The Goods and Services Tax (GST) was implemented with the primary aim of simplifying the taxation system. However, despite concerted efforts by authorities to achieve this goal, the GST framework remains inherently complex. This complexity not only poses challenges for taxpayers but also creates loopholes that can be exploited by fraudulent entities, leading to significant revenue losses for the government.
During a special drive spanning from May 2023 to December 2023, the government identified a concerning number of 29,273 fraudulent entities, suspected of evading Input Tax Credit (ITC) to the tune of ₹44,015 crore.
Similarly, between the fiscal years 2020-21 and May 2023, authorities unearthed a staggering 43,516 instances of GST fraud, involving a substantial ₹2,68,537 crore. These figures may just be a tip of the iceberg and indicates a possibility of numerous undetected cases. Moreover, fraudsters have exploited the complexity of the system, impersonating as tax authority and sending fake summons or notices to unsuspecting taxpayers.
While these fraudsters are constantly veiled by the tricks that they are mastered to play, innocent taxpayers often bear the brunt and end up facing financial losses such as credit blockages, interest, penalties, and legal disputes. GST authorities have undoubtedly ramped up detection through audits and notices, however, there have been cases where an inadvertent mistake of innocent taxpayers have been painted as fraudulent.
To counteract these challenges, both Central and state governments have implemented various measures. These include assigning risk ratings during GST registration, leveraging analytical tools, establishing Cyber Forensic Laboratories, utilising GST Seva Kendras and implementing document identification number (DIN). Additionally, tax authorities now have access to fraud detection tools and analytics via dashboards, enabling proactive action against suspected fraudulent entities.
Despite these efforts, the possibility of numerous undetected instances of fraud persists. Even with increasing use of technology, it is seldom possible to segregate the innocent ones over the fraudulent ones as it is always about the intent and culpable mindset, which under the GST law, has to be proven by the taxpayer.
Therefore, it is imperative for taxpayers to adopt the following preventive measures to safeguard themselves from falling victim to GST fraud.
A. Ensure vendor or customer due diligence
Performing due diligence on new suppliers or customers is crucial, especially for high-value transactions. This ensures that the potential customers and vendors have a genuine business and are not engaged into fraudulent activities. Taxpayer must utilise checks such as verifying GST Registration, period for which registration is active, GST compliance status, comparing tax liability reported to tax liability discharged, any news available in public domain which may critically hamper the imager of the said customer / vendor, etc. These details can be conveniently accessed through the GSTN portal. Taxpayers may also verify information on other government websites to ascertain if the vendor / customer or its directors are involved in any ongoing legal disputes.
B. Verify necessary documentation against inward supply
Taxpayers must ensure that they receive all necessary documentation when procuring goods and services. This includes verifying the authenticity of invoices and confirming they contain essential details such as GSTIN, tax rates, taxable value, e-invoice QR codes, and IRN. Cross-checking this information with the actual goods or services received is crucial to avoiding discrepancies. Additionally, ensuring the supplier generates e-way bill for the movement of the goods is also vital.
C. Implement strong internal controls
To safeguard against fraudulent activities, it is essential to establish robust internal controls. This includes implementing clear SOPs for onboarding employees, vendors, and customers, employing advanced accounting systems for accurate monitoring, and conducting regular internal audits. Ensuring the security of sensitive data and maintaining strict controls over the inward and outward movement of goods, with proper documentation and verification, are also crucial. Regular fraud risk assessments and employee awareness programs about fraud schemes are vital for maintaining a vigilant and proactive stance against potential risks in GST processes.
D. Use of Technology and analytical tools
Utilising technology and analytical tools is another effective strategy. Taxpayer may use advanced analytics to monitor GST-related data for unusual patterns or inconsistencies, while implementing predictive models to identify potential fraud risks. Digital verification methods, such as e-signatures and digital certificates reduce the risk of forged documents and ensure the authenticity of records.
E. Data Sharing Platforms
Participating in industry-wide data sharing platforms allows businesses to share information about known fraudsters, fraudulent practices, aiding into identification and prevention of GST fraud across the industry.
F. Verification of DIN
Taxpayer must ensure to verify DIN of correspondence received from tax authorities. This ensures their authenticity.
By incorporating a proactive approach and integrating multiple checks and verifications into their due diligence process, taxpayers can accurately evaluate the credibility and reliability of their business counterparts. This method not only reduces the risk of dealing with fraudulent entities but also nurtures trust and confidence in business relationships, thereby enhancing transparency and efficiency within the tax ecosystem.
