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Strategies for Resolving Increasing Fraud in GST ITC

Sumati Bengani , Last updated: 25 October 2023  
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Recently Ministry of Finance issued a Press Release dated 18th October, 2023 titled: "In fight against fake ITC, DGGI detects more than 6,000 fake ITC cases involving more than Rs. 57,000 crore GST evasion with the arrest of 500 persons between April 2020 to September 2023 In FY23-24, DGGI detects  Rs. 1.36 lakh crore overall GST evasion involving voluntary payment of Rs. 14,108 crore"

The titled itself depicts a truth about GST ITC complication and subsequent cumbersome recovery procedure. Despite, various measures implemented by CBIC like- e-invoicing, Special Drive to detect fake firms, geotagging & biometric authentication, implementation of GSTR-2B, restrictions imposed in GST return filing if one month’s return is not filed, enhancements in verification of new GST Registration by doing physical visits by respective Officers, etc- in FY 23-24 alone Rs 1.36 Lakh Crore GST evasion has been detected out of which only Rs 14,108 Crore has been recovered through voluntary payment. The big question is- despite various measures taken by CBIC and abundant data availability GST ITC fraud are happening post 6 years of GST implementation, how can the issue be tackled in ever-changing circumstances?

Strategies for Resolving Increasing Fraud in GST ITC

While there is no perfect cure for preventing fraud in GST ITC there might be some ways/ steps taken to prevent GST ITC fraud from happening

It is important to implement a strict process while the issue of new GST registrations. One of the biggest problems is use of PAN or Aadhaar documents by third parties without authorization or knowledge of PAN holder. To prevent people from using someone else's PAN or Aadhaar for fraudulent GST registration, the following measures can be implemented:

1. Biometric Authentication: That biometric authentication is already in place, but certain additional measures are required to avoid illicit use of PAN & Aadhaar by third persons without knowledge of PAN holder. This might mean tracking IP address from where registration is done and deviation in registered address in KYC can be raised as a red flag for further verification of documents.

2. Real-time Verification: Implement real-time verification of PAN and Aadhaar details during the registration process, which would detect discrepancies immediately. This might mean implementing process similar to video verification done before DSC issuance.

3. Digital Signatures: Encourage the use of digital signatures as an additional layer of security to confirm the authenticity of registration applications.

4. Periodic Review: Conduct periodic reviews and audits of registered entities to identify any irregularities.

5. Reporting Mechanism: Establish a clear mechanism for reporting suspected fraudulent registrations, allowing for quick action and investigation.

6. Public Awareness: Educate individuals and businesses about the risks and consequences of fraudulently registering for GST using another person's identity.

7. Blockchain Technology: Implement a blockchain-based system for GST registration. This would create an immutable ledger of all registrations, making it extremely difficult to manipulate or forge records.

8. AI-Based Identity Verification: Use of artificial intelligence (AI) to conduct in-depth identity verification by analyzing facial recognition, voice recognition, and behavior patterns to ensure the person registering is the legitimate owner of the PAN and Aadhaar.

9. Selfie Verification: During the registration process, require applicants to take a real-time selfie to confirm their identity, preventing the use of static images or photos.

 

10. Machine Learning for Anomaly Detection: Implement machine learning algorithms to analyze registration data and detect anomalies or unusual patterns that could indicate fraudulent activities.

11. Geolocation Verification: Use geolocation data to confirm the physical location of the person registering for GST, adding an additional layer of security.

12. Mobile App Integration: Development of a mobile app that allows individuals to complete the registration process with biometric authentication and secure document uploads.

13. Smart Contracts: Utilize smart contracts on a blockchain to automate the verification and approval process, reducing the potential for manual interference.

14. Third-Party Verification Services: Partner with third-party verification services that specialize in identity authentication to ensure the accuracy of registration details.

15. Periodic Re-verification: Implement a system of periodic re-verification, where registered entities are required to reconfirm their identity and business details at regular intervals. Like people taking principal or additional place of business on lease or rental, to undergo re-KYC on expiry of Lease or rent agreement.

By implementing these measures, the government can strengthen the GST registration process and reduce the occurrence of fraudulent registrations.

Further, post GST registration the various data analytics done by Department at present are not sufficient in prevention of ITC fraud. With increasing taxpayer base under GST, the challenges are also increasing. Preventing GST Input Tax Credit (ITC) fraud post-GST registration requires a multi-faceted approach involving robust technology, stringent processes, and strong enforcement.

Here are several strategies the government can implement

1. Real-time Data Analytics: Employ advanced data analytics tools to monitor and analyze transactions in real-time. This can help identify unusual patterns or discrepancies that may indicate fraudulent activities. At present data analytics is done but action on the outcome from these analytics is delayed which results in loss to revenue.

2. Whistleblower Mechanism: Establish a mechanism for whistleblowers to report suspected ITC fraud anonymously.

3. Collaboration with Banks: Collaborate with banks to verify the authenticity of businesses before they are allowed to claim ITC.

4. Review Thresholds: Regularly review and adjust thresholds for ITC claims, making them more restrictive if necessary.

5. Interconnected Systems: Ensure seamless data sharing and collaboration between different government departments and agencies to track transactions across the supply chain.

6. Education and Training: Offer training and resources to businesses on how to correctly claim and report ITC.

Certainly, here are some additional measures to prevent GST ITC fraud

7. Randomized Audits: Conduct randomized, unannounced audits to keep businesses on their toes and deter fraudulent practices.

8. AI-Powered Predictive Analysis: Use AI-powered predictive analysis to identify high-risk businesses and transactions for closer scrutiny.

9. Industry-Specific Controls: Tailor controls and regulations for specific industries that are more prone to ITC fraud.

10. Feedback Mechanism: Establish a feedback mechanism where businesses can report suspicious activities by other businesses, creating a self-policing environment.

11. Digital Signatures: Encourage the use of digital signatures on invoices, making it more challenging to forge documents.

12. Zero-Rated Supplies: Closely monitor and verify zero-rated supplies, which are often targeted for fraud.

13. Reward Systems: Introduce a reward system for individuals or businesses that provide information leading to the detection of ITC fraud.

14. Taxpayer Scorecards/ rating: Implementing a scoring or rating system that rates taxpayers based on their compliance history, and give additional scrutiny to those with lower scores.

15. Supplier Verification Portal: Create a centralized portal for businesses to verify the authenticity of their suppliers, reducing the risk of dealing with fraudulent vendors.

16. Public Reporting: Consider publishing regular reports on ITC fraud cases and convictions to deter potential fraudsters.

Combining multiple layers of these measures can create a robust system that discourages GST ITC fraud and maintains the integrity of the taxation system. By implementing these strategies, the government can reduce the instances of GST ITC fraud post-GST registration and maintain the integrity of the tax system.

 

Disclaimer:

The views and measures outlined above are provided for informational purposes only and should not be misconstrued as an attempt to bring dishonor or suspicion upon any individual, business, or entity. These suggestions are intended to serve as illustrative measures to address GST Input Tax Credit (ITC) fraud and are not an exhaustive or universally applicable solution.

Practical implementation may vary depending on local regulations, circumstances, and evolving needs. The intention is to support the prevention of fraudulent activities and enhance the integrity of the taxation system. It is strongly recommended to adopt responsible and lawful tax practices.

Readers and stakeholders are advised to consult with legal and regulatory authorities to understand and apply relevant measures in a manner consistent with the law and local regulations.

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Sumati Bengani
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Category GST   Report

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