Cartels set up 'briefcase' firms, defraud GST regime of thousands of crores

Fake companies are floated with the intention to fraudulently pass on input tax credit by issuing fake invoices without any supply of goods

Last Updated : Jan 10 2019 | 1:44 AM IST

Parliament was informed on Tuesday that 3,626 cases of tax evasion had been detected in the three quarters of FY19 under the goods and services tax (GST) regime. The total evasion in these cases works out to Rs 15,278 crore, of which Rs 9,959 crore has been recovered.

This revelation comes after recent data indicated compliance under GST was declining. The percentage of taxpayers not filing returns rose from 15.44 per cent in April 2018 to 28.75 per cent in November 2018. Even among composition tax payers, the percentage of non-filers rose from 19.28 per cent in Q1FY19 to 25.37 per cent in Q2FY19.

Why is it that compliance levels have not stabilised even a year and a half after GST was put in place? One reason, indirect tax authorities are finding, is mushrooming input credit frauds run by ‘briefcase' companies. A formal admission of this problem was made in the GST Council meeting in August by the finance minister. He observed that if such companies were not traceable, the recipient who had used the input tax credit would be liable to pay even though he might have paid the tax to the seller, according to the minutes of the meeting.

Business Standard spoke to senior GST officials and experts, and reviewed official records that reveal the modus operandi of scams to get a sense of the magnitude.

“We are seeing the tip of the iceberg. The one-nation one-tax concept has created, for the first time, countrywide cartels specialising in defrauding the GST system,” said one of the senior GST officials involved in detecting frauds.

Input credit

Under GST, taxes paid at intermediate levels in a production chain can be claimed as input credit, which is set off against the total liability. Sellers are required to upload sale invoices to GST Network (GSTN). These automatically get reflected as purchases of the taxpayer in the supply chain, allowing the latter to claim input credit. This allowed officials to cross-check vouchers of inward and outward purchases, known as voucher matching. This could be done online, reducing the requirement of physical inspections.

But faced with outcry over consequent high compliance burden, granular voucher matching was deferred. “The only way the system could oversee voucher matching was through GSTR-2 return. But that has not been activated. We are now going by whatever the taxpayers say. The only way to catch is by physically inspecting suspicious individual entities or transactions,” another senior GST official said.

A former member of the Central Board of Indirect Taxes and Customs (CBIC) said, “This is the reason why matching (of invoices) was contemplated. This has dogged us in both CST and VAT regimes.”

Take the case of a scrap iron and steel business busted in Bengaluru in November. A single person had registered 20 fake companies on the GSTN. “They floated fake companies at fake addresses, issued fake GST invoices and generated fake e-way bills, with fake vehicle registration details without supply of any goods… causing loss to the exchequer,” a government report disclosed. In this case, fake invoices worth Rs 1,200 crore had been generated to avoid GST liability of Rs 200 crore. Business Standard has reviewed records of several such cases.

“We are discovering links between such cartels and networks that run deep and wide. A large number of cases are being observed in trading,” said another official. “In effect, by fraudulently generating input credit in the system for GST taxpayers, these cartels are creating illegal money out of the GST system. Yet, they are to be prosecuted under relatively lax provisions of tax evasion.”

The KYC problem

KYC norms for registering on GSTN were loosened to reduce compliance burden on taxpayers and prevent petty corruption that existed under the older tax regime. Proprietorships and others can register by providing basic documents of identity and residence. These are difficult to verify digitally. And Aadhaar is not mandatory.

“PAN numbers of random people are being uploaded against ghost entities. These are available in the black market for as low as Rs 2,000. On physical verification, even electricity bills and rent deeds are being found to be bogus,” said another GST official.

Detecting such frauds will require much more than just data analytics. In all the cases that Business Standard reviewed, authorities required tip-offs and physical verification to catch culprits. And, while e-way bills were meant to improve compliance, as the system is hosted on National Informatics Centre servers, it is not deeply integrated with the GSTN that hosts the rest of the GST data.

Tackling the menace

The only way to catch culprits is to dig through all the layers of transactions to the point of origin. These layers, for a single case of evasion, can involve detecting dozens of fraudulent firms, thousands of vouchers generated from entities registered in different parts of the country.

“A lot of cases are being detected. In the initial period, we did not want to frighten everyone, so we moved softly. But people took advantage. We lost a lot of revenue in the initial months. We lost several trillions to transitional credit, which too was a scam and there was no verification of stocks,” the former member of CBIC said. “In the absence of granular voucher matching and in the face of a leaky KYC system, the best option is to study patterns of input credit that can legitimately exist at a point in time, in different production chains,” the member said. He added that while this would provide a sense of which sectors are to be tracked more closely, it would be a tedious exercise.

The GST Council has now decided to bring out a tweaked version of voucher matching in the next financial year. Pilots for this would be launched in April. The government plans to allow taxpayers to upload their vouchers on a daily basis if they find that easier.