Combating GST Fraud in India: Technology and Enforcement

India’s GST Revolution: Tackling Tax Evasion Through Technology and Enforcement

Introduction

India’s major economic reform i.e. advent of GST completed eight years on 1^st  July 2025, leaving a major milestone. During the course of journey., GST revenue achieved a record Rs.22.08 lakh crore in 2024–25, with an average monthly collection of about Rs.1.84 lakh crore, indicating robust compliance and a more formalized economy. Active GST registrations crossed 1.52 crore by April 2025, reached more than 100% raise from 65 lakh in 2017, indicating expanded economic activity. The GST regime turned from manual filing to fully digitized compliance processes, including e-invoicing, e-way bills, automated returns, and real-time credit matching, reducing both fraud and errors. Support for MSMEs by changing threshold limits for GST registrations enhancing market participation. As India moves into the ninth year of GST, the focus remains on consolidating reforms, enhancing stakeholder trust, and ensuring GST remains an engine for inclusive economic growth and competitiveness.

Following the completion of eight years of GST implementation in India, clandestine transactions and tax evasion have been curbed when compared to the pre-GST indirect tax regime significantly but not completely eliminated. This article focussed on Combating Fake Transactions in India’s Goods and Services Tax (GST) Regime with a Comprehensive Analysis of Fraud, Impact, and Enforcement

Executive Summary

Clandestine transactions under Goods and Services Tax (GST) regime in India represents a significant and unfolding difficulties to be addressed, primarily driven by fraudulent Input Tax Credit (ITC) claims. These activities, though not explicitly defined in GST law, are characterized by the absence of actual supply of goods or services, the misuse of GST Registrations, and the payment of collected taxes to the government’s exchequer. The volume of detected GST evasion, largely attributed to fake transactions, has reached crores of rupees over recent years, causing substantial revenue loss to the government and distorting level playing field. Legitimate businesses, particularly Micro, Small, and Medium Enterprises (MSMEs), often bear the brunt of increased scrutiny and operational disruptions due to the actions of fraudulent entities.

This article focussed the tax evasion methods followed by fraudsters, including the floating of shell companies and circular trading. It highlights the robust legal framework under the Central Goods and Services Tax (CGST) Act, 2017, and the Prevention of Money Laundering Act (PMLA), which imposes severe penalties, including imprisonment and asset attachment. Crucially, the report underscores the government’s escalating efforts, leveraging advanced technologies like Artificial Intelligence (AI) and data analytics, e-invoicing, and Aadhaar authentication, alongside targeted enforcement drives, to detect and deter these frauds. Recent high-profile cases illustrate the ongoing crackdown.

Defining Fake GST Transactions

Absence of Explicit Legal Definition and Practical Interpretations

The Goods and Services Tax (GST) law in India does not formally define “fake GST invoices” or “fake transactions.”. However, Enforcement actions resorted by the government as well as judicial interpretations are concerned, the characteristics of a fake invoice or transaction have become well-defined. In common parlance,  when an invoice is generally considered fake if it is generated by an entity without any actual delivery of goods or services, or if the GST collected is not remitted to the government treasury. This adaptive approach enables authorities to respond to novel fraud schemes as they emerge, but it also places a higher onus on businesses to remain vigilant and understand the evolving interpretation of what constitutes a “fake” transaction based on these identified characteristics.

Key Characteristics of Fraudulent Invoices and Transactions

Fraudulent GST transactions exhibit several distinguishing characteristics:

(i) No Actual Supply of Goods or Services or Both indicating that the issuance of an invoice without any physical movement of goods or actual provision of services. Such transactions exist purely on paper.

(ii) Non-Payment of Tax to Government – when GST is charged to and collected from the recipient but the issuer of the invoice fails to deposit this collected tax with the government treasury.

(iii)Misuse of GST registration , this can involve using a GSTIN that has not been legitimately assigned to any business, using a valid GSTIN without the actual owner’s authorization, or continuing to use GSTINs that have been suspended or deregistered.

(iv) Genuine GST invoices are required to contain 16 mandatory fields, including the name, address, and GSTIN of both the supplier and recipient. Invoices lacking these vital details or containing incorrect information are highly suspicious and likely to be fake.

(v) Fraudulent ITC Claim: The primary motivation behind most fake transactions is to illegitimately claim Input Tax Credit (ITC). By obtaining invoices for non-existent supplies, fraudsters can reduce their net GST liability or claim undue refunds, effectively evading tax.

