The scourge of evasion of GST

Tax assessments today are entirely trust-based. The taxpayers self-assess and pay what they determine is the tax due. The returns filed indicating the liability are a key to enable risk-based audit and controls. This is more so in a credit-based tax system like the GST which operates on the system of ensuring there is no tax on tax. The credit of tax paid at the earlier stage is available for discharge of liability created at a later stage. The GST regime's USP is this. Hence to the extent of the credit availed there is lesser revenue available with the government.

While it is not anybody's case that such credit should not be available, it also cannot be anybody's case that credit which is not due is availed. In the GST regime, this becomes even more important since the silos of the pre-GST regime have been removed and seamless flow enabled. As has been pointed out, "VAT is the only tax that requires Government not only to collect substantial money but also pay much of it back to the same people in the form of input tax credits." An invoice, which keeps a record of the sale, provides a way to track the date on which goods were sold, how much money was paid and any outstanding debt, is thus a key document.

An invoice constitutes a potential claim on public funds. Hence the emphasis on invoices in the GST law. The law thus stipulates that every taxable person supplying goods or services, issue a tax invoice showing description, quantity and value of goods, the tax charged thereon. Similarly, the provisions dealing with returns prescribe the number and manner of filing returns accompanied with invoices.

It is in this background, the unscrupulous resort to creating companies which are in existence only to generate invoices. Registration of a company under GST is online and automatic. Once registered, the fraud commences. Instances of up to several hundred companies having been created in one complex web of deceit have been noticed. No supply of goods takes place; neither is any payment made. Credit however is availed on the basis of these invoices by a sister concern. This credit is used to discharge tax liability. And worse, in very many cases of export which in the GST regime are zero-rated, even refund of input taxes is sought on the basis of these fraudulent invoices!

The government ends up getting lesser revenue than what is due, since in the absence of credit, tax liability would have been discharged in cash. Such companies are invariably fly by night operators, who shut down after about six months to escape detection. This, when the fiscal position of the government is bad and real GDP estimated to be falling to 8.2 percent this year, is criminal.

The law stipulates the matching of the details of inward supply with the corresponding details of outward supply and penal consequences, where such matching does not take place. Unfortunately, in the initial days of the roll-out of GST, technology was not in place to facilitate such matching. This is a lacuna which is being addressed now. Thus e-invoicing has been introduced from October 2020 for all B2B supplies above a certain threshold.

Issuance of an invoice or bill without supply of goods or services and wrongfully availing or utilisation of input tax credit on a bill/invoice, without any supply of goods or services, is a cognizable and non-bailable offence. And the GST law also provides for the arrest of persons found to be indulging in these offences. While arrest in a fiscal law is always harsh, the damage caused by such evasion is immense and needs to be dealt with firmly.

The tax gap, or the difference between what ought to be collected as tax revenue and what is actually collected, has always been a matter of concern for tax administrations the world over. How much is the gap is also always a matter of conjecture-or like the typical classic reply to a Parliamentary question would suggest "since evasion is a clandestine activity it would be difficult to give an estimate of the extent of evasion". While estimates in India vary wildly-taking of fraudulent credit is by far the single largest contributor.

As has been noted by Prof.Joel Slemrod, no government can announce a tax system and then rely on taxpayer's sense of duty to remit what is owed. Technology-driven matching of returns and data analytics is the key. In the meantime, firm action in the form of intelligence-driven enforcement action and audit is essential. The government cannot afford to lose revenues due.

 

—Najib Shah is the former chairman of the Central Board of Indirect Taxes & Customs. The views expressed are personal