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Lets Understand 1st GST Fraud Case

After the big bank ‘PNB scam’, another scam came into picture on March 1, 2018 in Mumbai, but this time this fraud is under Goods & Services Tax (GST). In this write-up, the author explains the actual case in a layman language along with the intention behind this fraud.

After the big bank ‘PNB scam’, another scam came into picture on March 1, 2018 in Mumbai, but this time this fraud is under Goods & Services Tax (GST). In this write-up, the author explains the actual case in a layman language along with the intention behind this fraud.

Gist of the scam

It is the first fraud under GST wherein 2 Directors of the private firms were arrested for availing Input Tax Credit (ITC) in a fraudulent manner by opening fake letter of credit.

Let’s understand this case in detail:

What actually happened??

Issuance of fake invoices– There were no actual movement of goods. Sale, purchase  were taking place on paper only. Fake invoices were issued and the 2 Directors who were involved, availed the ITC.

Understanding Concept of ITC through illustration:

Illustration:

Suppose a manufacturer-

 Tax payable on output (on Final product) is INR 350

Tax already paid on input is INR 100

A manufacture can claim tax Input Credit of INR 100 (tax payable on output-tax already paid on input i.e. 350-100) and only INR 250 needs to be paid.

Meaning of Letter of credit:

Just like LOU, LOC is another financial instrument wherein a letter issued by a bank to another bank especially in a different country to serve as a guarantee for payments made to a specified person under certain conditions.

Background of the persons Involved

1. Sanjiv Pravin Mehta– Director of Shah Brothers Ispat Pvt. Ltd., a company that deals in steel and operates from Trust House on Dr E Borges Road, Parel East.

2. Vinaykumar D Arya– Director of VN Industries, a company that operates from Darukhana, Mazgaon, Byculla.

Amount Involved

Name of Person Amount of wrongly availed ITC Type of offence
Sanjiv Pravin Mehta Rs. 5.20 crore Non-Bailable
Vinaykumar D Arya Rs. 2.03 crore Bailable

Intention behind such fraud

Likewise, Nirav Modi & Mehul Choksi did in P n B scam, the mala fide intentions behind this scam is to defraud the exchequer and banks by opening Letter of Credits (LCs) on fake purchases.

Penal Provisions

As per Section 132 of CGST Act, 2017:

The amount of ITC wrongly availed Punishment
Rs. 2 – 5 crore Imprisonment  upto 3 years & Fine
Above Rs. 5 crore Imprisonment  upto 5 years & Fine

As per CGST Act, 2017 and the press release dated March 1, 2018, Officers of CGST Mumbai have arrested two businessmen for creating fictitious invoices and availing ineligible credit. Among the two accused, Vinaykumar D Arya, availed ineligible credit of Rs 2.03 crore by submitting the fake invoices, but as per CGST Act, 2017 his offence is under Rs 5 crore, has been granted bail. Whereas, in case of Sanjiv Pravin Mehta, evasion of duty is above Rs 5 crore, so will be produced before the magistrate.

Please Note Article is based on information available on Public Domain.

Author: C S Ekta Maheshwari is the Author of this article and is a Practicing Company Secretary. The Author can be reached For further assistance/query, specimen of forms etc. at  pcs.ekta@gmail.com 

Disclaimer: The entire contents of this article is solely for information purpose and have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation.. It doesn’t constitute professional advice or a formal recommendation. The author has undertook utmost care to disseminate the true and correct view and doesn’t accept liability for any errors or omissions. You are kindly requested to verify & confirm the updates from the genuine sources before acting on any of the information’s provided herein above.

View Comments (16)

    • I don't agree with this statement. As long as any professional is adding value to our knowledge we should not restrict the type of professionals.

    • The details are sketchy and no conclusion can be drawn. Lcs are documents by banks guarnteeing payments on behalf of the applicant and is purely based on the documents like invoice etc produced by the claimant. Bankers can in no way be held responsible for the fraud unless there is a collusion for defrauding the exchequer.
      As the general scheme of GST provides that the ITC is given only when the tax on purchases has been paid, where is the fraud when there is no loss to the department. We are only discussing without full information

  • On GSTN portal since GSTR2 is still not available, a person can avial ITC in 3B without matching invoices filled by his vendor in vendor;s GSTR1. Taking advantage of it , it looks that these people would have forged invoices (not really issued by their vendors) and availed fictious credit.
    Question how it is concluded that these invoices are fictious invoices as time is available to link invoices till September of 2018 for ITC claimed in 2017-18 and facility of linking is till now not available on GSTN.

  • Article is very superficial. Starting is good but there is no case description, study and ABSOLUTELY NO CONCLUSION.

  • Dear Author,
    This is not an article but a simple news report. Please don't write such type of reports in an professional website.

  • Such frauds are pretty common in this country particularly in Kolkata where Businessmen generate false Purchase orders,invoices,dressed up profit and loss account in order to get Bank Finance for Working capital/project in connivance with bank official. In this case bogus PO/ invoice generated in order to get ITC . This is known in colloquial language as JAMA KARCHI and PUDIA GUMAO business model
    In my opinion punishment is low an\d government should impose more fine and longer jail term at least 10 years so that in future these con men get a lesson

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