Circular Trading under GST

The present article explains the term circular trading with example and also highlights the consequence of circular trading under GST.

Understanding the term ‘Circular trading’ with an example

Circular trading is a fraudulent scheme that creates an artificial trading activity by issuance of sales invoice amongst a close group without an actual supply of goods. In simple words, circular trading refers to the transaction of selling and buying of goods (without actual movement of goods) through shell companies. Circular trading is a circular which is being formed by a group of companies engaging themselves in fake sales transaction by producing fake sale invoices.

Example of circular trading

Suppose M/s. A, M/s. B and M/s. C is close group companies being engaged in circular trading. M/s. A issues sales invoice to M/s. B amounting to INR 2,00,000, wherein, GST tax amounts to INR 20,000. Please note, here only sales invoice is raised, and there is actually no movement of goods. M/s. B issues sales invoice (of the same goods) to M/s. C amounting to INR 1,50,000, wherein, GST tax amounts to INR 15,000. Here also only sales invoice is raised, without actual movement of goods. In this transaction, M/s. B has availed Input tax credit of INR 20,000 and paid only INR 15,000, meaning thereby that M/s. B will carry forward Input tax credit of INR 5,000. M/s. C issues sales invoice (of the same goods) to M/s. A amounting to INR 1,25,000, wherein, GST amounts to INR 12,500. Here also the only invoice is raised, without actual movement of goods. In this transaction, M/s. C has availed Input tax credit of INR 15,000 and paid only INR 12,500, meaning thereby that M/s. C will carry forward Input tax credit of INR 2,500.

The objective of circular trading

After understanding the circular trading, it is more important to understand the objective, i.e. purpose of circular trading. The main objective of circular trading is inflating turnover of the business. However, through circular trading, companies may also aim to:

• To increase the valuation of the company/business;
• To benefit higher loans from the Banks or Non-Banking Financial Corporation (NBFC);
• To bring black money into the system;
• To avail fake input tax credit.

The consequence of circular trading under GST

Section 132(1)(b) of the Central Goods and Service Tax Act, 2017 covers the situation, wherein, the person issues invoices without actual supply of goods (i.e., circular trading). Further Section 132(1)(c) covers the situation, and wherein the person avails input tax credit based on the invoice so issued without actual supply of the goods. The section states that in both the case, the punishment would be as under:

Amount of tax evaded or wrong availment of input tax credit	Punishment
More than INR 5 Crores	Maximum imprisonment of 5 years with a penalty fee.
INR 2 Crores to INR 5 Crores	Maximum imprisonment of 3 years with a penalty fee.
INR 1 Crore to INR 2 Crore	Maximum imprisonment of 1 year with a penalty fee.

It should be noted here that the punishment, as mentioned above, are cognizable offence and nonbailable.

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ARNOLD T
Post By IndiaFilings.

Updated on: December 17th, 2019