GST being a landmark reform in the indirect taxation regime was thought to be the economic integration of the nation with the slogan of one nation one tax. The system of GST taxation has undergone a roller coaster ride since the day of its implementation. A large number of changes were made into the original idea of GST in order to suit the needs of the nation and the technical preparedness. One of the pivots of GST was invoice matching but keeping in view the technical unpreparedness and needs of the smaller business, it was done away with. This doing away of invoice matching opened the Pandora of modus operandi leading to large scale of tax evasion.
The business came out with new ideas of evasion be it huge credit availment in tran-1 returns, profiteering (non-passing of benefits of tax reduction on different goods and services to the ultimate consumer), registration of large number of fake entities (as registration norms made lenient) and many more other tactics harnessing the loopholes into the GST systems.
One of the malpractices prevalent nowadays is fake or bogus invoicing in order to claim illegal input tax credit and to avoid payment of taxes. This malpractice is leading to huge tax evasion and consequently erosion of the government tax base.
What is Fake invoicing?
To understand the problem of fake invoicing better, firstly we shall know what is fake invoicing and how it is forbidden under the GST law.
Fake invoicing is a malpractice wherein fake invoices are issued by the supplier to the recipient for avoiding payment of tax or for claiming invalid input tax credit etc. Following practices leads to fake invoicing;
Unregistered supplier issues tax invoice against the supply by mentioning invalid GSTIN & collects GST from its customers.
This activity contravenes the provisions of section 31 & 32 of the CGST act, as per section 31 only registered persons can issue tax invoice against supply, but in instant case unregistered person is issuing tax invoice which is forbidden.
Further, as per section 32 unregistered person is not authorized to collect tax from its customers.
Sale and purchase of bogus Invoices without actual supply for claiming wrong input tax credit.
This activity contravenes the provisions of section 31 & 16 of the CGST act, as per section 31 tax invoice can be issued only when actual supply of goods or service is being made, but in instant case there is no supply thus tax invoice shall not be issued.
Further, under section 16, there is a condition for the recipient to claim ITC, that the goods or services shall be actually received, since in instant case no supply is involved, the recipient is not eligible to claim ITC.
Supply of goods or services without issuing invoice in order to avoid payment of tax.
This activity contravenes the provisions of section 31 & 9 of the CGST act, as per section 31 tax invoice shall be issued before/at the time of supply of goods or services, but in instant case no tax invoice is issued.
Further, as per section 9, tax shall be levied on the supply of goods or services, but in instant case supply is made without charging & paying GST.
Setting up dummy entities for issuing fake invoices and creating illegal input tax credit
This activity contravenes the provisions of section 22, 31 & 16 of the CGST act, as per section 22 every supplier is liable to register in the State from where it makes taxable supplies, but in instant case the entities are not making any supplies rather they are created only as devices for tax evasion.
Further, as per section 31 tax invoice can be issued only when actual supply of goods or services is being made, but in instant case there is no supply thus tax invoice shall not be issued.
Furthermore, under section 16, there is a condition for the recipient to claim ITC, that the goods or services shall be actually received, since in instant case no supply is involved, the recipient is not eligible to claim ITC.
The aforesaid is not an exhaustive list of malpractices in which the taxpayers are involved. The defaulters are exploiting every loophole in the GST system for taking undue advantage which was not the intention of GST law leading to a massive tax evasion.
Incidents of Fake Invoicing
In the recent times, a large number of fake firms have been caught up by various anti evasion and tax investigation agencies which has estimated tax implication to the tune of 15000 crores (figure from the recent statement of ministry of finance) or may be more upon the economy.
One of such malpractice was caught in Bengaluru where three tax consultants have taken registration of 20 fake companies and have created illegal ITC to the tune of Rs.1,200 crores.
Another incident is in Sirsa, where DG of GST Intelligence arrested a Resident of Sirsa accused of setting up 90 fake firms and issuing bogus invoices valuing Rs.7,600 crores.
The count of these malpractices is increasing day by day as more number of people are becoming aware of these malpractices. Till now, in 2019-20, 535 cases of fake invoices involving wrongful ITC claims of Rs.2,565 crores has been detected. Further, in 2018-19, 1620 cases of fake invoicing involving wrongful ITC claims of Rs.11,251 crores were detected by the GST authorities.
