The Hindu Business Line : `VAT system can spawn money laundering'

In a special report on `Money laundering - Definition, Tools & Means and Prevention,' presented at a workshop on `Emerging fiscal trends vis-à-vis economic reforms,' organised by the Direct Taxes Professionals' Association (DTPA) here recently, Mr Anshuma Rustagi, a practising chartered accountant, has pointed out that in contrast with the violent nature of cash-in-transit robberies and motor vehicle hijackings, "VAT fraud is a typical convenient white-collar crime."

Mr Rustagi said that input tax deductions are allowed on the VAT component of the purchase price of all goods or services acquired by a trader for consumption or taxable supplies. Except for specific input tax denials relating to motor cars and air-conditioners, input tax may also be deducted for capital goods.

"This creates the opportunity for disguising a large fraudulent input tax claim as merely relating to an extraordinary acquisition of capital goods." Mr Rustagi held that the availability of the deduction is not suspended until output tax linked to the goods or services has been derived. This enables defrauders to claim large input tax credits and subsequently disappear.

Common VAT frauds, which can be a means of money laundering, include export fraud, conspiracy among the seller, the purchaser and the missing trader intra-community (MTIC), which is known to occur in EU countries. Typically, in MTIC frauds, a dealer registers under VAT, sells goods to a trader, charges VAT and disappears without submitting any return or paying the VAT.

He said that in the EU, MTIC fraud is one of the most prevalent systems of misleading the tax authorities. This involves obtaining a VAT registration number in one member-state; purchasing goods free from VAT from another member-state (as imports are VAT-free); and selling goods at a VAT-inclusive purchase price in the member-state of registration, i.e., in the domestic market, and then going missing without paying the output tax due in the member-state of registration.

Mr Rustagi said that in a federal set-up, it is proposed that Central Sales Tax would be phased out, thereby making cross-border transactions across States VAT-free. "International experience suggests that this VAT-exempt cross-border supply of goods shall present the perfect breeding ground for MTIC fraud to take roots."

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