Shell cos to fake invoice: How firms trying to evade GST are getting caught

DGGI has unearthed number of modus operandi by which tax evasion has been done in the recent past

A countrywide crackdown by the Goods and Services Tax authorities uncovered tax evasion to the tune of Rs 8,100 crore,carried out via stolen identities and 4.909 bogus business establishments. The tax evasion was done by taking undue advantage of input tax credit of GST through shell companies  and fake bills.

In fact, GST evasion detection by tax officers almost doubled year-on-year to over Rs 1.01 lakh crore in the 2022-23 fiscal. During the last fiscal, a recovery of Rs 21,000 crore was made by the officers of the Directorate General of GST Intelligence (DGGI).

The modus operandi adopted by fraudsters included short payment of tax by undervaluing taxable goods and services, wrong availment of exemption notifications, wrong availment of the input tax credit, non-payment of tax on supply of taxable goods and services (clandestine removal), and fraudulent availment of the input tax credit on the basis of invoices from fake firms.

GST authorities had arrested 1,402 persons for evading taxes in the last five-and-a-half years till February 2023.

Recently, the Gurugram Zonal Unit of the Directorate General of GST Intelligence unearthed a major fraudulent Input tax Credit (ITC) racket involving 461 shell/fake entities, which had passed on fraudulent ITC of Rs. 863 crore. 

Several  forged/ morphed/ fake soft copies of documents like rent agreements, electricity bills, aadhar card, driving licence, PAN card, etc. were detected in the laptops recovered from a secret office, which were used to create and operate their fake entities.

“Initial investigations indicate that the fraudulent ITC credit has eventually travelled to the highly evasion prone metal/iron & steel sector,” a government release said. 

It is but obvious that with the rise of GST Revenue collection year by year,  taxpayers are finding more e ways to escape the chain of taxes and hoard the benefit as much as possible.  

DGGI has unearthed number of modus operandi by which tax evasion has been done in the past

 (i) short payment of tax by undervaluing taxable goods and services

 (ii) wrong availment of exemption notifications

(iii) wrong availment / non-reversal of input tax credit

(iv) non-payment of tax on supply of taxable goods and services (clandestine removal)

(v) tax collected but not paid to Govt. exchequer,

(vi) non-payment of tax under reverse charge mechanism

 (vii) fraudulent availement of input tax credit on the basis of invoices from fake firms

 (viii) fraudulent availment of refund of IGST on export of goods, etc.

Among the most common  is issuance of the tax invoices without actual supply of goods/services being involved. This particular modus operandi of GST evasion is witnessed frequently in the industry since the inception of GST. 

Fake invoicing

Fake firms have been involved in the sale and purchase of fake invoices, thus passing on of the input tax credit without any actual business. This can be understood as “Credit laundering”.

"Input tax credit means one can avail credit of tax already paid by the person or business behind him in the supply chain so that there is no double taxation. The investigating agencies who caught these fake firms say that these fake firms integrated themselves in the chain and were passing on the credit first to different other fake firms and then ultimately to one actual business firm after many layers, which seems synonymous to concept of placement, layering and integration as in money laundering," explains Radhe Krishnan, IRS officer working as Assistant Commissioner GST &CX Audit. 

The modus operandi of this practice is detailed by  Ankit Jain, Partner, Ved Jain & Associates:

A registered supplier raises a tax invoice showing the outward supply of goods/services to a registered recipient while in reality, no supply of the goods/services takes place. The implication of this transaction is that the supplier raises his GST liability and files the tax invoice in his GSTR-1. The same gets reflected in GSTR-2A/ GSTR-2B of the registered recipient, who then claims the input tax credit on the same. This way, the recipient gets the benefit of a fake invoice.  

Subsequently, the Supplier may opt to do any of the following practice- 

The supplier does not file his GSTR-3B. 

The supplier files GSTR-3B with Nil / negligible GST liability. 

This way the supplier evades from actual payment of tax and the recipient claims the input tax credit. The input tax credit so claimed by the recipient is then distributed between both the parties involved in a predetermined ratio. 

How can one prevent these practices?

To put a constraint on such practice, GST Council has introduced Rule 37A based on Section 16(2)(c) of the CGST Act, 2017. As per Rule 37A, a buyer will have to reverse the ITC claims on taxes not deposited by their supplier by November 30 immediately following the year in which this ITC was claimed via the GSTR-3B form, explained Jain.

The said insertion in the GST provisions may identify the suppliers, who have not filed the GSTR-3B, however the suppliers who have made the short payment of taxes still goes unnoticed.  

"To identify such suppliers / tax evaders, the GST Authorities issues  various Show Cause Notices time and again asking for the reasons for the discrepancies between GSTR-1 and GSTR-3B. Though the Authorities have been able to unearth some of the fraud cases in the recent times, but many still manage to escape," said Jain

The GST officials have recently said that the government is taking steps to increase the compliance and using  data analytics and human intelligence to identify the fraud.

“CBIC has been working tirelessly in improving the taxpayer ecosystem by weeding out fraudulent taxpayers using technology and data analytics. In fact, the recently announced All India drive seems to be yielding results with media reports quoting large ITC frauds have been unearthed due to unscrupulous elements forging documents and engaging in identity theft to obtain registrations. It is a known fact that this hurts genuine businesses a lot when such elements engage in frauds resulting in tax credit denial and penal implications," said Mahesh Jaising, Partner, Leader, Indirect Taxes, Deloitte India.

As a measure to establish genuine taxpayer base, the CBIC has issued another instruction with guidance for officers in granting new registrations.  The guidance includes thorough verification of documents, establishing the veracity through publicly available sources such as land registers, electric discoms etc., physical verification.

With digitisation of data, the entire chain of suppliers is available with GST authorities. 

"We have seen even genuine businesses receiving notices from GST authorities where their vendor has utilised or availed fraudulent input. For businesses, it is important to transact with genuine vendors after due verification of their records and to maintain proper records of their transactions with  vendors," said Jain.