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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GST authorities to now detect suspicious transactions on real time basis

Government functions with the help of the taxes collected from the citizens. Tax evasion is the major field, were Government revenue is lost. On account of non-payment of taxes by tax evaders, Government stands to lose revenue. For the past 6-7 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.

However now, the government’s efforts to check evasion of GST and step up the indirect tax system’s efficiency is set to reach the next level soon with officials being able to intercept suspicious and fraudulent transactions on a real time basis. The aim is to enable tax officials to block generation of electronic invoice at the time of the transaction in the case of companies against which red flags have been raised in the system. The concept of GST e-invoice generation system was taken into consideration for the reduction in GST evasion.

What is the GST e-invoicing system?

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.
Businesses with sales up to Rs 500 crore will be excluded from compulsory e-invoicing of GST. The recommendation was reportedly made on July 22, 2020 by the GST Implementation Committee of the GST Council. The compliance limit earlier was up to Rs 100 crore.

What is the future course of action in e-invoicing to detect suspicious transactions?

Validating transaction details on real time in a portal run be National Informatics Centre, was made compulsory for companies with sales more than Rs 500 crore from 1 October.
It is further to be expanded to cover all businesses. The current plan is to make e-invoicing facility available to businesses with Rs 100 crore sales from 1^st January, 2021 and to everyone from 1^st April, 2021.
The data included in the e-invoice, such as the details of buyers, sellers, the description of the item sold as per the harmonized system of nomenclature (HSN), the amount and the tax payable, will be used to pre-populate some of the tax return forms and to compute the eligible tax credit and tax liability of the parties to the transaction.
The government’s move is towards pre-filled return forms which businesses can validate or modify at the end of every month, giving the tax administration greater oversight on the economic activities and to ensure that these do not escape the tax net.
The best part is the ability of tax administration to intercept a bogus transaction.
Already, due to data mining and use of artificial intelligence, officials are able to nail bogus invoices and shell companies before it is too late and protect the revenue.
Now intervention by GST officials can also happen almost on real time basis. With data analytics, they can identify and block such entities from issuing electronic invoice so that they are not able to damage the system. While deterring fraudulent elements, this also provides greater simplicity and convenience to honest tax payers..

What is the benefit of implementing the system of e-invoicing?

For a nation like India where tax evasion is rife, this system can be a boon. Its most important benefit will be transparency and proof.

With e-invoicing, the moment an invoice is made, it will be uploaded to GSTN portal where pre- validation will be done and a unique number called IRN (Invoice Reference Number) will be issued. Once IRN is issued, the tax invoice will be shared with the recipient also.
This real time tracking of invoices can be done by both, vendors and the government, and will result in a reduction of frauds and fake GST invoices
E-Invoice system boosts the automation of GST return filing process. E-invoicing can bring ease, speed and accuracy to the return filing process.
It will reduce the chances of fake GST invoices and the only genuine input tax credit can be claimed as all invoices need to be generated through the GST portal.
Since the input credit can be matched with output tax details, it becomes easier for GSTN to track fake tax credit claims.
E-invoice resolves a major gap in data reconciliation under GST to reduce mismatch errors.
Lesser possibility of audits/surveys by the tax authorities since the information they require is available at a transaction level.

Benefits of data sharing and GST and Income Tax Authorities

Fake invoicing, abuse of tax credits and frauds around export incentives have been a major head ache for the indirect tax administration.
Data sharing among various enforcement agencies, use of advanced technology, steps like e-invoicing and tight oversight of use of tax credits will remain key elements of the GST compliance enforcement measures.
Data sharing between GST and income tax enforcement authorities on a quarterly basis and Central and the State GST administrative officers is already in place and the focus of compliance improvement measures on export incentives and exemptions is expected to detect frauds.
This government has been inclined towards leveraging technology and already many states are using artificial intelligence to identify GST evasion. This would definitely become the norm and be implemented on a full scale once the technical glitches in the network is resolved and the filings become more seamless.

Other steps taken by the GST Authorities to prevent tax evasion

The Goods and Service Tax Network (GSTN), the company that processes GST returns, introduced auto-populated monthly tax returns for businesses, making tax filings easier and improving compliance.
Auto-populated tax forms showing the summary of monthly transactions (form 3B) will be available from the October tax period.
These forms will be available in the GSTN portal from 12^th November.
In a separate statement, GSTN said that it has stepped up its IT systems to handle 300,000 concurrent logged in users at a time, twice what it used to handle earlier.
The upgrade has also enabled GSTN to scale up to 500,000 concurrently logged in taxpayers, if necessary, the company said.

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. However, there are some challenges to the system. Many parts of India continue to suffer from lack of infrastructure. Large organizations, who have implemented auto generation of the e-waybill on creation of the tax invoices, will have to change their existing process. Taxpayers who have not up taken automation of e-waybill have to reach out their OEM’s (original equipment manufacturer) for the configuration of the same. Similarly, the manual bill books and accounting software products used today may need to undergo an overhaul. This may prove to be a time-consuming task.

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