Summary: The article examines Poland’s “Locked Account” or split-payment approach as a possible model for addressing missing-trader fraud under India’s GST system. Under the Polish mechanism described, the tax component of specified high-risk transactions is automatically separated from the supplier’s ordinary funds and placed in a restricted account that can principally be used for tax-related payments. The article contrasts this preventive approach with India’s existing mechanisms, including TDS under Section 51 and blocking of Input Tax Credit under Rule 86A, which are described as having more limited or post-event application. It proposes considering a restricted GST wallet initially for high-risk sectors such as scrap, steel and cement, supported by GSTIN-linked banking, GSTR data, e-way bills and existing fraud-analytics systems. The article also acknowledges that split payment alone cannot prevent fake-invoice transactions where no genuine supply exists and therefore suggests linking wallet payments with e-way bills and applying risk scoring before releasing surplus balances.
- The Missing-Trader Problem Under GST
- How Poland’s “Locked Account” System Works
- Targeting High-Risk Transactions Instead of Every Payment
- Risk Scoring and Bank Account Monitoring
- India’s Existing GST Tools and Their Limitations
- How India Could Adapt the Locked GST Account Model
- How Input Tax Credit Would Continue to Work
- The Remaining Challenge of Fake Invoices Without Actual Supply
The Missing-Trader Problem Under GST
A GST registered taxpayer in Srinagar buys scrap iron worth ₹20 lakh from a supplier in other part of the country. The invoice shows GST separately. He pays the full amount, price plus tax, into the supplier’s account, exactly as the law expects. A few months later, that supplier’s firm turns out to be non-existent. No tax was ever deposited by the supplier. The department is now left with two choices: chase a firm that has vanished, or recover the Input Tax Credit from a taxpayer who paid honestly and has the invoice and transaction trail to prove it.
This is the “missing trader” problem, and almost every country running a GST or VAT system has run into it at some point. Poland built a fix for it that is worth understanding, because it is one of those ideas that sounds technical but is actually very simple once you see how it works.
How Poland’s “Locked Account” System Works
Think of a GST invoice as having two parts: the price of the goods, and the tax on top. Normally both go to the seller in one payment, and the seller is trusted to set the tax aside and hand it to the government later when he files return. Poland removed that trust requirement. Instead, it put in place what is called a “Locked Account” system. When a buyer pays a bill that falls under its rule, the bank does not send one lump sum to the seller. It splits the payment automatically, the moment the money moves: the price goes into the seller’s ordinary account, free to spend on anything. The GST portion goes into a second, locked account that every business is required to hold. The seller cannot draw cash from it, cannot move it to a personal account, and cannot use it for ordinary expenses. It is like Electronic Cash Ledger system that we have under GST in India.
That locked account isn’t frozen money going nowhere, though. It can be used to pay the seller’s own GST bill, or to pay the GST portion owed to their own suppliers, so the same split carries on up the chain. If a surplus builds up, the business can apply for it to be refunded, and the tax office has to decide within about two months. Ignore the rule when it applies, and the penalty is steep: 30 percent of the GST amount, plus loss of the right to claim that expense against income tax.
The idea in one line: don’t wait for the seller to pay tax later, separate it the moment payment is made, so there’s nothing left for a vanishing seller or non-existent supplier to run off with.
Targeting High-Risk Transactions Instead of Every Payment
Poland doesn’t apply this to every transaction. It kicks in only when both parties are registered, the invoice crosses roughly ₹4 lakh, and the goods fall in a specific list of around 150 categories the government has flagged as high-risk: scrap and steel, precious metals, electronics, fuel, and subcontracted construction work. These are exactly the sectors Poland’s own enforcement data had already identified as the biggest source of missing-trader and circular-trading fraud, so the split-payment rule was built around them rather than applied everywhere.
Risk Scoring and Bank Account Monitoring
Poland also runs a separate system to work out which businesses deserve a closer look in the first place. Every bank reports account and transaction data daily to a central clearing house, which scores each business on how likely it is to be involved in fraud, weighing things like whether its turnover matches its declared business, whether it deals with known high-risk regions, and whether it’s part of a cluster of firms trading mainly with each other (circular trading). A high score can lead to a bank account being frozen, first for 72 hours, then longer if the concern holds up.
India’s Existing GST Tools and Their Limitations
India already has two tools aimed at similar problems, but both act after the damage is done. TDS under Section 51 works only for notified government buyers, not for one private trader buying from another. Rule 86A lets the department block a buyer’s Input Tax Credit once fraud is suspected, but by then the credit has usually already been claimed, and an honest buyer who dealt with a supplier that later turns out to be a shell company can have lakhs blocked overnight through no fault of his own.
How India Could Adapt the Locked GST Account Model
India doesn’t need to redesign GST to borrow Poland’s core idea. Start with the sectors India’s own enforcement data already flags: scrap, steel, cement and similar high-risk trade. Every business’s bank account is already linked to its GSTIN for refunds, so a second, restricted GST wallet for these sectors needs no new plumbing, just a new payment rule. Split the payment the way UPI or NEFT already handles transfers, restrict the wallet to GST-related payments, and build a risk score from data India already collects, GSTR filings, e-way bills, and existing fraud-analytics tools like BIFA, BISAG etc. to flag accounts before releasing any wallet surplus. Buyers who use the system should get something in return: faster refunds and protection from Rule 86A shocks, since the tax was never in the seller’s free hands to begin with.
How Input Tax Credit Would Continue to Work
A fair question follows: what happens to a genuine seller’s own Input Tax Credit if their sales tax is now locked away? Nothing changes. A trader who buys scrap for ₹10 lakh and pays ₹1.8 lakh GST at 18 percent rate of tax gets that as ITC exactly as today. When he sells the processed scrap for ₹15 lakh and collects ₹2.7 lakh GST, that lands in his own locked wallet, and at month-end he pays the difference, ₹90,000, straight out of it. The wallet never delays credit that’s genuinely earned; it only makes sure the cash due to the government is sitting somewhere safe by the time anyone files a return.
The Remaining Challenge of Fake Invoices Without Actual Supply
There is one gap worth admitting honestly. Split payment assumes a real sale sits behind every invoice. A good share of India’s fake-ITC cases involve no sale at all, just paper invoices from shell firms passing on credit that was never earned. A locked wallet can’t tell a payment backed by a real truckload of scrap from one backed by nothing. Closing that gap needs two more steps: tying wallet payments to matching e-way bills, and running a risk score before any wallet surplus is released. Do both, and genuine traders in Srinagar’s scrap, steel and cement markets get faster refunds and freedom from Rule 86A shocks, while shell firms lose the one thing they relied on, collecting tax money before disappearing.
