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Think twice before tax fraud, the authorities are on to you with AI

Post-GST rules have created a host of tax evasion methods. But the tax department has new tricks up their sleeve

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In pre-GST indirect tax regimes, businesses wanting to evade taxes would not issue genuine tax invoices to the customer. With GST came the concept of Input Tax Credit (ITC), a device planned to avoid double taxation by taxing only the value addition at each step, which also incentivised business entities to issue genuine tax invoices as it would be necessary for claiming ITC on the taxes already paid through the suppliers.

Input tax credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs and pay the balance amount.

However, novel schemes are being used to sabotage this mechanism. The most dangerous and widely used tactics are the menace of fake invoicing and fraudulent ITC claims.

Also Read: Why Kanpur traders protested over Yogi’s GST raids — ‘heavy fine for discrepancy of even Re 1’

Skirting tax rules

Despite the ITC mechanism, tax evaders and fraudulent taxpayers resort to suppression of sales by not issuing genuine tax invoices to end consumers.  Such taxpayers only declare as much sales as are tax covered by using ITC availed from their suppliers. As a result they are able to evade taxes on the value addition at their end.

This practice can be caught by regularly checking the stocks of taxpayers, which, in the above scenario will not match the difference between purchases made and sales disclosed. The difference can be calculated from ITC accumulated and the opening stock and comparing the same to the sales shown. Regular stock-checking exercises have begun in the tax jurisdictions of the Union territory of Jammu and Kashmir and are yielding impressive results.

An even more sinister and dangerous trend has come to the fore in the form of registrations of nonexistent and fake business entities, fake invoicing without actual supply of goods and services and circular trade rackets. Many taxpayers are not just suppressing sales beyond tax liability covered by ITC but also passing on the ITC accumulated on their purchases to fake entities by raising fake invoices without actual supply and receipt of goods or services.

Instead of showing sales to end consumers by issuing genuine tax invoices and reflecting them in their GST returns, the suppliers of these fake invoices are able to reduce their stocks in books of accounts and avoid sale purchase mismatches. Besides, they also get a commission on the ITC passed to fake entities who have found ways to convert such ITC to cash.

The fake entities created and registered, accumulate huge and unnatural amounts of ITC by the above methods and then attempt to cash this ITC. This is done in many ways including by exploiting the distortions created by the inverted duty structure where the output supplies are taxed at a lower rate than the input supplies. Scrap dealers are one prominent example, they may show input supplies from various entities including fake invoice traders while showing scrap as their output supply, thus exploiting the tax difference to convert fraudulent ITC to cash.

Some contractors also show fake purchases from such entities in order to evade tax by showing minimum expenditure on the labour component and paying their tax liability through the fake ITC sourced by fake invoices created in lieu of highly inflated input material supplies; often in violation of the terms of contract.

It has also been observed that genuine and non-genuine taxpayers create a circular chain of ITC trade, starting and ending at the same taxpayer. Known as circular trade, it works like a circular conveyor belt where the ITC accumulated on account of suppression of sales is cashed round after round till it vanishes from the system.

Apart from cashing accumulated ITC, malicious taxpayers also become part of such fake invoicing rackets in order to avail fraudulent ITC refunds, to show increased turnover for a higher valuation, to obtain large bank overdraft facilities, and at times to avail export refunds.

Also Read: GST’s ‘give-and-take’ attitude has dried up. India needs a system overhaul

Tightening the checks

These menaces have emerged as the biggest challenge to the GST taxation system, affecting the revenues of both the Union and State/UT governments. As a result, tax authorities have increased their focus on combating it. Advanced data analytics, machine learning and artificial intelligence tools like Business Intelligence and Fraud Analytics (BIFA) are being put to use to identify suspicious supply chains.

Certain patterns have been useful in identifying fake ITC chains. These include multiple registrations against a single PAN and incorrect or fake addresses in registration details, huge purchases from return non-filers, unnatural increase in turnover, mismatch in HSN (Harmonized System of Nomenclature) of purchases and HSN of sales, mismatch in the volume of transactions in monthly returns compared to E-Way bills generated, frequent high-value transactions not commensurate with the scale of business, and huge ITC to cash ratio. HSN is a systematic classification identifying goods and services.

GST Act provides wide-ranging powers to tax authorities in order to combat such practices, these include the power to block ITC (Rule 86A(1)), impose monetary penalties (Section 122) and in ITC frauds beyond a threshold to even arrest tax offenders. Under section 132 of the GST Act, such offences have been made cognizable and non-bailable.

The GST administration in the Union Territory of Jammu and Kashmir is fully cognizant of the gravity of the problem and has given full attention to combating it. Many fake invoicing chains have been identified, proceedings have concluded in some cases and are underway in others. Special and dedicated MIS (Management Information System) cells and investigation units have been deployed for this purpose. Informed enforcement actions based on the latest data analytics have taken place and others are in the pipeline to combat and eradicate the problem of suppression of sales, fake ITC, circular trade, fake invoicing and other forms of tax evasion. It is hoped that in the coming months, decisive results will be visible on this front.

The author is the Additional Commissioner State Taxes, J&K government. He leads the tax administration for Kashmir Division. Views are personal.

(Edited by Theres Sudeep)

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