Government detected defrauding the GST System of Thousands of Crores.
- The Goods and Services Tax (GST) that was intended to bring a system of one nation one tax. But there have been cases of new structures being created in order to avoid paying taxes
- Recently, Government has detected GST evasion to the extent of ₹38,896 crores in the period April-October 2018.
How GST is being evaded:
- Through Input Tax Credit – According to the report, traders buy fake bills which enable them to claim input tax credit on the supply which never happened. Input tax credit is an option in the GST which allows the taxpayers to claim credit for the taxes paid on purchase.
- For example, by selling fake invoices (of a good or service which attracts 18 per cent GST) of say Rs 500 crore, one can make Rs 5-10 crore. The buyer of these invoices then can claim input tax credits of 18 per cent or Rs 90 crore.
- Another example, where goods are sold to one customer (who did not ask for an original bill) and the bills are sold to some other person, who could claim tax credit. The buyer and the seller both share the booty while the facilitator gets a 2 percent commission.
- Inter-state movement – Companies use this technique to move goods from one state to another state. Once the vendor in the state which receives the good claims input credit the vendor in the state who sells it vanishes
- Billed versus unbilled revenue: Several smaller entities including pharmacies and grocery chains do not prepare bills for transactions. Only those who insist on them are given bills. This can be used to hide revenue earned as long as the cash is not deposited in bank accounts.
- Backdate transactions: One of the most common methods used to avoid paying taxes is to backdate the transaction to a particular day which is convenient to both the payer and the claimant.
- Changing product category: One of the mechanisms which some companies use to avoid paying taxes or cut down on tax is to change the category of product that they manufacture. GST tax rates have been revised for 80,000 items in the country depending on the type of product and the ingredients used in its manufacturing. Hence, a chocolate could be categorized as a candy, cocoa-filled confectionary, candy, biscuit or wafer-coated biscuit.
- Threshold exemption limit: Those with a turnover of Rs 20 lakh or below are exempt from GST. Smaller tax consultants are also seeing a demand for splitting larger businesses into smaller multiple units to claim tax relief.
- Trade in exempted goods: Several products including puja products, khadi, agricultural equipment, earthen pots and local handicrafts are exempt from taxation. Tax experts said that entities, especially, in South India, dealing primarily in puja articles and products, have been seen to change the category registration to ‘religious articles’ to avoid taxes.
- Change registration location: Underdeveloped areas like the North-East have access to tax holidays as an incentive. Companies operating in those areas are also giving tax-breaks to boost their business which is in fact misused by smaller entities to incur zero taxes. Often these ‘registered offices’ are unmanned and exist only on paper
To deal with rising input credit frauds, the GST Council has adopted invoice matching mechanism
What is invoice matching mechanism
- Invoice matching is a concept wherein all the taxable supplies procured by a buyer and supplied by a seller are matched. The Government, through this concept, seeks to ensure the accurate transfer of Input Tax Credit (ITC) between the states and the parties in a transaction.
CENVAT Credit Rules
- CENVAT credit is a credit in respect of central excise on inputs purchased for the manufacture or duty paid in relation to the manufacture of the final product
- Under CENVAT Credit scheme, the benefit of excise duty on inputs is available, instantaneously, when the inputs reach the factory. There is no need to establish any linkage between the inputs and goods manufactured.