Mechanism to control GST fraud in ITC claims expected in November

The Union Ministry of Finance is working to develop a mechanism to check fraudulent input tax credit (ITC) claims for goods and services tax (GST) paid under the reverse charge mechanism (RCM), according to a senior government official familiar with the matter.

“The Central Board of Indirect Taxes and Customs (CBIC) and the Goods and Services Tax Network (GSTN) are collaborating to create an ITC ledger for this purpose. The ledger is expected to be operational in November,” said the official.
 

Under the GST framework, certain businesses must pay tax through RCM, meaning the recipient of goods or services is responsible for paying the tax instead of the supplier. This approach aims to expand the GST’s reach into various unorganised sectors, where suppliers may not be registered, and to ensure that services imported from abroad are taxed appropriately.
 

After paying the tax and issuing an invoice, the recipient can claim ITC. However, there have been instances where ITC was claimed even when the recipient hadn’t paid the GST under RCM, or where the claimed ITC was excessive. The CBIC aims to address this issue by ensuring that the ledger accurately reflects RCM-related data. 
 

Unscrupulous actors often exploit the identities of others to obtain fraudulent GST registrations, allowing them to deceive the government.  
 

These non-genuine registrations are then used to illegally transfer input tax credits by issuing invoices without any actual supply of goods or services.
 

At present, a similar ledger exists under GSTN for non-RCM transactions.
 

An email sent to the finance ministry remained unanswered until the time of going to the press.
 

Tax experts indicate that implementing this new mechanism will require strong collaboration between businesses and the GSTN. “The creation of an 'ITC ledger' to track ITC disbursement could enhance transparency, reduce tax evasion, and ensure that businesses comply with GST regulations more effectively. Implementing this new system may involve additional reporting requirements for taxpayers to justify their ITC claims,” said Gurmeet Sukhija, indirect tax head at Mankind Group.
 

In a written response in the Lok Sabha, Minister of State for Finance Pankaj Chaudhary revealed that fake ITC detection surged by 50 per cent in FY24 to over Rs 36,000 crore. However, less than 10 per cent of this amount has been voluntarily deposited.
 

“As transaction-wise purchase and sale data is available with GSTN, the government can leverage advanced analytical technologies, data analytics, and artificial intelligence to create new mechanisms for detecting improper credit claims and resulting revenue leakages,” said Harpreet Singh, partner, indirect tax, at Deloitte India.
 

On the challenges the government faces in tracking fake ITC fraudsters, Chaudhary said: “The challenges arise from masterminds who generate fake ITC by managing a complex network of entities across various jurisdictions. We are addressing these issues through coordination with multiple stakeholders, including law enforcement agencies.”

Deception game
 

 In FY24, Central GST officers booked 9,190 cases involving fake ITC worth Rs 36,374 crore

 182 individuals were arrested, with Rs 3,413 crore voluntarily deposited in these cases

 Detection of fake ITC claims rose by 51% from FY23, when Rs 24,140 crore was flagged in 7,231 cases

 In FY23, 152 people were arrested, and Rs 2,484 crore in taxes was voluntarily deposited