In India, majority of business class population comes from middle class and what business they do is of no relevance here but how they do is of utmost relevance.

We all know the concept of sole proprietorship and partnership firms and yes this “firm” is the way in which how majority people work.

Did you notice the increasing GST frauds are originating from the fake invoices?

Undoubtedly, the frauds are getting traced by the department but just think and answer to yourself that whether all the frauds are getting traced or reported?

We all know the answer is No and it is impossible too but shall we continue like this only? Let’s understand.

The Fake Invoices:

Recently, we came to know about few bigger scamss in which the fake ITC (Input Tax Credit) was claimed by the assessees.

How does this happen?

This all starts with creating a nexus of firms in which no real flow of goods take place but still invoices are generated at multiple points and fake ITC is claimed. In short, The concept of “Supply” is completly destroyed.

Are these firms really a part of shell firms?

The answer is No. Few days back, I had a conversation with a businessman and he informed me that usually he get proposals from so many people for doing “Invoice Business” and he asked me whether he should accept it or not?

It was his wisdom that before taking my opinion he had already rejected all the proposals but he was surprised to see the financial growth of the proprietors of his neighbor firms, so he decided to consult someone.

So, after talking to him I came to know about the whole nexus.

Earlier, I used to think that this all works with the help of shell firms but I was wrong completely. Actually what is happening, Real & Genuine firms are selling their invoices without supplying goods and in turn claiming ITC against those goods.

The actual unsold goods which were invoiced but not sold are then sold in cash.

For example:

Suppose M/s ABC Associates has purchased some goods in respect of which the firm is having ITC of Rs. 1,00,000.

Legally, The firm have to claim this ITC by selling these goods via issuance of invoice but Now the firm has been approached by M/s MNO Associates and they ask M/s ABC Asso. to issue few fake invoices against which M/s MNO Asso. will pay Rs. 5,00,000.

Now try to understand it slowly,

1) GST liability arises on the sale of these invoices by M/s ABC Asso. say Rs. 2,50,000.

So, M/s ABC Asso. will pay GST of Rs. 1,50,000 after setting off/claiming its ITC (2,50,000 – 1,00,000)

But, actually the goods are still lying with the firm and now these goods will be sold by the firm to the customers in cash and again the firm will earn money on the same goods and also there will be no GST liability on the firm.

This looks easy. Isn’t it?

But this is not so easy and that’s why the fraudsters are getting caught.

The mechanism of GST works in a chain in which there are multiple parties involved and one party depends completely on other for claiming ITC. So, initially few people with guilty mind creates this nexus in which the person doing end sale to the consumer i.e. Registered Retailer is also involved so that the goods can be sold be in cash at the end because ultimately goods are also required to be released in the market otherwise Fresh ITC cannot be gained.

2) Now let’s see the picture from the side of M/s MNO Asso.

This firm has recorded purchase of Rs. 5,00,000 from M/s ABC Asso. in his books in respect of which the firm will claim ITC of Rs. 2,50,000 but there is no actual inflow of goods.

The firm will purchase the same goods in cash which were fakely invoiced and for ease of understanding just suppose the cash purchase is from ABC Asso. and these goods were then sold to customers in cash.

You might be thinking that what is the benefit to M/s MNO Asso. as the firm is paying twice for the same goods. Once via invoice and secondly in cash.

Let me show you the game.

MNO Asso will further sell the invoice without goods and will earn from invoice the purchase price of “invoice” and the profit and will also claim ITC on this sale while discharging its GST liability.

After that the goods will be actually sold in cash and dual profit will be earned

This is a very small example. Real evasions are done on a huge level. Like this only, multiple parties are involved and nexus is created so as to show the whole transaction as genuine. If you know about the Money Laundering, then this is something similar to that.

Did you notice, the fraudster firms are doing two businesses:

1) Selling of Goods

2) Selling of Invoices

Now the other part:

The functioning and registration of firms:

In India, setting up a firm is the most convenient way of doing business. No much formality, least compliances, no checks, hassle free environment and this is somewhere the real reason behind these evasions.

Mandatory Regulatory Body Not Assigned:

We all know that most of the firms which are getting registered under GST are nowhere else registered and also there no such requirement for that. Even the partnership firms are not mandatorily required to get registered under The Partnership Act, 1932.

What it all need is a notary registered partnership deed and yes then they become a legally permitted body to do whatever they want till the time they are caught.

The firms registered under MSMED Act, 2006 are still more regularized because there are checks at various points in the execution.

So, there is need for a regulatory body for firms either it is a proprietary firm or a partnership firm. This can also be done by investigation wing of GST department itself or on the similar grounds a body can be formed which will also help other authorities for keeping an eye on the work of these entities.

This will create some hurdles for the honest businessmen but what we all need to understand is the proper functioning of all the firms so that the dishonest can be caught easily.

Here, what a govt. can do is mandatory surprise checks on area level by the departmental people and the checks should not hamper the peace and business of anyone rather the checks can be done in a fictitious identity of a customer. Alternatively, complaint mechanism on area level can also be there where a customer can report the cash sales, fake invoices etc. but this all needs Registration of firms initially in a particular act. As I said earlier, this can be done in GST regime itself.

Consumer Courts are already burdened and it handles dispute between customer and entity so these courts are not appropriate for this work.

The Other Important Aspect: Professional Immunity

You might have heard about the cases where few firms alleged of doing illegal business or tax evasions are caught and initially, the Chartered Accountants who were involved in the registration of those firms were arrested. But here the question is Why? Is Registration Process a Conclusive Proof of Genuineness?

Specifically talking about the registration of firms, Chartered Accountants just help people in getting their businesses registered under GST on the basis of the documents they produce to them.

First of all they are not authorised at the point of registration to do legality checks of these businesses. Either govt. should give exclusive powers to the professionals because A CA can’t do audit of the business before its inception.

Further, what a CA can do if client involves in fraudulent activities post registration?

So, there is only one solution to all the evils and that is “Mandatory Registration of Firms under some act leading towards Regularisation of Firms”

Appeal to ICAI:

ICAI is having a robust mechanism under which students are trained and ultimately formed as professionals but what if honesty itself starts creating problems for the professionals? The cases where Chartered Accountants are getting arrested should be handle by the ICAI itself and after the initial inquiry the cases should be transferred to civil courts and then only the arrest should be conducted. I am not at all talking about the scams which are identified after the audits and inspections by the govt. departments like CBI. What I am talking about is the Arrest without any evidence merely because a CA has registered a firm. This way a CA can’t work. ICAI should provide professional immunity to its members in these cases via immediately after the FIRs the cases should be refer to ICAI Disciplinary Committee and then accordingly it should be dealt with.

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Qualification: CA in Job / Business
Company: N/A
Location: Panchkula, Chandigarh, India
Member Since: 12 Jun 2019 | Total Posts: 29
Published Author - An Insight Into Tax Audit by Young Global Publications, New Delhi View Full Profile

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May 2021