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January 12, 2021

Swiggy and Instakart Services now under the scanner for GST fraud

by CA Shivam Jaiswal in GST

Swiggy and Instakart Services now under the scanner for GST fraud

For the past 9-10 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.

Swiggy and Flipkart’s subsidiary Instakart Services are now under the scanner for involvement in a faux GST bill fraud. Apart from motion beneath the GST legal guidelines, the Income Tax division has additionally joined the investigation because the faux GST claims quantity to concealment of revenue.

What was alleged against the two internet giants?

  • It was being alleged that Swiggy and Instakart Servicesrelied on fake manpower supply to utilise input tax credit (ITC) and evade GST.
  • Apart from GST authorities, the Income Tax (IT) department also pursued cases against the two entities, which resulted in surveys at the two internet giants in Bangalore earlier this week.
  • IT department joined the investigation as fake GST claims amounted to concealment of income which attracted stringent penalties to the tune of 100% of the GST amount claimed fraudulently. 
  • The ongoing surveys sought to ascertain the veracity of payments made by the companies to two vendors- Merlin Facilities Pvt Ltd (MFPL), and Surya Team Management Pvt Ltd (STMPL), that had supplied staff to the companies. Flipkart and Swiggy confirmed the development. 
  • The development came after enquires by Directorate General of GST Intelligence (DGCI) reportedly unearthed goods & services tax (GST) invoice frauds at the companies in cahoots with fake firms.
  • Data analytics and artificial intelligence (AI) helped the Directorate General of GST Intelligence (DGGI) detect the alleged modus operandi of the multi-layered GST fake invoice frauds of availment and passing on of ITC worth Rs 21 crore.

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 forpayment. 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 oradebit 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.

How did the two companies respond to the allegations?

  • Both the companies denied any financial wrongdoing.
  • According to the report, Flipkart’s chief financial officer Sriram Venkataraman and tax head Pramod Jain from the company’s top brass filed for anticipatory bails on 7thJanuary, 2021 in the ongoing investigation by the DGCI.
  • The matter would be heard by the court on 13thJanuary, 2021.
  • Rejecting any accusation of wrongdoing, Flipkart reportedly said, “the investigation by GST authority pertains to alleged GST default by two manpower service providers of Instakart and should not be misconstrued as being related to any wrongdoing by us”.
  • Swiggy also denied the allegations as “false and baseless”. However, as a law-abiding company, they stated that they are in full compliance with the tax and legal mandates.
  • Swiggy denied allegations that it colluded with Greenfinch with respect to both it being a fictitious entity and availing fake input tax credits.
  • It also added that it provided all documentary and physical evidence, co-operating fully with the authorities at the time. 
  • As per the currently existing laws, Swiggy is fully compliant in taking input credit on the tax invoice raised by Greenfinch for receipt of contracted services, the payment of which was duly done along with the filing of the requisite GST returns.
  • Also,Swiggy paid back the ITC of Rs 27.52 crore claimed pending investigations.
  • It said it had to reverse the ITC owing to irregularities by vendor concerned as the entity could not be traced.
  • Following the development, Swiggy also slapped a case against the vendor. 
  • Two senior Instakart officers have not responded to summons from the Directorate General of GST Intelligence (DGGI) and have moved the courts for anticipatory bail in a case involving incorrect availment in addition to passing on, of enter tax credit price Rs 21 crore.
  • Their bail listening to is listed on the Patiala House District & Sessions court docket on January 13.
  • While sources at Swiggy asserted that the tax authorities had initiated a follow-up survey on the agency attributable to a third-party vendor’s alleged default, the income division contends that the modus operandi of the fraud, which has been carried out since 2017, suggests the involvement of the corporate’s administration.

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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