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December 26, 2020

Flipkart’s subsidiary accused for using fake GST invoices to avail ITC of Rs 21 crore

by CA Shivam Jaiswal in GST

Flipkart’s subsidiary accused for using fake GST invoices to avail ITC of Rs 21 crore

For the past 8-9 months the COVID 19 pandemic has forced India into a lockdown. Most of the countries small businesses which relied on physical availability of customers have had the most hit. Small business revenues have plunged everywhere. Nevertheless, tax evaders have proved to be an exception to this rule, who no matter what the situation persists, find a way to evade tax.

Flipkart’s subsidiary Instakart Services are being accused by tax authorities for using fake GST invoices. The ecommerce giant’s subsidiary is said to have illegally availed input tax credit (ITC) worth Rs 21 Cr since July 2017. The undue credit has been availed by the firm on the basis of fake invoices issued by two of its vendors engaged in ‘manpower supply’.

What do you mean by an invoice?

An invoice is basically a bill of the list of goods sent or services provided, along with the amount due for payment. It is a commercial instrument issued by the supplier to the recipient.

What is the importance of an invoice?

  • Evidences of supply of goods or services
  • A registered person cannot avail input tax credit unless he is in possession of a tax invoice or a debit note.
  • Invoice is an important indicator of the time of supply.

What was found in the investigation by GST officials pertaining to Instakart Services?

  • The investigation by the GST Intelligence wing concerned the non-payment of GST by two vendors.
  • However, while investigating a separate case, the Directorate General of GST Intelligence (DGGI) found that the accused had supplied fake invoices to these two vendors contracted by Instakart, which, in turn, had availed ITC based on invoices issued by these firms.
  • After issuing summons to Instakart’s vendors, the DGGI found that these two firms didn’t exist at their given addresses.
  • This was followed by summons issued to Instakart to investigate its dealing with these firms which only existed on paper.

Contention of Instakart Services spokesperson

  • A Instakart Services spokesperson said that they were merely cooperating with the authorities to help with their findings to trace and track any wrongdoings by such vendors.
  • It was stated that each and every invoice of the vendors was paid through banking channels and all documentary evidence was already submitted to the department.
  • The investigation was not to be misconstrued as being related to any wrongdoing by Instakart Services.
  • It was also added that the firm’s transactions with these vendors was based on the valid GST registration certificate issued to them by the department.
  • The allegations were thus vehemently denied by Instakart Services.

Legal Proceedings against Instakart

  • After DGGI refused Instakart’s plea to allow appearance of its officials via video conference, the company filed a writ petition in the Delhi High Court earlier this month.
  • DGGI is likely to argue that the evidence at this stage of investigation could not be shared electronically due to its sensitive nature.
  • Instakart’s petition, which was reviewed by FE, says tax payment to the government was not its responsibility as it had paid the due taxes to its suppliers.
  • It was also appealed for quashing the summons for personal appearance of its officials.
  • Further, the petition has asked the court to direct DGGI to refrain from taking any coercive actions against the company or its officials.
  • The government contention was that the investigation was not on the issue of whether Instakart had paid GST to vendors on the supplies but was in relation to wrongful availment of ITC on the strength of fake invoices.
  • In the same petition, the firm also challenged the constitutional validity of the sections of GST law that allow the government to recover any ITC availed by the company if its supplier fails to deposit tax.

How are fake invoices used for committing a fraud?

Committing a fraud with the aid of fake invoices is done in the following ways:

  • Initially fraudsters float multiple dummy firms
  • Then, they obtain GST registrations for the same
  • Fake GST invoices of goods and services are issued without actual supply of services
  • Ineligible ITC accrued from the bogus invoices is passed to clients for a commission, who subsequently used it to make GST payments, causing losses to the government.

In some other cases, the tax department has found that promoters of certain companies have routed fake invoices through a series of shell companies and transferred input tax credit from one company to another in circular transactions to increase the turnover of the company. This helped them not only evade GST but also avail higher bank loans and credit facilities due to increased turnover.

What is the reason for increase in invoice fraud?

One of the primary reasons for an increase in companies availing ITC fraudulently is the lack of due diligence during the GST registration. The process of registration was made easy and hassle free by the government so that businesses could be easily on-boarded to the system.

However, this meant that a number of dummy companies too obtained the GST registration in the absence of scrutiny or physical verification of the registered address of the companies. Apart from this, lack of data exchange among the enforcement agencies and banks have also led to increase in fraud cases.

In the last one month, the Directorate General of Goods and Services Tax Intelligence (DGGSTI) arrested over 100 people and booked 3,479 entities in 1,161 cases for illegally availing or passing on input tax credit (ITC) by using fake GST invoices, and causing loss to the exchequer. Further investigations in these cases unravelled the network and multiple chains of fake invoices’ benefactors and, also, to ascertain the exact amount of tax evasion and usurpation by these fake entities and fraudsters. Use of fake invoices to wrongfully avail ITC credit has been gradually increasing and has become a concern for the government.

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