Department officials have started focusing on various masterminds, professionals, accountants, directors in recent times for their misconduct in availing fake GST ITC under CGST Act, 2017. We often regularly hear about the various scams going on to evade GST ITC. Nowadays, people have made this conduct as their source of revenue generation without knowing the future consequential effects. In this article, an attempt has been made to explain the whole situation.

Let us discuss basics GST concepts which are essential to understand this concept. Let us take one example where Mr A is rice merchant and Mr B is the customer of Mr A. Suppose, Mr A supplied rice costing Rs 11,800/-(Including CGST & SGST of 9% of Rs 10,000 i.e. Rs 900/- each) to Mr B. This transaction is outward supply for Mr A and it is inward supply for Mr B. Mr A will discharge his liabilities of Rs. 900/- on account of CGST and SGST each by paying to the Government. In the same time, Mr A will disclose this transaction in GSTR-1 and make payment by disclosing in GSTR-3B of that month. When Mr A will file GSTR-1, the same outward supply would be reflected in GSTR-2A of the counter party. Subsequently, in this case Mr B (liable to receive input of Rs 1800/- for purchases made from Mr A) can claim such Input Tax Credit in GSTR-3B (Assuming other conditions mentioned over CGST Act, 2017 has fulfilled). This Input Tax Credit claimed can be utilized for making other output payments of Mr B. This is the basic mechanism of GST Tax Laws.

Now, let us discuss the modus operandi behind the Fake GST Input Scams by another example. Mr Ram is having a furniture business in Uttar Pradesh. Ram has substantial market share in his line of business. He majorly deals with other vendors in retail market. He has also started his retail division to sell directly to consumers. Let’s suppose, Mr Shyam, middle class person purchases furniture for Rs 5,90,000/- (including SGST and CGST of Rs 45,000/- each). Mr Shyam purchases furniture for household consumption purposes (Not eligible to claim ITC). Mr Ram, by making various excuses, does not provide GST invoice for such sales made and with the view of non-claiming of ITC, Mr Shyam is also least bothered about it. Mr shyam will be forced to settled dues of Rs 5, 90,000/- in Cash.

With this act, Mr Ram has a surplus bill of Rs 5,90,000/- without having goods in stock. Now, Mr Ram can approaches Mr Mohan to take this bill. Mr Mohan will accept such fake invoice in a view to generate fake ITC credit for Rs 90,000/- which can be utilised for payment of his output liabilities. In return, Mr Mohan will provide some commission to Mr Ram for making such arrangements.

After the issue of invoices, Mr Ram will upload the same output tax liability in GSTR-1. The same invoices will get reflected in GSTR-2A of Mr Mohan. Mr Mohan claims such ITC in GSTR-3B of that month. He has clear his dues of Rs 5,90, 000/- through banking channels and in return Mr Ram will pay in cash after deducting the commission. Now, Mr Ram follows a practise of disclosing the liability in GSTR-1 but not discharging liabilities by making payment through GSTR3B. Moreover, there is no adverse effect on ITC claimed by Mr Mohan immediately.

In the same way by following the above practise with various clients, Mr Ram will accumulate huge illegal income in short span of time. Subsequently, he will abscond with funds generated.

Due to non-filing of GSTR-3B for consequent months, GST department would send him notice under CGST Act. But the department would not be able to get any response from Mr Ram. Now, the GST Department will start investigation on people who has availed such fake ITC from his GSTIN. Ultimately, people like Mr Mohan who has availed the credit would be caught. Mr Mohan has to face burden of making payment of penalty and fines imposed by the GST department along with reversal of such ITC.

Conclusion– Availing Fake GST Input Tax Credit can provide short term benefit to businesses but in long run, it could have devastating effect. In above case, Mr Mohan has been witnessed greedy to avail credit of Rs 90,000/- and in long run, he has to face huge interest, penalty and fines imposed by the GST Department. We all should remember not to play with the intelligence level of any personnel of Tax Departments.


DISCLAIMER- This article is solely for educational purpose, neither for any legal damages, nor promoting such techniques.

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Qualification: Student - CA/CS/CMA
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Location: Ranchi, Jharkhand, India
Member Since: 12 Aug 2021 | Total Posts: 1
I am currently pursuing mandatory articleship part of Chartered Accountants Course. I have completed by graduation from St. Xavier's College Kolkata. View Full Profile

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September 2021