The Broader Harm: Beyond Revenue Loss

The repercussions of fake GST transactions extend far beyond direct revenue loss to the government. These illicit activities severely undermine the credibility and integrity of the entire tax administration system. They disrupt the level playing field for compliant businesses, as fraudulent firms gain an unfair competitive advantage by operating without the true tax burden.

Furthermore, fake invoices are frequently used to generate “cash” that can then be channelled into fraudulent activities. Such transactions are also leads to artificially inflate business turnover, which can then be used to secure larger bank loans or other financial benefits under false deceits. This highlights that the problem is not only tax evasion but hinders that financial discipline of the Country.

III. Modus Operandi: Common Schemes and Perpetrators

Input Tax Credit (ITC) Fraud: The Prime Factor

Input Tax Credit (ITC) fraud stands as the most prevalent and damaging form of GST fraud. The inherent mechanism involves the issuance of “dummy invoices” or “fake invoices” by a supplier to a recipient. In these scenarios, the supplier either does not remit the collected GST to the government or, more commonly, no actual transfer of goods or services occurs. In turn the recipient then uses these fabricated invoices to claim ITC, thereby reducing their own net GST liability or even obtaining fraudulent refunds. This manipulation of the ITC system is consistently identified as the central motivation behind a vast majority of GST frauds, accounting for a substantial portion of the detected evasion, as evidenced by the significant financial figures attributed to fake ITC schemes. The very design of ITC, intended to streamline the indirect tax system, becomes the primary entry point for fraudulent activities.

Floating of Shell Companies and Circular Trading

The GST fraud heavily relies on the creation and manipulation of fictitious entities. “Shell companies” or “bogus firms” are established with no genuine business activities, serving solely as conduits for issuing fake invoices and facilitating the fraudulent claiming or passing on of ITC. These entities often have no physical presence at their registered addresses and stopped their business quickly consequent the commitment of fraud, making them difficult for authorities to trace.

A particularly complex and damaging scheme is “circular trading,” also known as “carousel fraud.” A network of shell companies engages in a series of transactions, issuing fake invoices to one another, frequently without any actual movement of goods. This circular invoicing inflates the turnover artificially which can then be used for illicit purposes such as securing bank loans. To further legitimize these paper transactions, fraudsters may generate “dummy e-way bills” to falsely demonstrate the movement of goods, creating a deceptive trail of documentation.

Other Practices like Misclassification, Non-Remittance, and Identity Fraud

Beyond ITC manipulation, fraudsters employ various other deceptive practices:

(i) Misclassification of Goods/Services: This involves deliberately miscategorising goods or services into lower GST rate slabs to reduce the tax payable. For instance, luxury items might be declared as essential goods to attract a lower GST rate, distorting the tax system and fair competition.

(ii)Collecting GST but Not Depositing: A straightforward form of fraud where businesses charge GST from their customers on sales but then fail to remit the collected amount to the government treasury within the prescribed timeframes.

(iii)Fraudulent Refunds: Illicit claims for GST refunds are made based on fabricated documents, such as fake export invoices, or by overstating ITC claims.

(iv)Identity Fraud: A more insidious method involves manipulating identity documents like Aadhaar or using the identities of unsuspecting individuals to obtain PAN numbers and subsequently secure GST registrations for shell companies. This provides a seemingly legitimate facade for their fraudulent operations.

Impact Assessment: Financial and Economic Repercussions

Quantifying Revenue Loss to the Government

The financial impact of fake GST transactions on government revenue is substantial and growing.

Below is a tabular summary of reported GST fraud-related revenue losses and evasion cases in India, based on recent official data and investigative reports from 2018 to early 2025:

Note: Data points are sourced from. Recovery rates are approximate based on available cumulative figures and specific year data.

Adverse Effects on Legitimate Businesses and MSMEs

Furthermore, many MSMEs become unwitting victims of ITC fraud when they unknowingly engage in transactions with fake or non-compliant vendors. In such scenarios, even if the MSME has genuinely paid taxes and filed their returns correctly, they may be denied legitimate ITC due to the misconduct of their supplier. This can lead to critical financial penalties, including the requirement to repay over-claimed ITC, which can severely shrink their working capital. This highlights the need for a balanced approach where enforcement is stringent but also aims to minimize disruption for compliant entities, focusing on risk-based analysis to target only dubious taxpayers.