—The authors; Sanjay Chhabria and Ankit Bakiwala, are Director (Indirect Tax) and Manager (Indirect Tax) respectively at Nexdigm, a Mumbai-based business management consultancy firm. The views expressed are their personal.
During a special drive spanning from May 2023 to December 2023, the government identified a concerning number of 29,273 fraudulent entities, suspected of evading Input Tax Credit (ITC) to the tune of ₹44,015 crore.
Similarly, between the fiscal years 2020-21 and May 2023, authorities unearthed a staggering 43,516 instances of GST fraud, involving a substantial ₹2,68,537 crore. These figures may just be a tip of the iceberg and indicates a possibility of numerous undetected cases. Moreover, fraudsters have exploited the complexity of the system, impersonating as tax authority and sending fake summons or notices to unsuspecting taxpayers.
While these fraudsters are constantly veiled by the tricks that they are mastered to play, innocent taxpayers often bear the brunt and end up facing financial losses such as credit blockages, interest, penalties, and legal disputes. GST authorities have undoubtedly ramped up detection through audits and notices, however, there have been cases where an inadvertent mistake of innocent taxpayers have been painted as fraudulent.
To counteract these challenges, both Central and state governments have implemented various measures. These include assigning risk ratings during GST registration, leveraging analytical tools, establishing Cyber Forensic Laboratories, utilising GST Seva Kendras and implementing document identification number (DIN). Additionally, tax authorities now have access to fraud detection tools and analytics via dashboards, enabling proactive action against suspected fraudulent entities.
Despite these efforts, the possibility of numerous undetected instances of fraud persists. Even with increasing use of technology, it is seldom possible to segregate the innocent ones over the fraudulent ones as it is always about the intent and culpable mindset, which under the GST law, has to be proven by the taxpayer.
Therefore, it is imperative for taxpayers to adopt the following preventive measures to safeguard themselves from falling victim to GST fraud.
A. Ensure vendor or customer due diligence
Performing due diligence on new suppliers or customers is crucial, especially for high-value transactions. This ensures that the potential customers and vendors have a genuine business and are not engaged into fraudulent activities. Taxpayer must utilise checks such as verifying GST Registration, period for which registration is active, GST compliance status, comparing tax liability reported to tax liability discharged, any news available in public domain which may critically hamper the imager of the said customer / vendor, etc. These details can be conveniently accessed through the GSTN portal. Taxpayers may also verify information on other government websites to ascertain if the vendor / customer or its directors are involved in any ongoing legal disputes.
B. Verify necessary documentation against inward supply
Taxpayers must ensure that they receive all necessary documentation when procuring goods and services. This includes verifying the authenticity of invoices and confirming they contain essential details such as GSTIN, tax rates, taxable value, e-invoice QR codes, and IRN. Cross-checking this information with the actual goods or services received is crucial to avoiding discrepancies. Additionally, ensuring the supplier generates e-way bill for the movement of the goods is also vital.
C. Implement strong internal controls
To safeguard against fraudulent activities, it is essential to establish robust internal controls. This includes implementing clear SOPs for onboarding employees, vendors, and customers, employing advanced accounting systems for accurate monitoring, and conducting regular internal audits. Ensuring the security of sensitive data and maintaining strict controls over the inward and outward movement of goods, with proper documentation and verification, are also crucial. Regular fraud risk assessments and employee awareness programs about fraud schemes are vital for maintaining a vigilant and proactive stance against potential risks in GST processes.
D. Use of Technology and analytical tools
Utilising technology and analytical tools is another effective strategy. Taxpayer may use advanced analytics to monitor GST-related data for unusual patterns or inconsistencies, while implementing predictive models to identify potential fraud risks. Digital verification methods, such as e-signatures and digital certificates reduce the risk of forged documents and ensure the authenticity of records.
E. Data Sharing Platforms
Participating in industry-wide data sharing platforms allows businesses to share information about known fraudsters, fraudulent practices, aiding into identification and prevention of GST fraud across the industry.
F. Verification of DIN
Taxpayer must ensure to verify DIN of correspondence received from tax authorities. This ensures their authenticity.
By incorporating a proactive approach and integrating multiple checks and verifications into their due diligence process, taxpayers can accurately evaluate the credibility and reliability of their business counterparts. This method not only reduces the risk of dealing with fraudulent entities but also nurtures trust and confidence in business relationships, thereby enhancing transparency and efficiency within the tax ecosystem.
—The authors; Sanjay Chhabria and Ankit Bakiwala, are Director (Indirect Tax) and Manager (Indirect Tax) respectively at Nexdigm, a Mumbai-based business management consultancy firm. The views expressed are their personal.
First Published: Apr 10, 2024 1:57 PM IST
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