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:

SOP-for-Tackling-Fake-Invoice

Tags: GST Penalties