The Income Tax Department has unearthed a network of 232 fake money-changing companies and detected tax evasion amounting to ₹1,000 crore through fraudulently generated Input Tax Credits under the Goods and Services Tax (GST) regime.

Giving details of the fraud mechanism, the Chairman of the Central Board of Indirect Taxes and Customs (CBIC), Sanjay Kumar Agarwal, said that the incident came to light when the Meerut CGST Commissionerate busted a syndicate of firms fraudulently claiming ITC. ‘’Interestingly, the investigation revealed that ‘Full Fledged Money Changer Companies (FFMCs)’ were used for parking/routing of funds generated through fraudulently passed on ITC without any real recipient of the foreign currency,” he said.

Further, he said the accounts used for routing money have been provisionally attached. “Three persons have been arrested for their role in the entire fake billing racket,” he said.

A fake invoice means there is no real supply of goods or services; it is simply invoice issuance, which is fraudulently used to avail of input tax credit (ITC). Unscrupulous elements misuse the identity of other persons to obtain fake/ bogus registration under GST to defraud the Government.

Such fake/non-genuine registrations are used to fraudulently pass on input tax credits to unscrupulous recipients by issuing invoices without any underlying supply of goods or services or both. Fake registrations and the issuance of bogus invoices to pass off fake ITC have become a serious problem, as fraudulent people engage in dubious and complex transactions, causing revenue loss to the Government.

Last month, a scam was unearthed in Uttar Pradesh, too, with fraudsters using hand pumps to claim fake refunds using Inverted Duty Structure (IDS) under the GST mechanism. Taxes on inputs can be deducted from tax on the final product, and the net is deposited with the Government. However, this is not possible under IDS, where inputs attract tax at higher rates while it is lower for the final product. So, under IDS, the taxpayer gets a refund. Very few goods under GST fall into the IDS category, and a hand pump is one of them.

Lucknow Zonal Unit of Directorate General of GST Intelligence (DGGI) booked a case after officers gathered that three Agra-based taxpayers were allegedly availing fake Input Tax Credit (ITC) on the raw material for manufacturing hand pumps. The fake ITC on raw materials (attracting GST at 18 per cent) was further used to issue fake invoices of hand pumps (attracting GST at five per cent) to non-existent entities without any actual manufacturer and supply. A total of 15.27 crore of evasion was detected, out of which ₹5.21 crore was deposited voluntarily by the accused.

These are just a few examples of using fake firms for evasion. Earlier, the Finance Ministry reported that over 29,000 fake firms were identified and over ₹44,000 crore of GST tax evasion detected in a nationwide drive between May and December of 2023. It was planned that details of such identified suspicious GSTINs, jurisdiction-wise, would be shared with the concerned State/Central Tax administration to initiate a verification drive and conduct necessary action. If, after detailed verification, it is found that the taxpayer is non-existent and fictitious, action will be initiated for suspension and cancellation of the taxpayer’s registration.

Further, the matter may be examined for blocking the ITC in the Electronic Credit Ledger. Efforts will also be taken to identify the recipients to whom such non-existing taxpayers have passed the input tax credit, identify the mastermind, and act.