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January 31, 2021

ICAI takes disciplinary action against eight CA’s arrested in invoice fraud

by CA Shivam Jaiswal in GST, ICAI

ICAI takes disciplinary action against eight CA’s arrested in invoice fraud

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. 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.

Input Tax Credit (ITC) basically means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax. According to Section 16(1) of the CGST Act, every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

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.

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.

Disciplinary action against Chartered Accountants (CA’s) arrested in invoice fraud

The government had arrested 258 people, including eight chartered accountants (CAs) in its nationwide drive against fake GST fraud launched since mid-November to nab unscrupulous elements using fake invoices to fraudulently claim input tax credit.

They were operating multiple non-existent firms and fake entities to dupe the exchequer with fraudulent ITC utilisation in connivance with fraudsters and fly-by-night operators.

The CA Institute has initiated disciplinary proceedings against the eight chartered accountants who have been arrested in the nationwide drive against fake GST invoice frauds in the last two and half months since November 2020.

The Revenue Department’s letter formed the basis for initiation of disciplinary proceedings against these eight Chartered Accountants.

The eighth Chartered Accountant was arrested along with his four business accomplices in Jaipur for operating 25 fake firms to fraudulently avail and pass on Input Tax Credit (ITC) through bogus invoices without actual supplies of goods/services.

The drive by various GST authorities is still on and so far, more than 2,500 case have been booked against 8,000 fake GST-registered entities. Authorities have recovered more than Rs 820 crore from these fraudsters.

The Disciplinary Committee of ICAI disposed more than 650 cases in last 2 years

In the last 2 financial years (2019-20 and 2020-21) ICAI disposed more than 650 cases through disciplinary mechanism wherein prime endeavour, in consonance with the amendments proposed, was to conclude case within 1 year as against the current period of 2 years. Of these 650 cases, as many as 400 were held guilty and punishments ranged from a ‘reprimand’ to ‘removal of names’. Hundreds of them have been removed from the register of members.

During FY 2019-20, the Disciplinary Committee concluded its enquiry in 300 cases, which included cases referred to it in previous years. ICAI also reported that during the current year 2020-2021, a new bench of the Disciplinary Committee has been constituted and thus with the four Benches of the Disciplinary Committee i.e., Bench I, Bench II, Bench III and Bench IV and the Board of Discipline, it is expected to have an expeditious disposal of cases under inquiry apart from the consideration of the Prima Facie Opinion formed by the Director (Discipline). In addition, the Disciplinary Committee under Section 21D headed by the President, ICAI has also been constituted to look into any residual old cases that are/may be referred back by the Council.

Enforcement agencies have used data analytics and artificial intelligence (AI) to process data exchanged among GST authorities, customs department and income-tax offices and pin-pointedly identify unscrupulous elements. It is through such systemic changes, that the department has now been able to take targeted actions against fraudsters and tax evaders. It is with these measures that the DGGI has not only been able to unearth the fake firms but also the final beneficiaries of ITC frauds. Going forward also, the endeavour of ICAI would be to conclude the case within one year.

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