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GST system prone to input tax credit frauds: CAG

CAG (Comptroller and Auditor General) said, GST mechanism was rolled out 2 years ago with aim of simplified indirect tax regime and eliminating the tax evasion to the higher extent, and made credit for input taxes available through the value chain.

but, that system is vulnerable to fraudulent Input Tax Credit (ITC claims) and has also slowdown in tax revenue growth.

Report stated that “due to the complexity of return mechanism and the technical glitches in the system leads to invoice-matching, rendering the system prone to ITC frauds. Thus, on the whole, the envisaged GST tax compliance system is non-functional”.

CAG considered a serious lack of coordination between the executive and the developers (of GSTN, the IT platform) for the deficiencies in the mechanism.

If we talk about the centre’s revenue, there is a decline of 10% revenue in 2017-19 as compared to the previous year from taxes on goods and services subsumed in GST.

So, the overall growth of indirect taxes collected by the Centre slowed from 21.3% in 2016-17 to 5.8% in 2017-18.

In case of fake invoices, Central GST Authorities booked cases of fake invoices involving fraudulent ITC in GST. A total of 1,620 such cases involving an amount of ₹11,251 crore were detected in 2018-19.

Even during current fiscal (between April 1 and June 25), 535 cases were recorded involving total amount of over ₹2,500 crore. Authorities arrested 154 and 40 people during these two years, respectively.

And about the monthly returns trend, only about 70% of eligible taxpayers have been filing GSTR-3B returns till the deadline. Moreover, GSTR-1 filing is considerably lower than this at around 60% of eligible taxpayers.

 In order to eliminate evasion and assessment cases, the manual system may no longer be necessary (returns themselves can be generated by a system that matches invoices); and cases of evasion etc., can be traced by applying analytical tools and AI to the massive data that crores of invoices generate.

As per GST Rules, for claiming ITC by taxpayer, the same should be paid by the supplier. This claiming provision was supposed to be ensured through the provisions for matching of invoices of ‘suppliers and recipients’ through filing of returns GSTR-1 and 2 and generation of monthly return GSTR-3 with taxpayer adding details of tax paid in GSTR-3.

However, filing of GSTR-2 return had not yet activated and taxpayers were allowed to claim ITC in GSTR-3B return on self-assessment basis and without any such cross-verification.

An instance took place where a taxpayer in Andhra Pradesh claimed excess IGST credit of ₹6.45 lakh crore while the GSTR-3B in July for June 2018 and this was brought to the notice of GSTN by audit on August 21, 2018, after that he revised the same on August 28, 2018.

Thus, “unrealistic erroneous claim of ITC of IGST by one taxpayer, representing 79 per cent of total ITC claim by all taxpayers for a month was allowed by the system” such cases exposing the vulnerability of the system to fraudulent ITC claims.

CAG emphasis that for protecting the revenue of both center and state government, “Invoice-matching is the critical requirement that would yield the full benefits of this major tax reform”.

Author: Niranjan Reddy

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