Linkages to Broader Financial Crimes

Fake invoices are often employed to generate illicit “cash” which can then be channelled into various unlawful activities augment social tensions. Recognizing this critical linkage, large-scale GST fraud, including fake invoicing, has been designated as a “predicate offense” under the Prevention of Money Laundering Act (PMLA).

This legal classification empowers enforcement authorities, such as the Enforcement Directorate (ED), to initiate investigations under anti-money laundering laws. Consequently, properties can be attached, and bank accounts of individuals or companies involved in fake invoicing scams can be frozen, ensuring financial recoveries and proactively preventing further fraudulent activities. Moreover, fraudulent activities can also involve the diversion of legitimate company funds for illicit purposes. This multi-layered legal approach reflects a recognition that GST fraud often serves as a gateway or component of larger financial criminal enterprises, necessitating a coordinated response that extends beyond traditional tax enforcement.

Penal Provisions for GST Fraud

Penal Provisions under the Central Goods and Services Tax (CGST) Act, 2017

The Central Goods and Services Tax (CGST) Act, 2017, provides a robust legal framework to deter and penalize GST fraud.

Section 122: Penalties for Specific Offences

Section 122 of the CGST Act outlines a comprehensive list of offences related to fraudulent GST activities and specifies corresponding penalties. These offences include, but are not limited to:

•  Supplying goods or services without issuing a proper invoice, or issuing an incorrect or false invoice.
• Issuing an invoice or bill without any actual supply of goods or services.
• Collecting tax from customers but failing to remit it to the government within three months.
• Taking or utilizing Input Tax Credit (ITC) without the actual receipt of goods or services, in contravention of the Act’s provisions.
• Fraudulently obtaining refunds of tax under the Act.

The quantum of penalty under Section 122 is generally the higher of Rs.10,000 or an amount equivalent to the tax evaded, ITC wrongly availed, or ITC wrongly passed on. A crucial provision under Section 122(1A) targets individuals who retain the benefit of a fraudulent transaction (such as those involving fake invoices or ITC without supply) and at whose instance such a transaction was conducted. Such a person is liable to a penalty equivalent to the tax evaded or the ITC availed or passed on. Furthermore, Section 122(3) imposes penalties up to Rs.25,000 on those who aid or abet any of the specified offences, deal with goods liable to confiscation, or fail to issue invoices in accordance with the Act.

Section 132: Criminal Liabilities and Imprisonment

Section 132 of the CGST Act addresses the criminal liabilities associated with serious GST frauds, prescribing imprisonment and fines. The severity of the punishment is directly linked to the quantum of tax evasion:

• For evasion exceeding Rs.5 crore, the offence is cognizable and non-bailable, punishable by imprisonment of up to five years along with a fine.
• For evasion between Rs.2 crore and Rs.5 crore, the offence is non-cognizable and bailable, punishable by imprisonment of up to three years and a fine.
• For evasion between Rs.1 crore and Rs.2 crore, the offence is non-cognizable and bailable, punishable by imprisonment of up to one year and a fine.
• Other offences, such as furnishing false information or records, obstructing officers, or tampering with evidence, can also lead to imprisonment of up to six months.

The legal framework under the CGST Act, augmented by other statutes, represents a comprehensive strategy to combat GST fraud. This multi-layered approach, extending beyond simple tax penalties, aims not only to recover evaded tax but also to dismantle criminal networks and seize illicit assets, thereby making the consequences for fraudsters far more severe and wide-ranging.

The following table summarizes key penalties for GST fraud under the CGST Act:

Rule 86A: Powers to Block Input Tax Credit

Rule 86A of the CGST Rules grants significant powers to GST officers, not below the rank of Assistant Commissioner, to block the utilization of Input Tax Credit (ITC) available in the electronic credit ledger. This drastic power can be invoked if there is a “reason to believe” that the ITC has been fraudulently availed or is otherwise ineligible. Common grounds for blocking include ITC availed on invoices issued by non-existent suppliers, without the actual receipt of goods or services, or where the supplier is not conducting business from their registered place.

While Rule 86A provides a critical tool for immediate action against suspected fraud, its exercise is subject to judicial scrutiny. The Supreme Court has affirmed that ITC blocking under this rule must be backed by material evidence and cannot be arbitrary. Furthermore, “negative blocking” – disallowing the debit of more credit than what is available or creating a negative balance in the ledger – is impermissible. The power does not extend to forcing taxpayers to replenish previously used ITC. Judicial pronouncements also emphasize the requirement for a post-decisional hearing, particularly given the serious civil consequences for taxpayers. This ongoing judicial interpretation aims to strike a balance between the imperative of swift action against fraud and the protection of legitimate taxpayer rights, ensuring that significant enforcement powers are exercised with due process.

