GST system vulnerable to fraudulent input tax credit claims, says CAG

Our Bureau New Delhi | Updated on July 30, 2019

The Comptroller & Auditor General (CAG) has came down heavily on the GST (Goods & Services Tax) executioners saying that system is vulnerable to fraudulent Input Tax Credit (ITC claims).

This also substantiates the government’s response that Central GST Authorities booked cases of fake invoice(s) involving fraudulent ITC in GST. A total of 1,620 such cases involving an amount of ₹11,251 crore were detected in 2018-19. Even during current fiscal (between April 1 and June 25), 535 cases came in light involving total amount of over ₹2,500 crore. Authorities arrested 154 and 40 people during these two years, respectively.

According to report laid in the Lok Sabha, CAG said that law prescribes the recipient of supplies would take credit of the input tax paid on such supplies. Recipient should utilise the ITC available in the credit ledger for discharging his tax liabilities. As per GST Rules, ITC could not be claimed by a taxpayer unless it had been paid by the supplier. This was supposed to be ensured through the provisions for matching of invoices of ‘suppliers and recipients’ through filing of returns GSTR-1 and 2 and generation of monthly return GSTR-3 based on GSTR-1 and -2 filed by taxpayers, with taxpayer adding details of tax paid in GSTR-3.

However, for the time being, filing of GSTR-2 return had been kept in abeyance and taxpayers were allowed to claim ITC in GSTR-3B return without any such cross-verification. Under GSTR-3B, ITC was claimed by the taxpayer on self-assessment basis. Hence, in the absence of evidence that ITC was being claimed by a taxpayer after payment of tax by the supplier, there was a risk that the irregular ITC claims by the taxpayers might go undetected.

Excess IGST credit

According to the report, out of ₹8.19 lakh crore of ITC of IGST claimed during July 1, 2017 to August 8, 2018), taxpayers of Andhra Pradesh alone claimed (on July 19, 2018) IGST-ITC for ₹6.45 lakh crore which was considered as highly unlikely. This was brought to the notice of GSTN (GST Network, the IT backbone of indirect tax system) by audit on August 21, 2018.

The report noted reply by GSTN. The reply said that while filing the GSTR-3B in July for June 2018, a taxpayer in Andhra Pradesh claimed excess IGST credit of ₹6.45 lakh crore. He revised the same on August 28, 2018. Thus, “unrealistic erroneous claim of ITC of IGST by one taxpayer, representing 79 per cent of total ITC claim by all taxpayers for a month, was allowed by the system, exposing the vulnerability of the system to fraudulent ITC claims,” CAG said.

It further added that the adherence to the business rules and the system design are the responsibility of Department of Revenue, Central Board of Indirect Taxes & Custom (CBIC) State Tax authorities and GSTN. It mentioned that the system of payment and settlement of tax that was envisaged for GST was based on one hundred per cent invoice-matching and availment of ITC, as well as settlement of IGST on the basis of invoice-matching.

“Neither is possible as of now, as an invoice-matching system has not kicked-in. Invoice-matching is the critical requirement that would yield the full benefits of this major tax reform,” the CAG said while emphasising that it would protect the tax revenues of both the Centre and the States, it would lead to proper settlement of IGST and would minimise, if not eliminate, the tax official-assessee interface.

Published on July 30, 2019

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