Fake Invoicing: A Loophole in The GST Law

Since the introduction of GST effective from July 2017 fraudulent invoices or fake invoicing has regularly made the headlines. It is estimated that there have been numerous occasions in the past two years of implementation of GST that evasion of tax in the form of fraudulent ITC in lakhs of crores of rupees has happened. Though no established figures exist at present, the magnanimity of the situation can be ascertained by the fact that various enforcement authorities have initiated more than 6,000 cases of tax evasion relating to fake invoicing in the past period of two years. Numerous arrests have also been made in such cases.

One can easily assume that it would not be possible to recover each and every penny that the government exchequer and ultimately the citizens of India have lost for such fraudulent activities committed by few individuals.

What has come to the fore is that even the shortcomings of the GST Portal have in a way assisted such fraudulent activity.

To understand the issue of fake invoicing one must look into the aim and objective of the GST Portal and the relevant law in background. The GST law was aimed to be a paradigm shift from the earlier existing indirect tax regime not only in terms of cross-utilization of input tax credit but also the implementation methodology. The new law implemented with effect from July 2017 aimed at a 100% IT based implementation mechanism. For such reason the GST Portal was developed.

The portal was supposed to record all the transactions of sales/supplies as well as purchases/receipts from the Day-1 and was to cross-verify each and every transaction for allowing the claim of input tax credit. ITC was allowed on a provisional basis before such cross-verification could undertake.

However the GST Portal failed miserably and could not perform even a single function which could meet any minimum standards of such portal which was entrusted to record, verify and secure the entire indirect tax revenue data of such a humongous economy as that of India.

Although the portal was supposed to cross-verify input tax credit on a monthly basis, such cross-verification occurred only after at least six months from the date of implementation of GST.

During the said period of six months, the fraudsters were set free to do as they wished. It is not unknown that the citizens of our country do not leave any stone unturned to take benefit of loopholes in tax laws. To the surprise of the great taxmen of our country the GST Portal proved to be a big hole without any loop involved.

Even till today one could take registration in the GST Portal with minimal documentation and no physical verification. It is well known that in the initial period no or minimum physical verification had occurred prior to or even post grant of GST registration. If at all physical verifications were done, the focus was on the implementation of Rs 25,000 penalty for not displaying GST no. in front of the premises.

Rampant registrations were taken in absence of proper or misleading documentation which is currently surfacing upon scrutiny.

Post such registration fake invoices were generated without any supply of goods/services and such invoices were purchased by actual suppliers of goods/services either directly or through via companies in order to effectively reduce their tax liability. Such short payment of tax on account of utilization of ITC has caused losses to the government exchequer.

It was also proposed that a robust e-way bill mechanism shall be introduced along with RFID based tracking of vehicles. The said e-way bill mechanism was introduced after almost six months of implementation of GST, causing inability of implementing authorities to even keep a physical check on movement of goods and matching the same with the quantum of invoices being generated. Physical verification of goods at state borders was barred with effect from July 1 2017.

In absence of appropriate tracking and cross-verification mechanisms the implementing authorities also found themselves clueless about the huge frauds that were taking place. It is only at a later point of time, that is about six months post the implementation of GST when substantial data was available, the revenue authorities identified the nature of fraudulent activity and only thereon effective measures were undertaken to catch hold of the individuals engaged in such fraudulent activities.

It has come to the fore that such activities have happened throughout the country, be it industrial hubs or IT focused hubs or even at village level. Upon launching of special drives to curb such practices and to recover lost revenue the existing provisions did not help the authorities to a great extent.

The provisions for availing ITC indicate four conditions to be fulfilled:

  1. Possession of tax invoice, debit note or other taxpaying document;
  2. Actual receipt of goods and services;
  3. Tax on supply is actually paid to the government; and
  4. The recipient furnishes the return under S.39 of the CGST Act.

It is interesting to note that the said conditions were fulfilled either completely or to a large extent, causing the recoveries either impossible or possible only after a long drawn battle before various courts.

It is in the Budget 2020 that provisions have been introduced to impose penalties and punishments even on individuals/organizations that benefit out of such transactions. The provisions earlier included the taxable person who was involved for imposition of penalties and imprisonment. Currently provisions have been introduced to include persons who retain benefit out of transactions involving fake invoices in manner whatsoever shall be liable for penalties and punishments equivalent to taxable person.

Measures have also been taken to restrict usage of ITC without matching as proposed under S.39 of the CGST Act. Measures have further been introduced in the form of e-invoicing which shall further strengthen the electronic matching systems on the GST Portal. However it is to be noted that all such measures are mere actual implementation of the law which was required to be done from Day 1.

It is not possible for the revenue officers to even identify the true loss that has occurred on account of such fake invoicing, leave alone recovery of the entire tax loss. However it is expected that by introduction of the above stated provisions for restriction on utilization of unmatched ITC, e-invoicing, imposing liability on the beneficiaries and introduction of parallel provisions in the form of S.27 (1) AAD under the Income Tax Act, such activities shall be curtailed to a larger extent.

It is imperative to highlight that such activities not only cause revenue losses but also harm the trade in general as it leads to implementation and introduction of harsher provisions under the tax laws causing harassment to bonafide assessees.

Thus it is always the duty of the trade along with the taxmen to be wary of such transaction and to not only avoid but also desist such practices in whichever manner possible.

At this stage one can only be optimistic that such fraudulent transactions shall come to a halt, the evaded taxes shall be recovered and genuine and bonafide assessees shall not be harassed in the name of implementation of provisions referred above.

Dipankar Majumdar, Consulting-in-Charge, ALA Legal, with inputs from Tithi Neogi, 3rd Year B.A.LLB student at KIIT Bubneshwar.

GST Law India is a blog on GST and allied commercial laws managed by members of the law firm ALA Legal.

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