Application of the Prevention of Money Laundering Act (PMLA)

This classification allows for the prosecution of individuals and entities involved in GST fraud under anti-money laundering laws, significantly broadening the scope of enforcement beyond traditional tax recovery. Under PMLA, enforcement authorities, such as the Enforcement Directorate (ED), are empowered to take stringent actions. These include the attachment of properties and the freezing of bank accounts belonging to individuals or companies implicated in fake invoicing scams. Such measures are vital for ensuring financial recoveries and preventing the further diversion of illicit funds. The application of PMLA underscores the government’s comprehensive legal strategy, recognizing that GST fraud is often a component of wider financial criminal activities, thereby necessitating a coordinated legal response that goes beyond conventional tax enforcement.

Other Legal Consequences and Enforcement Actions

Beyond the specific provisions of the CGST Act and PMLA, several other legal consequences and enforcement actions are taken against entities involved in GST fraud:

• GST Registration Cancellation/Suspension: Fraudulent entities face the cancellation or suspension of their GST registration, effectively disabling their ability to operate within the formal tax system.
• Recovery of ITC: Any Input Tax Credit (ITC) fraudulently availed by entities is subject to recovery by the tax authorities, often with interest and penalties.
• * Provisional Attachment of Property: If criminal involvement is established, the properties of the fraudulent entities, and even their directors, can be provisionally attached to secure the recovery of dues.
• * FIRs and Prosecution: First Information Reports (FIRs) are lodged, leading to prosecution under relevant sections of the Indian Penal Code (IPC) or the Bharatiya Nyaya Sanhita (BNS) for offences such as cheating, forgery, and criminal breach of trust. This ensures that perpetrators face not only tax-related penalties but also broader criminal charges.

Detection Mechanisms and Government Enforcement Strategies

Technology Driven: AI, Data Analytics, and Digital Systems

In the recent past, the government has shifted its enforcement strategy towards a technology-driven, data-centric approach. Artificial Intelligence (AI) and Machine Learning (ML) are now extensively employed to analyze vast datasets from GST filings, including GSTR-1 (sales returns) and GSTR-3B (summary returns), e-way bills, and other financial records in real-time. These advanced tools are capable of detecting subtle fraudulent patterns, identifying discrepancies, and uncovering illicit networks that would be difficult for human auditors to discern.

Graph analytics, a specialized AI technique, is used to map and delineate complex relationships among various GSTINs, transaction pathways, and shared identifiers such as IP addresses or contact numbers. This allows authorities to pinpoint fraudulent clusters and visualize entire illicit supplier networks. Automated risk profiling systems assign real-time risk scores to taxpayers based on a multitude of variables, including ITC claim patterns, mismatch trends between returns, filing consistency, and vendor history. Entities flagged with high-risk scores are then prioritized for closer scrutiny or audit, while compliant taxpayers benefit from faster processing.

The National Informatics Centre (NIC) has developed “GST Prime,” an analytical tool specifically designed for tax administrators. This system provides actionable reports, identifies defaulters and tax evaders, highlights possible fraudulent activities, and facilitates risk-based analysis for audits. Commercial solutions, such as KPMG’s Tax Intelligence Solution, also leverage GST data analytics to help businesses identify internal errors and anomalies, demonstrating the broader application of these technological advancements. This reliance on technology implies continuous investment in sophisticated systems and skilled personnel to maintain an edge over evolving fraud tactics, and it also necessitates that businesses enhance their digital literacy and internal controls to keep pace with compliance requirements.

Andhra Pradesh is among the first states in India to deploy AI-based systems designed to track GST fraud, fake invoicing, and misuse of Input Tax Credit (ITC). The AI system performs real-time tracking and analysis across multiple GST data sources such as GSTN, e-Way Bill, and registration modules. It flags suspicious transactions, detecting anomalies in invoice and goods movement patterns, sectoral tax patterns, and fake firm networks through pattern recognition and network mapping. This marks a major shift from manual inspections to data-driven risk-based compliance monitoring.

