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Duplication in input tax credit major source of misuse in VAT

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is widely believed to be a tax which is not so evasion prone because of the audit trail that it creates. However, this audit trail is not so much easy to pursue mainly because of very voluminous records of input credit that are to be checked. Unless it is supplemented by action on the basis of intelligence reports, merely routine check of documents do not reveal the misuse of input tax credit resorted to by the manufacturers and dealers. The occurrence of frequent misuses led to the (CBEC) to tighten the check as well as to introduce the measure of debarring the manufacturers from availing of this system of input tax credit for a certain period.

In a recent case (NCR Corporation Indian Pvt Ltd vs. Member, CBEC -2010(259)ELT663(Mad.), the Madras High Court has upheld that the duplication in the entry of credit of nearly Rs 2 crore was a deliberate act which attracted the punishment as in the notification No.32/2006 dated 30-12-2006. The High Court noted that this notification was issued to prevent the violation of such misuse and the manufacturer could not take the plea that it was just a mistake due to a very large number of input tax credits taken per month. This mistake was not detected by their internal audit though the audit was already completed. It was detected by the Department on the basis of intelligence report. The notification No.32/2006 has laid down certain procedure which is quite elaborate so that ultimate decision is taken by the CBEC. If the CBEC is convinced that the manufacturer is knowingly involved in committing the offence of taking the same credit twice or similar fraudulent actions for evading duty, it can debar the manufacturer from availing of the facility of for a certain period and also from availing of the facility of paying duty on a monthly basis. In that case the manufacturer has to pay the duty on a daily basis. In this case when an order was passed by the CBEC to take action under the above notification, the action was upheld by the Madras High Court.

The misuse of duplication in the availing of duplicate cre-dit on the basis of the same invoice is more common than records show. Even on the basis of checking of monthly statements many such cases of misuse have been found. In a study which was made by the NIPFP, nearly 14 years ago, it was found that nearly in 6 per cent of total detections, there were substantial fraud committed by the manufacturers. They were of the following types; (i) Credit without producing documents, (ii) Credit on invoice without physical movement, (iii) Credit on extra/Xerox copy of invoice (iv) Credit availed twice on same invoice (v) Credit availed without payment of duty and (vi) Fraud/fake documents, etc. No recent data are available but the frequent occurrence of such cases must have prom-pted the CBEC to issue the notification for taking action against such fraud. There are some other interesting but devastating examples of misuse by duplication of clearan-ces. In one case simply two zeros were added some 34 times. This led to loss of nearly Rs 34 crore of revenue. It was detected by the Government audit and the manufacturer’s plea was that it was a mistake by the clerk.

Such deception could be uncovered by comparing for every transaction, the invoice submitted to the tax administration by the seller with that submitted by the buyer. Matching up invoices for all transactions for every VAT firm is an enormous task, even with the aid of computers. The use of false invoices to abuse the credit (Carl S Shoup – Choosing among Types of VAT, p.9 in Value Added Taxation in Developing Countries edited by Malcolm Gillis et al, World Bank 1990) system is the type of fraud under a VAT that is different from and more sophisticated than fraud under other indirect taxes (Liam Ebrill et al – The Modern VAT, p.60, IMF 2001).

Email: smukher2000@yahoo.com  (Sukumar Mukhopadhyay is a former member CBEC)

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