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Directorate General of Goods and Services Tax Intelligence (DGGSTI)

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Know how GST department tracking fake invoices using smart technology

Know how GST department tracking fake invoices using smart technology

For the past 9-10 months the COVID 19 pandemic had 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.

What do you mean by fake invoices?

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.

Fake invoice refers to a non compliant GST Invoice. It basically means any invoice which does not comply with the provisions of the GST Act and Rules. Usually, it refers to the non-compliant GST Invoice of the following types:

  • Invoice without any supply
  • Invoice with a non-compliant supply

The objective of the taxpayers behind issuance of fake invoicing may involve:

  • Availment of the undue input tax credit on fake invoices by the recipient.
  • Evade GST & Income tax & then Divert funds from companies.
  • To show non-existent transactions to hike figures on the books to obtain loans from banks and to siphon off funds.
  • To claim GST refunds for exporters.
  • To conduct hawala transactions (money transfer without money movement).

GST department tracking fake invoices using technology

  • GST department is tracking taxpayers using smart technology.
  • The GST department is taking concerted action to ensure compliance in the GST net, pooling data with States, the Income Tax (IT) and Customs departments, banks and other agencies.
  • They are now in a position to undertake data analytics to pinpoint those who are trying to game the system and take targeted action against such tax frauds.
  • GST Council has also adopted few standard operating procedures for “how to detect and tackle the fake invoices”. 

What are the effects of issuing fake invoices under GST?

Final action will be taken by the Government after investigating the genuineness of the supplier who generated the fake invoice and buyer who used that invoices for the taking unnecessary tax benefit. Once the forgery is proved then the following steps will be taken:

  • Cancellation of GST registration
  • Re-registration of such entities under GST law is differently dealt with than normal registration. No deemed registration should be done in this case and physical verification by the officer must include before allowing re-registration
  • GSTIN of Such supplier are flagged for generating fake invoices or for any other frauds and this will indicate those buyers who take credit on behalf of fake invoices and automatic alert for further verification by the officer
  • Input tax credit availed on behalf of fake invoices to be recovered as per the provision under the law
  • Even in certain cases, the input tax credit may be blocked from such persons so that no one can get the undue advantage of credit
  • Maximum imprisonment up to 5 years
  • Penalty of sum equal to the aggregate amount of such false or omitted entry. The assessing officer has been given discretionary power to impose penalty.
  • Further, there exists Sec 270A provides a penalty of 200 percent of the tax evaded in the case of misreporting of income.
  • So, if a company accepts a fake invoice of Rs 50 lakh without actual supply of goods or services and shows the same as his purchases or expenses and claims income tax benefit on the same, the amount of penalty shall be U/S 271 AAD of Rs 50 lakh plus 200% of tax evaded U/S 270A of Rs 30 lakh (assuming tax of 30%) i.e., Rs 80 lakh (more than the value of the fake invoice)

If any citizen comes across this kind of criminal activity, they are directed by the GST council to immediately inform the local CGST Seva Kendra either by telephone or e-mail with details. Their identity will be kept confidential and they will be rewarded suitably subject to the guidelines of CBIC.

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How fake invoices used for committing a GST fraud?

How fake invoices used for committing a GST 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.

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.

In the last month, 132 persons including four chartered accountants and a woman were arrested for availing or passing on ineligible ITC fraudulently and 1,430 cases were filed against more than 4,586 fake GSTIN entities identified across the country.

The GST officials in November 2020, also arrested three persons involved in massive frauds involving GST amounting to over Rs 2350 crores. The Director/Partner in various firms was arrested for availing ITC amounting to Rs 485.64 crore and passing on fictitious Input Tax Credit amounting to Rs 485.55 crore. Thus, the total quantum of the fraud committed involved GST amounting to Rs 971.19 crores.

In a parallel investigation, another person was also found engaged in the fraudulent availment and utilization, as well as passing on of ineligible ITC on the basis of bogus invoices issued and received without actual supply of any goods or services. These entities had availed ineligible ITC amounting to Rs 580.23 Crores and had passed on ineligible ITC amounting to Rs 579.76 crores. The total quantum of the fraud committed involved a GST of nearly Rs 1,159.99 crores.

According to official data, in 2018-19, the central GST authorities registered 1,602 cases of fake ITC involving an amount of Rs 11,251 crore and arrested 154 people. Between April and November 2019, the authorities booked over 6,000 such cases.

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.

What are the steps taken by the Government to control such invoice frauds?

Previously, businesses used to generate invoices through various software’s, and the details of these invoices were manually uploaded in the GSTR-1 return. The invoice information was thereafter reflected in GSTR-2A for the recipients for viewing only. On the other hand, the consignor or transporters had to generate e way bill by again importing the invoices in excel or JSON manually.

The GST Council, in its 35th meeting, decided to implement a system of e-invoicing, which would be applicable to specified categories of persons. The concept of GST e-invoice generation system was taken into consideration for the reduction in GST evasion.

  • GST e-invoice is basically a digital invoice for goods and services provided by the business firm generated at the government GST portal.
  • ‘E-invoicing’ or ‘electronic invoicing’ is a system in which B2B invoices are authenticated electronically by GSTN for further use on the common GST portal.
  • Under the e-invoicing system, an identification number will be issued against every invoice by the Invoice Registration Portal (IRP) to be managed by the GST Network (GSTN).
  • All invoice information will be transferred from this portal to both the GST portal and e-way bill portal in real-time.
  • E-invoicing replaces the physical invoice and will soon replace the existing e-way bill system, and taxpayers will not have to generate separate e-way bills.

The e-invoicing process was introduced to capture sales details, reduce errors, automate data entry and improve compliance and trust between tax officials and companies. It will also help auto-populate certain forms. E-invoicing will most definitely provide a push towards a digital economy. Curbing tax evasion and increasing tax collections for the government may ensure that the government will not increase GST rates any further. The government is also planning to tighten the GST registration process and legal measures to deal with the rising cases of fake invoicing.

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