Businesses, govt spar over fraudulent ITC claims and imprisonment under GST

Companies may challenge jailing provisions, say Section 69 of central GST Act is arbitrary as it empowers commissioners to arrest persons they have "reasons to believe" have claimed fraudulent ITC

While the government has decriminalised 48 sections of the Companies Act, a controversy is brewing over jail provisions in the GST laws.

The government defends the jail provisions for clamping down on fictitious firms and fraudulent claims of the input tax credit (ITC) under the goods and services tax (GST) regime, while businessmen and tax experts find fault in the extant provisions.

Companies are likely to file a petition in the Orissa High Court (HC) soon, challenging constitutional validity of these provisions. Similar such cases are pending in the Bombay and Delhi high courts too. 

According to the Orissa HC’s observation in a case pertaining to the jailing of a businessman, some 1,620 cases of fraudulent claims for ITC involving a sum of Rs 11,251.3 crore were registered during 2018-19. The number of cases stood at 535, involving a sum of Rs 2,565.40 till June 25 during 2019-20, the court said.

Abhishek Rastogi, partner at Khaitan & Co, who is arguing in various courts against the arrest of businessmen, said Section 69 of the central GST Act is arbitrary since it empowers GST commissioners to arrest persons they have “reasons to believe” have claimed fraudulent ITC.

Commissioners can order a term of up to five years of such persons, depending on the value of bogus ITC claims. 

“Reasons to believe are subjective in nature and are prone to  misuse,” Rastogi said, adding that many of those arrested in this connection have claimed ITC but the movement of goods has not happened.

Section 16 of the CGST Act, which deals with ITC, clearly said that movement of goods is not necessary for the supply of goods.

This is clearly mentioned in the explanation to section 16 (2) of the CGST Act, he said.

The explanation says, "For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by  way of transfer of documents of title to goods or otherwise."

For instance, if the goods are lying in Kolkata and a company in Mumbai asks a dealer in Delhi to supply the goods to him, the goods may not leave Kolkata but the supply would happen if the person gives money to the dealer and gets invoices. If that is not the case, one should not charge even GST on output, but that is not happening, Rastogi said.

He said the intention of the government appears to decriminalise certain GST aspects and hence some amendments were carried to make suitable changes. 

For instance, a provision was inserted to empower GST commissioners to block or restrict ITC utilisation in case of fraudulent claims. 

Rastogi said this would suffice to reduce the bogus ITC claims. 

He wondered how arresting a person serves the purpose of checking fraudulent claims. "You (authorities) seize his accounts and books, which is sufficient to serve the purpose," he said.

Without issuing show cause notices, the authorities are jailing persons when the charges haven't even been proved, he said.  

Besides, there have been instances where the prosecution report has been filed and the accused is in judicial custody for more than six months. It is hoped that these matters are appropriately highlighted and addressed, Rastogi said.

Pratik Jain, partner PwC, said industry has a few concerns related to possible misuse of arrest and prosecution provisions under GST laws. It is felt that these provisions should be invoked in rare cases and only where there is clear evidence of an intention to defraud the revenue department.

The government, on the other hand, claimed that these businessmen have allegedly incorporated various firms in partnership, and then on the basis of certain invoices, claimed ITC allegedly in the absence of any actual physical receipt depicting the nature of goods.

Jain said the government is concerned that fake invoices are increasing and there have been fraudulent claims of ITC. 

In its report, tabled in July, 2019 in Parliament, the Comptroller General of India said the roll-out of GST has unified the multiple central and state taxes on goods and services to a great extent and made credit for input taxes available through the value chain, but hasn’t simplified the tax compliance regime.

“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 input tax credit (ITC), as well as settlement of I-GST on the basis of invoice-matching. Neither is possible as of now, as an invoice-matching system has not kicked-in,” the top auditor said in the report. 

While the invoicing matching system did not come up despite some efforts in that direction, the e-invoicing system that is being implemented may help detect fraudulent ITC claims. 

"After e-invoicing was implemented in October this year, and with plans of widening the net to gradually cover all businesses, it would perhaps be easier to identify such cases on a timely basis," Jain hoped. 

Under the e-invoicing system, firms with annual turnover of over Rs 500 crore have to raise e-invoices through a unique reference portal and generate the IRN (invoice reference number), October 1 onwards. Failing this, they will not be able to move goods for business-to-business (B2B) transactions. For business-to-consumer (B2C) transactions, they have to fix a QR code, which is to be generated by companies.

After much hue and cry from businesses, the government gave partial relief to companies by deciding to not impose penalties if businesses get IRN within one month of moving the goods for the month of October. It also deferred it for B2C transactions. 

E-invoicing would be made mandatory for firms with over Rs 100 crore annual turnover from January next and for all by April next. 

Jain also pointed out that the government has been interacting with industry bodies on decriminalisation of GST laws. "We expect some corrective measures in the near future," Jain said.