Thus it is clear that the cases of fake invoicing are huge and still rising, accordingly it is the need of the hour for the government to curb this menace.
Consequences of Fake Invoicing
These malpractices are causing a huge loss to the government exchequer as wrongful input credit claims are eroding the tax base of the government. This bogus billing is creating illegal money out of the GST system, since the taxpayer would have paid the taxes in cash instead of utilizing the invalid input tax credit.
Further in order to arrest the offenders government officials invests their time & resources to look behind the persons involved in such menace. It is hampering the machinery of the government which can be put to a better & progressive use.
Through this wrongful input credit claims, the defaulters are giving a boost to their working capital in the business, as a result the honest taxpayers become uncompetitive in the business environment unless they also resort to such menace.
The defaulters are securing loans from the banks & financial institutions by inflating their turnover through bogus invoicing which is leading to improper usage of funds.
Measures to overcome Fake Invoicing and Tax evasion
Thus it is clear that the practice of fake invoicing is a serious trouble for the country, now the question that arises is how to bottle this genie of credit laundering. The following methods may act as a safeguard against the victimization of fake invoicing and will assist in the overall wellbeing of the economy.
Introducing the Invoice Matching System
The government shall establish a system wherein the credit will be allowed based on the invoice matching, wherein the recipient will be allowed to claim only such amount of input tax credit on any particular supply which is paid by the corresponding supplier as evidenced through invoice.
The similar type of system was initially introduced by the government however due to technical glitches it could not make a hit. Accordingly, with a better preparedness the government shall now come with the invoice matching system to curb this menace.
Check the validity of GSTIN over the GST portal
The unregistered persons are issuing tax invoices and collecting taxes from their customers. To prevent this, the customers shall at the time of purchase verify the GSTIN of the supplier over the GST common portal. In case of invalid GSTIN, the recipient shall report the same to the GST authorities.
Control over generation of E-way bill
The crooks are issuing tax invoices without any actual movement of goods, for the purpose of transferring input credits or they are making actual supply without issuance of tax invoice for saving taxes.
Here the e-way bill mechanism will help the government in tracking the movement of goods. Through this mechanism the government can follow the trail of e-way bill or tax invoice and can catch such offenders.
Adequate checks while granting registration
The fraudsters are creating multiple firms/ shell companies for issuing fake invoices and claiming bogus input tax credit. These bubble entities are being run by single person from the same premise just for fake invoicing.
To overcome this problem of creation of bubble entities, the government at the time of granting registration needs to put in adequate checks for verification such as the place of business and nature of business etc.
GST Compliance Rating Score
It’s difficult for the government and the industry to identify the dishonest taxpayers which creates chaos as a result all the taxpayers are seen with the same eyes. The dishonest taxpayers take the advantage of the same.
Section 149 of the CGST Act provides for the compliance rating score to be given to the registered persons (i.e. suppliers) by the government based on their record of compliance with the provisions of GST.
This section is not made applicable till now, however the applicability of this section will help the government and the market to assess the genuineness of the taxpayer.
Lack of knowledge
One of the major problems in our country is the lack of knowledge and awareness among the people about their rights and duties. The government makes stringent laws, however due to lack of knowledge the people remains non-compliant. The malpractice of fake invoicing is a bane for the GST law and there exists stringent punishments for the persons involved in such malpractices. However, due to lack of knowledge the persons continue this practice unless detected & barred by the government officials.
Therefore, to overcome this problem the government shall educate the industry about these malpractices and its consequences. It shall organize workshops across the country for a twofold-dialogue between the GST authorities and the industry.
Precaution while granting Loans
The fraudsters are raising loans from the banks & financial institutions by inflating their turnover through issuance of fake invoices.
To overcome this problem, the banks & financial institutions shall before granting loans reconcile the turnover of prospective borrower with the data available with the GST authorities.
With a hope that the government takes into account the above measures to overcome the crime of fake invoicing, it can be concluded that these malpractices are creating a hole in the system which needs to be filled. The burgling with government revenue cannot be allowed in the name of ease of doing business when in actual there is neither any business nor any benefit to the small and medium businesses as was expected in GST regime.
Source: GST law & the Yellow Newspapers.