Plugging GST leaks

| Updated on November 29, 2020 Published on November 29, 2020

Tighter GST registration norms are fine, but data coordination between agencies is crucial, too

With tax frauds pertaining to GST “to the tune of more than ₹1.19-lakh crore in the last three years” (according to the website of the Directorate General of Goods and Services Tax Intelligence, or DGSTI), it is hardly surprising that the DGSTI has unleashed a crackdown on fake invoicing networks. To put this sum in perspective, it approximates the budgets of small States, and is close to the deficit that the Centre owes to the States in GST revenues. Of the ₹1.19-lakh crore, it appears that roughly a quarter has been recovered so far. The DGSTI needs to crack down on existing fraudsters and recover the amounts involved, while the GST Council should improve systems to ensure that future frauds are checked. The law committee of the GST Council has suggested stringent GST registration processes, which includes an Aadhaar-like biometric identification and an examination of the track record of the applicant, in terms of income-tax and GST transactions. The law panel has also suggested that 2 per cent of the GST dues be set aside as a deposit or a bank guarantee. Meanwhile, the DGSTI arrested over 60 individuals in recent days, the amounts running up to ₹2,500 crore or more.

A Finance Ministry memorandum issued in May last year details the modus operandi and motives of fake invoicing. While the motive is generally to claim input tax credit without doing any transaction (supplying goods), it could also be aimed to “defraud other authorities such as banks by inflating turnovers, laundering of money, etc”. Fake invoicing can be used to show lower profit and avoid payment of income-tax. Improved coordination with direct taxes data is called for — whether the transactions being reported are in sync with the wealth of the firm and its promoter. The movement of goods is falsified by issuing fake e-way bills. “The lack of real time connect between the e-way bill system and GSTN is being exploited by fraudsters,” the Ministry notes. The e-invoicing system, which has been introduced for entities above ₹500 crore, is expected to tackle this problem. However, it will apply to firms above ₹100 crore only after April next year.

The fake invoicing network also involves powerful vested interests, as is borne out by the involvement of the son of a Maharashtra MLA. The Ministry points to a network of shell companies at work. The DGSTI needs a free hand. At the same time, a distinction needs to be made between booking the guilty and leaving bonafide entities alone. To prevent the wrong choice of parties to transact business, a list of wrongdoers should be published on the DGSTI portal. The Centre should pursue the matter in a fair, even-handed way, sending out the message that the rule of law rather than arbitrariness shall prevail.

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Published on November 29, 2020
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