Enhanced Registration and Verification Protocols

The government has implemented significantly more rigorous processes for GST registration and verification. New GST registrations are now subject to stricter scrutiny, including mandatory physical verification of business premises for high-risk applicants. Field visits are mandated in cases where mismatches are detected between PAN, address, or the nature of the business. AI-based validation tools are employed to detect and reject multiple registrations originating from the same IP address, mobile number, or Aadhaar/PAN credentials, aiming to prevent the creation of shell companies.

A crucial measure introduced is mandatory Aadhaar authentication for all new GST applicants. This policy, which became critical after a major scam in 2021-2023, aims to prevent the misuse of fake or stolen identities for GST registration. Linking Aadhaar to GST registration allows authorities to trace the individual behind the firm, significantly reducing anonymity and enhancing accountability. Furthermore, the government has launched nationwide drives specifically targeting fake GST registrations. These campaigns aim to identify and cancel non-genuine GSTINs, verify the physical existence of registered businesses, and proactively prevent ITC frauds facilitated by fake invoices. This strategic shift towards proactive fraud prevention at the entry point aims to reduce revenue leakage at its source, rather than solely relying on post-facto detection and recovery.

The Government of Andhra Pradesh has adopted a firm stance on tax fraud, with strict enforcement actions against evaders, including cancellation of fake GST registrations and penalties under appropriate legal provisions. Since January 2025, the state implemented biometric facial authentication integrated with the GST registration process. This system enhances identity verification beyond Aadhaar, ensuring only legitimate taxpayers can register, thereby reducing fraudulent registrations and identity-related fraud.

Dedicated Enforcement Units.

Recognizing the complex and often inter-state nature of GST fraud, governments are establishing specialized enforcement structures and enhancing inter-agency coordination. States like Punjab have set up dedicated Special Fraud Detection Units (SFDUs) headquartered at Patiala. These units are tasked with uncovering and investigating high-value GST frauds, with a particular focus on dismantling circular trading operations, unearthing benami (anonymous) transactions, and eliminating fake invoicing practices. These units leverage advanced technologies, including AI and data analytics, and have real-time access to critical datasets such as GSTN information, e-way bill tracking, and toll records to enable prompt and precise action.

Increased vigilance and formal notification mechanisms between state commercial tax departments are also being implemented to curb tax fraud across state lines. For instance, the Telangana commercial taxes department formally notified the Maharashtra government about a large-scale GST input credit scam involving fake invoices. Key agencies such as the Directorate General of GST Intelligence (DGGI), the Enforcement Directorate (ED), and the Customs and Revenue departments play a central role in the identification and prosecution of these frauds. Their coordinated efforts are vital in tackling the organized criminal networks that often span multiple jurisdictions. The geographic spread of these frauds makes detection and prosecution more complex, highlighting the importance of centralized data analytics and robust inter-agency intelligence sharing.

Due Diligence for Businesses to Mitigate Risk

Businesses play a crucial role in strengthening internal controls and mitigating the risk of becoming involved in or victimized by GST fraud. Proactive due diligence is paramount:

• Verify GSTIN and Supplier Details: It is essential to consistently check the supplier’s GSTIN on the official GST portal, cross-check the displayed business details against the supplier’s information, and confirm the GST rate charged against official charts.
• Monitor Supplier Filing Patterns: A regular supplier who suddenly stops filing their GST returns or consistently fails to provide valid tax invoices should be considered a red flag. Maintaining a record of supplier filing patterns can help identify risky vendors.
• Cross-Match GSTR-2B & Books: Businesses should regularly reconcile their Input Tax Credit (ITC) claims by cross-matching the data in their GSTR-2B (auto-drafted ITC statement) with their internal purchase records. This helps avoid claiming ITC from fake or non-compliant vendors.
• Maintain Accurate Records: Meticulous record-keeping is vital. Businesses should maintain all utility bills, rental agreements, sales invoices, and purchase orders in an organized manner and ensure timely and accurate filing of GSTR-1 and GSTR-3B to avoid system flags.
• Proactive Response to Notices: Any notice received from the GST portal or tax authorities must be addressed immediately and accurately to avoid temporary GSTIN suspension, ITC mismatch issues, or other adverse consequences.
• Leverage Technology: Utilizing accounting software and third-party tools that integrate with the GST portal can automate the reconciliation of ITC and help flag suspicious transactions, enhancing internal compliance.

