to stop the scammers from cheating the government.