Gst Evasion Using Dummy Invoices

The GST Investigation wing has issued an SOP on detecting and tackling dummy invoice fraud to the GST Council. The usage of dummy invoices and tackling of the same by the Government are explained in this article.

Input Tax Credit

To understand the dummy invoice fraud in GST we must first understand the concept of

Input Tax Credit

and how it is used in India. When a buyer pays GST on goods or services purchased, the said buyer can then claim Input Tax Credit on GST paid on a sale either after processing the goods or a resale of the same goods, to another customer. In other words, suppose a buyer incurs Rs.250 on GST when purchasing books from a seller. Then, the buyer, in turn, sells the books to end customers charging a GST of Rs.450. The net GST that needs to be paid to the Government on books sold will be only Rs.200 (Rs.250 will be adjusted or deducted from Rs.450). Thus Rs.250 becomes the Input Tax Credit for the buyer that can be claimed from the Government.

Dummy Invoices

The registered taxable person would issue “dummy invoices” (otherwise known as "fake invoices") with an intention to cheat the Government and claim Input Tax credit without actually paying the GST in the first place. The following are some of the ways this fraud is perpetrated:

No GST paid

: The buyer gets a dummy Invoice from the seller. Here the seller has not paid any GST to the Government but has issued the

Invoice

with GST paid amount.

No goods or services sold

: The seller issues a dummy or fake invoice to the buyer but no transfer of goods or services has actually occurred in reality. It is all just on paper.

Invoice and goods issued to two different entities

: The seller issues invoice to one entity but goods are transported to someone else.

Routing through shell companies in a cyclical manner

: There are several shell companies through which the invoices are routed. This results in the transfer of input tax credit in a circular manner that ultimately boosts the turnover spuriously. This is done by dummy eWay Bills to show the movement of goods and dummy invoices.

Tackling Dummy Invoices

The following are the SOP to tackle the dummy invoice fraud:

Identification:

The very first task is to identify entities that are committing this fraud. This includes both the creators of dummy invoices and the users of such invoices. There are some risk factors that signal the presence of such entities:

Multiple GSTIN registrations with the same address, email, common mobile numbers, common signatories and promoters
Multiple GSTIN with the same PAN
Incomplete or incorrect address furnished during GST registration
The mismatch between the area of premises and the goods transaction volume
The mismatch between the total number of E-Way bills generated and quantity transacted
GSTR-1A or GSTR-2A have the PAN number of such fraud entities
Input Tax Credit utilization is abnormally high, e.g. over 95%

Investigation:

The next task is to prove that dummy invoices had been issued by such entities. The following are the steps that can be taken during the investigation:

Conducting a comprehensive search in all declared premises to prove a lack of manufacturing facility.
Checking the power and water consumption amongst other parameters in the premises and comparing with the quantum of manufactured goods.
Understanding space and facilities available on the premises and assess whether it is feasible to accommodate goods manufactured.
Checking all clearances, licenses, and permissions from authorities.
Complete Assessment of E-Way bills issued or lack thereof including validating vehicle numbers provided in the E-Way bills using the RTO database.
Any mismatch in details supplied to other Government departments like Income Tax, Company Registrar, etc.

Action from the Government:

The final task is to take comprehensive steps to penalize such entities such that it does not occur in the future. The following are the actions that can be taken:

Cancelling the GST registration of such fraudulent entities.
GSTIN of entities flagged for frauds is added to the database. In the future, if someone purchases invoice using the flagged GSTIN then automatic alerts are generated to the authorities.
Re-registration of such entities to have a process separate from the normal process. For instance, it could require mandatory physical verification.
The Input Tax Credit that were availed based on dummy invoices from the entities will be recovered. Also, all the past transactions will be reviewed and checked for fraudulent invoicing.
Provisional attachment of property and also properties of Directors of such entities if criminal involvement is established.
To the extent of blocking the Input Tax Credit of such entities can be done.

The standard operating procedures (SOP) to the GST authorities can be accessed below for better knowledge on tax evasions using dummy invoices:

Open PDF in new tab

Back to Learn

Frequently Asked Questions

Common questions about GST Evasion Detection: Tackling Dummy Invoice Fraud Strategies.

A dummy invoice fraud in GST involves the issuance of fake invoices by registered taxable persons to claim Input Tax Credit (ITC) without actually paying the GST or transferring any goods or services. It is a form of tax evasion where businesses attempt to defraud the government by claiming fraudulent ITC.

Businesses can perpetrate dummy invoice fraud in several ways, such as issuing invoices without paying any GST, issuing invoices without any actual transfer of goods or services, issuing invoices to one entity while transporting goods to another, or routing invoices through shell companies in a cyclical manner to boost turnover spuriously.

Some risk factors that signal the presence of entities committing dummy invoice fraud include multiple GSTIN registrations with the same address, email, mobile numbers, or signatories; mismatch between premises area and transaction volume; abnormally high ITC utilization; and incomplete or incorrect address details provided during GST registration.

Authorities can investigate dummy invoice fraud by conducting comprehensive searches of declared premises, checking power and water consumption, assessing the feasibility of manufacturing facilities, verifying clearances and licenses, and validating E-Way bill details. Actions taken include canceling GST registration, recovering availed ITC, attaching properties, and blocking ITC of fraudulent entities.

The consequences of being caught for dummy invoice fraud can be severe. Authorities can cancel the GST registration of fraudulent entities, recover any Input Tax Credit availed through dummy invoices, review and check all past transactions for fraudulent invoicing, provisionally attach properties, and even block the ITC of such entities.

Businesses can ensure compliance and avoid dummy invoice fraud by maintaining proper records, verifying the authenticity of suppliers and their invoices, conducting due diligence on business partners, and implementing robust internal controls and risk management processes. Additionally, they should stay updated on the latest regulations and guidelines issued by the GST authorities.

E-Way bills play a crucial role in detecting dummy invoice fraud. Authorities can validate the details provided in E-Way bills, such as vehicle numbers, against the RTO database. Any mismatch or lack of E-Way bills for the quantum of goods transacted can signal potential fraud.

The routing of invoices through shell companies in a cyclical manner contributes to dummy invoice fraud by enabling the transfer of Input Tax Credit in a circular manner, ultimately boosting the turnover spuriously. This is done by using dummy E-Way bills to show the movement of goods and dummy invoices.

The Standard Operating Procedures (SOP) issued by the GST Investigation wing provide a comprehensive guide for detecting and tackling dummy invoice fraud. It outlines the risk factors, investigation steps, and actions that authorities can take against fraudulent entities, ensuring a standardized and effective approach to combating this form of tax evasion.

Businesses can stay informed about the latest developments in dummy invoice fraud detection and prevention by regularly monitoring updates from the GST authorities, attending seminars and workshops conducted by tax professionals, and subscribing to relevant industry publications and newsletters. Additionally, seeking guidance from experienced tax consultants can help businesses stay compliant and avoid inadvertent involvement in such fraudulent activities.