E-invoicing and E-way Bill Systems

E-invoicing and e-way bill systems are foundational elements in the government’s strategy to combat GST fraud by enhancing transparency and real-time data integration. E-invoicing, which has become mandatory for businesses above certain turnover thresholds, ensures that invoices are validated and recorded instantly on the GST portal before goods or services are supplied. This system assigns a unique Invoice Reference Number (IRN) and a QR code to each invoice, digitally authenticating it.

The integration of e-invoicing with the e-way bill system is particularly powerful. E-way bills, which track the movement of goods, are often auto-generated from validated e-invoices, creating a seamless link between invoice data and physical goods movement. This real-time data integration significantly discourages fraudulent changes or adjustments to invoices and makes it exceedingly difficult to fake transactions without detection, as AI tools can match invoice data with goods movement data instantly.

Furthermore, stricter rules for e-way bills have been implemented: base documents used for e-way bill generation must not be older than 180 days, and the maximum extension period is capped at 360 days from the original generation date. These measures prevent the backdating of invoices or the use of outdated documents for fraudulent purposes. The combined effect of these systems is to create a digital audit trail that significantly reduces errors, enhances accuracy, and curbs tax evasion by providing tax authorities with comprehensive, real-time transactional data.

VII. Recent Cases and Enforcement Highlights

The intensified crackdown on GST fraud has brought numerous significant cases to light, illustrating the scale and modus operandi of these illicit activities, as well as the government’s proactive enforcement.

• Telangana-Maharashtra Inter-State Fraud (Rs.100 Crore): A notable case involved a Hyderabad-based company that issued high-value fake invoices for copper supplies to a Maharashtra firm without any actual movement of goods. This scheme allowed the Maharashtra firm to fraudulently claim Input Tax Credit (ITC). The Telangana commercial taxes department formally notified the Maharashtra government, highlighting the expanding scope of inter-state vigilance against such rackets. This case exemplifies how frauds are not localized but often involve networks spanning multiple states, necessitating enhanced coordination and data sharing between central and state tax authorities.
• Rs.156 Crore GST Scam via Fake Firms: Tax authorities recently busted a Rs.156 crore GST fraud involving fake firms that issued bogus bills and claimed fraudulent ITC without any real supply of goods or services. Investigations revealed that these firms were non-existent or non-operational at their registered addresses, underscoring the pervasive use of shell companies in these schemes.
• Uttar Pradesh Bogus Firms (Rs.120 Crore Loss): A month-long enforcement drive in Uttar Pradesh uncovered a scam involving over 233 bogus firms. This included 33 firms registered under state GST and 200 under central GST, all engaged in fraudulently claiming ITC without conducting any actual transactions. This resulted in a significant loss of over Rs.120 crore to the state exchequer, with Rs.100 crore being the state’s share of the ITC fraud.
• Tax Consultant Misuse of GSTIN (Rs.73.63 Lakh): In Chhatrapati Sambhajinagar, a tax consultant was booked for allegedly misusing a client’s legitimate GST number. The accused uploaded fabricated purchase and sale invoices on the client’s GST portal in the names of non-associated entities, generating fraudulent transactions worth over Rs.73 lakh. This case highlights a critical vulnerability: the breach of trust by professionals entrusted with financial and tax compliance, necessitating robust internal controls and periodic audits by businesses.
• Jharkhand, West Bengal, Maharashtra ED Raids (Rs.750 Crore): The Enforcement Directorate (ED) conducted extensive searches across Jharkhand, West Bengal, and Maharashtra as part of a Rs.750 crore fake GST invoices generation case. These actions, carried out under the Prevention of Money Laundering Act (PMLA), targeted shell entities and unauthorized financial channels involved in generating fraudulent ITC. The investigation followed the arrest of a “key mastermind,” demonstrating the multi-agency approach to dismantling organized financial crime networks.
• Odisha Businesswoman Arrest (Rs.100 Crore): The Directorate General of GST Intelligence (DGGI) arrested a businesswoman from Rourkela in connection with a Rs.100 crore GST fraud. She was found operating 27 fake, non-existent firms across various states using forged documents and dummy persons. These entities were solely used for generating fake invoices and e-way bills to facilitate fraudulent ITC claims.
• Overall Enforcement Statistics: These individual cases are part of a broader, intensified enforcement drive. Since the rollout of GST, over Rs.1.5 lakh crore in fake ITC has been detected nationwide. In the financial year 2025 alone, authorities detected Rs.1.95 lakh crore in GST fraud across more than 25,000 cases, with fake ITC claims accounting for Rs.46,472 crore of this total. These statistics underscore the persistent challenge posed by GST fraud and the increasing effectiveness of the government’s detection and enforcement mechanisms.

