An auto rickshaw driver in Pune and a fake company registered in his name were at the heart of an elaborate Goods and Services Tax (GST) scam unearthed by the Directorate General of GST Intelligence (DGGI) authorities last week involving an amount of Rs 5,000-Rs 8,000 crore. The accused in the fraud are alleged to have registered as many as 246 fake GST firms to commit the multi-crore fraud. Using these fake firms, the accused would use stolen personal identities, and multiple bank accounts to undertake the fake GST transactions without any real supply of goods or payment of tax to the government.
Many suppliers also undervalue their final goods and show purchase of raw materials at lower rates. Or, they supply taxable goods and services without the due payment of GST to the central and state governments.
Non-payment of taxes.
The GST evasion formats
There are broadly four categories of GST evasion and frauds — short payment of tax by undervaluing taxable supply; supply of taxable goods and services without payment of tax; non-payment of tax under reverse charge mechanism; and wrongful availment of input tax credit (ITC) through fake claims.
Non-payment of tax including clandestine supply, undervaluation etc constitutes the major chunk of the GST fraud cases, followed by fake ITC, wrong availment of ITC or blocked credit, among others. But, the most complicated layers of frauds are seen in cases involving fake ITC, an official said.
Fake ITC cases have evolved from being typically controlled by masterminds to new-age specialisation, wherein large and more complex web of layers exist for such fraudulent transactions. “Fraudulent ITC ecosystem has evolved into a marketplace. Fake firms, fake invoices, fake KYCs (Aadhaar, mobile numbers, PAN cards, address proofs) are created fraudulently and sold in the market through intermediaries on a commission basis. Since these cases then become more about identity theft in the first place, GST authorities then involve police also to solve such cases,” the official said.
The main cause of concern, however, for authorities goes deep into the multi-layered nature of the crime setup for GST fraud. “By the time, the tax authorities unravel the last layer, most of the fake credit availed by them is exhausted or transferred through a complex web of entities. That’s why the detection amount is more than the recovery in such cases,” the official explained.
Fake invoicing, fraudulent availment of ITC across various sectors of Goods and Services.
The modus operandi
For cases involving undervaluation, most entities engage in misclassification of the items purchased to suppress the value of the materials purchased. In one such case in Jaipur last year, plywood and board manufacturers were evading GST by undervaluing their finished goods by 60-70 per cent. In purchase of inputs like core veneer, invoices mentioned the length and width but did not mention the details of thickness and reduced the invoiced value by 40 per cent. Investigations of 25 such manufacturing units had then uncovered GST evasion of about Rs 20 crore.
For supply of taxable goods and services without payment of tax, cases have been seen wherein services were being provided on the payment of an upfront fee but without any payment of GST. For instance, in a case in Mumbai last year, a taxpayer involved in brand licensing services had licensed their brand to someone for over 20 years for an upfront fee of Rs 2,494 crore but did not pay GST on payments on this supply. On investigation, the taxpayer then paid Rs 382 crore voluntarily to the GST authorities. In another case in Mumbai only last year, several taxpayers were found to be involved in transferring leasehold rights in industrial properties through MoUs, agreements, deeds. Initially, the entity allotted industrial plots for 99 years to the original lessee on June 28, 2017, a transaction which was GST exempt and then while transferring the rights, the original lessee then assigned their sub-leasehold rights to another taxpayer, which was liable to be charged under GST. The DGGI then detected Rs 505 crore of evasion, leading to voluntary payment of Rs 196 crore in 227 such cases.
In the case of fraudulent ITC and fake firms, as was the case in Pune last week, one set of the accused were obtaining sim cards with fake identities and bank accounts were opened fraudulently using KYC documents of common people. Then, fake GST firms were being opened and another set of accused were selling fake GST firms and bank accounts to people.
Earlier in May this year, Noida police authorities had arrested 41 people, detected around 2,660 fraudulently registered firms involving fake ITC worth Rs 5,300 crore generated using some 15,300 crore bills in a three-tier GST evasion scam. The accused would frequently change phone numbers, use high-end luxury cars to move across state borders and then check into upmarket hotels with fake identities in the evenings and operated in the Delhi-Noida-Lucknow belt without being detected by authorities for well over six months.
The plot had been unravelled after a Noida-based individual had reported a case of identity theft last year and it was then found that there were fake GST registrations in his name, following which the police started investigating the case in May 2023. The Noida police had caught the racket for misusing identification documents and creating fake firms and GSTINs (GST identification numbers) and shared the data with the DGGI.The data was then shared with the Financial Intelligence Unit (FIU), which then found around 8,000 GSTINs to be linked to these risky mobile numbers, Aadhaar and PAN. The first layer of the scam was related to fake GST registrations with identity theft and forged documents; the second layer involved fake billing; and the third layer was linked to securing fraudulent input tax credit using fake bills under GST.
The evasion numbers
In the financial year 2023-24, tax evasion of Rs 2.01 lakh crore was detected by the DGGI, nearly double from Rs 1.01 lakh crore detection in the previous financial year under the GST regime, as per the data by the DGGI. Mumbai topped among zones with the highest amount of GST detection of Rs 70,985 crore, followed by Delhi (Rs 18,313 crore), Pune (Rs 17,328 crore), Gurugram (Rs 15,502 crore) and Hyderabad (Rs 11,081 crore). Including the detection of frauds in CGST zones in 14,492 cases, the total GST evasion detected was over Rs 2.37 lakh crore in 20,576 cases.
The evasion trends were seen among both goods and services. Among services, real money online gaming (Rs 81,875 crore evasion in 78 cases); and banking, financial and insurance sectors (Rs 18,961 crore evasion in 171 cases) were identified to be the most evasion-prone sectors. Among goods, iron, copper, scrap & alloys (Rs 16,806 crore evasion in 1,976 cases), and pan masala, tobacco, cigarette and bidi (Rs 5,794 crore evasion in 212 cases) were registered as the sectors most prone to GST evasion in FY24.
The detection of GST evasion by DGGI has been steadily rising since the rollout of GST in 2017. In 2017-18, Rs 7,879 crore of GST evasion was detected, followed by Rs 19,319 crore in 2018-19, Rs 21,739 crore in 2019-20, Rs 31,908 crore in 2020-21 and Rs 50,325 crore in 2021-22.
