With the introduction of the Goods and Services Tax (GST) in India on July 1, 2017, a unified and streamlined system of indirect taxes was put into place, replacing over a dozen separate taxes imposed by the central government and states. However, like any taxation system, GST too has become a target for tax evasion and fraud, specifically in the realm of export and import businesses.
Recently, Sanjay Kumar Agarwal, a member of the Central Board of Indirect Taxes and Customs (CBIC), highlighted the growing issue of fake Input Tax Credit (ITC) claims, a scheme that is rampantly used to evade taxes. This blog aims to shed light on this issue, provide a practical example of how such frauds are committed, and offer measures to prevent them. Let's delve into it.
How Fake ITC Claims Work
ITC is a mechanism in the GST system that allows businesses to reduce their tax liability by claiming credit for the taxes paid on the purchase of goods and services intended for business use. Unfortunately, this provision has been exploited by fraudulent entities to submit fake ITC claims based on bogus invoices, thereby defrauding the government of tax revenues.
Here's an example of how such frauds are typically committed:
Company A, an exporter, purchases raw materials from Company B, a local supplier. As per the GST system, Company B should charge GST on these sales and deposit it with the government. However, in a fraudulent situation, Company B issues a fake invoice without actually supplying any goods but includes the GST amount on the invoice.
Company A then claims ITC based on this fake invoice, reducing its GST liability on its sales. When Company A exports its products, it receives a GST refund from the government, effectively receiving money for taxes that were never actually paid.
This fraudulent transaction not only reduces the tax liability of Company A but also denies the government of GST revenue.
Increasing Instances of GST Fraud
Agarwal noted that the instances of GST fraud have been increasing, with evasion surging from Rs. 54,000 crore in the fiscal year 2021-2022 to Rs. 1 lakh crore in the fiscal year 2022-2023. The number of evasion cases has also risen, from 12,574 in 2021 to 14,000 in 2022-2023.
Measures Taken to Curb Fraud
Recognizing the severity of this problem, the CBIC has launched a two-month-long campaign to detect fraudulent GST registrations and malpractices. Advanced technology tools are being used to detect and filter out suspicious and fake GST Identification Numbers (GSTINs).
During this "Special All-India Drive", the CBIC plans to weed out fake billers from the GST ecosystem by performing thorough verifications and taking appropriate action.
Preventing GST Fraud: The Way Forward
While the government is ramping up its efforts, businesses must also play their part in preventing GST fraud. This includes conducting due diligence on suppliers, verifying GSTINs, and ensuring the legitimacy of invoices. Using GST-compliant software and regularly updating it can also significantly reduce the risk of fraud.
Furthermore, awareness about the legal repercussions of GST evasion, including heavy fines and imprisonment, can act as a deterrent to such activities.
In conclusion, while GST has streamlined taxation in India, the system still faces challenges in the form of fraudulent ITC claims, especially in the realm of export-import businesses. It's crucial that both government and businesses work hand in hand to detect and prevent such fraud, thereby preserving the integrity of the GST system and ensuring fair trade practices.
From the above article, the essential practical inquiries to consider are:
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Understanding of GST and ITC: Do you fully understand how the Goods and Services Tax (GST) and Input Tax Credit (ITC) work? Do you know the rules and regulations associated with claiming ITC and the consequences of non-compliance?
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Verification of Suppliers and GSTINs: Are you conducting due diligence on your suppliers and their GST Identification Numbers (GSTINs)? Are you ensuring that all invoices are legitimate and contain accurate information?
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Use of GST-compliant Software: Are you using GST-compliant software for your accounting and financial management? Is it being regularly updated to reflect changes in GST rules and rates?
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Awareness of GST Fraud: Are you aware of the various forms of GST fraud, such as fake ITC claims, and how they are perpetrated? Do you know the measures that the government and your business can take to prevent such fraud?
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Handling of Export and Import Transactions: Are you aware of the specific GST rules that apply to export and import transactions? Do you know how to claim GST refunds on exports and how to pay GST on imports?
Barai Overseas Export Import Consultation offers a variety of services that can help address these inquiries and assist businesses in navigating the complexities of GST in export-import transactions.
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GST and ITC Consultation: They offer in-depth consultation services about the intricacies of GST and ITC, helping businesses understand these concepts and apply them accurately in their transactions.
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GST Compliance Support: They assist businesses in ensuring their operations are GST-compliant. This includes verifying the legitimacy of suppliers and GSTINs, ensuring correct and lawful ITC claims, and providing advice on maintaining proper documentation and invoices.
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GST Software Advice: They offer advice on the best GST-compliant software for businesses, as well as guidance on how to use such software effectively for GST calculations, ITC claims, and preparation of GST returns.
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Fraud Detection and Prevention: They provide training on recognizing signs of GST fraud and advice on preventive measures. This includes conducting due diligence on suppliers, verifying the legitimacy of invoices, and understanding the consequences of fraudulent activities.
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Customized Export-Import Advice: They provide customized advice on handling GST in export-import transactions. This includes understanding the specific GST rules that apply to these transactions, claiming GST refunds on exports, and paying GST on imports.
By leveraging the services of Barai Overseas Export Import Consultation, you can ensure that your business remains compliant with GST regulations, prevent potential GST fraud, and streamline your export-import operations. This can ultimately result in cost savings, reduced risk, and improved business growth.