VIII. Initiatives of the Government.

The rollout of real-time e-invoicing, automated ITC matching, and AI-driven analytics like “Project Anveshan” for fraud detection have increased transparency and reduced fake invoicing and input tax credit fraud. These efforts have expanded the tax base and curtailed some methods of evasion. GST’s tax buoyancy improved from 0.6 in FY20 to nearly 1 in FY25, indicating tax revenues increasingly align with economic activity—reflecting better compliance and less evasion overall. The taxpayer base expanded to over 1.5 crore active registrations, promoting deeper formalization of the economy.

VIII. Conclusion and Forward-Looking Recommendations

Summary of Challenges and Progress

GST evasion detected rose sharply to over Rs.2.23 lakh crore in FY 2024–25, with voluntary payments of nearly Rs.29,000 crore. However, recoveries lag behind detection significantly; for example, FY24 showed detection of over Rs.34,000 crore but recoveries were only about Rs.4,000 crore. This gap poses a limitation on policy success as detection alone does not fully translate into revenue gain

Despite these persistent challenges, India has made considerable strides in combating GST fraud through a multi-pronged approach. The legal framework has been significantly strengthened with provisions under the CGST Act, 2017, and the application of the Prevention of Money Laundering Act (PMLA). Crucially, the government has embraced advanced technologies, including AI, data analytics, e-invoicing, and Aadhaar linking, to enhance detection and prevention capabilities.

Recommendations for Policy Enhancement

To further fortify the GST regime against fraudulent activities, continuous refinement of policies and enforcement mechanisms is essential:

• Further Data Integration and Real-time Matching: Enhance the real-time connectivity and AI systems combine invoice data, e-way bill movement records, taxpayer registration details, and third-party sources into a centralized platform (GST Data Lake). This allows cross-verification to spot discrepancies such as mismatch between goods movement and reported sales, duplicate or fake invoices, and irregular ITC claims
• Refinement of Risk Profiling Models: Continuously update and evolve AI/Machine Learning models with newly identified fraud tactics. This iterative refinement will improve predictive accuracy, reduce false positives, and minimize unnecessary scrutiny on compliant taxpayers, thereby optimizing enforcement efforts.
• Streamlined Recovery Mechanisms: Improve the efficiency and speed of recovery processes for detected evasion. This could involve strengthening provisional attachment powers and expediting legal proceedings to ensure that evaded taxes and penalties are recovered promptly.
• Legislative Clarity: While enforcement has established practical interpretations, considering the provision of clearer, albeit adaptive, legal definitions or comprehensive guidelines for “fake invoices” and “fake transactions” could reduce ambiguity for both taxpayers and enforcement agencies, fostering greater compliance and certainty.
• Enhanced Inter-Agency Collaboration: Formalize and strengthen data exchange and coordination mechanisms between central and state tax departments, financial intelligence units, and other law enforcement agencies. This is critical for effectively tackling inter-state and organized fraud networks.
• Leverage Technology: Utilize accounting software and third-party tools that integrate seamlessly with the GST portal. These tools can automate the reconciliation of ITC (e.g., matching GSTR-2B with internal books) and help flag suspicious transactions, significantly enhancing internal compliance and risk management.
• Stay Updated: Businesses must remain continuously informed about the latest GST compliance changes, government advisories, and evolving enforcement trends to adapt their practices accordingly.
• Prompt Response to Notices: Timely and accurate response to any notices or queries from tax authorities is critical. Delayed or inadequate responses can lead to adverse consequences, including temporary GSTIN suspension or denial of ITC.
• Professional Advisory: Engage with reputable tax consultants or legal experts for guidance on complex GST matters, particularly concerning compliance, due diligence, and audit support. Their expertise can help navigate the intricate regulatory landscape and mitigate risks.

By embracing these recommendations, both the government and businesses can collectively strengthen the integrity of the GST regime, curb fraudulent activities, and foster a more transparent and equitable economic environment in India. In summary, while current GST tax evasion policies in India have successfully increased detection, improved compliance, and expanded the tax base, the regime has not yet fully succeeded in eliminating evasion or closing the gap between detection and recovery. The battle against GST evasion continues, with technology, legal reforms, and administrative vigilance being crucial to future success.