Unmasking Unethical Practices: GST Challenges & Precautions for Taxpayers

There is no information available to suggest that the Goods and Services Tax (GST) poses a threat of any kind. It is a tax system implemented by the government for indirect taxation purposes and is not associated with terrorism or any illegal activities. If you have any specific concerns or questions about GST, feel free to ask, and I’ll do my best to provide information.

The Goods and Services Tax (GST) Act was implemented to overcome the deficiencies faced by earlier indirect tax laws, such as the cascading effect, under-invoicing, and the cumbersome process of availing Input Tax Credit (ITC).

With the introduction of GST, the government aimed to protect the interests of revenue and introduced various key measures to weed out those who were taking undue advantage of the previous system.

The government has been successful in implementing GST in India, but there are still taxpayers who are manipulating the system for personal gains.

In this article, I will highlight the modus operandi through which some taxpayers are benefiting themselves.

Let’s first understand how a normal taxpayer would avail the ITC:

Suppose Mr. A from Delhi buys goods worth ₹42,000 from Mr. B, including GST of ₹2,000 (assuming a 5% GST rate). Mr. A will record this transaction in his books of accounts by debiting the purchases account with ₹40,000 and the Input Tax with ₹2,000. He will credit the bank or Mr. B’s account. Mr. B will file his GSTR-1 by the 11th of the following month, making Mr. A eligible for availing the ITC (assuming other conditions of section 16(2) are met).

The above transaction seems transparent, but let’s add some “masala” to it.

Suppose Mr. B issues an invoice in the name of Mr. A but does not supply the goods. In this scenario, it becomes difficult for the government to determine whether the actual supply of goods took place or not since both parties are in Delhi. Through this modus operandi, Mr. B engages in bill trading, issuing invoices without actually supplying the goods. Here, Mr. B doesn’t provide the goods but trades GST invoices to pass on fake ITC to Mr. A.

Mr. A pays Mr. B through banking channels, acting as if it were a genuine transaction. Now, Mr. B has possession of unaccounted goods, which he can sell to his customers without charging GST (i.e., supplying without issuing an invoice). This gives him an advantage in the market compared to other sellers offering the same goods. Mr. A receives a commission from Mr. B and also benefits from tax deductions under the Income Tax Act, 1961, creating a win-win situation for both.

This is the main reason why some markets in India can provide goods at lower prices compared to others. However, this practice is unethical and carries severe penalties under the Goods and Services Tax Act, 2017. The taxable person can be liable to pay a penalty equal to the tax evaded or ₹10,000, whichever is higher, for committing offenses as prescribed under section 122(1). It also incurs penalties under section 271 AAD of the Income Tax Act, 1961, where the penalty payable is equal to the aggregate amount of false or omitted entries.

The government has implemented measures to identify those taking undue advantage of the system. They are using various AI tools to detect such malpractices. There is a high likelihood of being caught when engaging in such wrongdoing. For example, when taxpayers under-invoice goods to reduce tax liability, the government can easily track these transactions by checking the weight of goods entered on the transporter’s copy of the consignment note and comparing it with the market price. Therefore, taxpayers are advised to avoid such malpractices just to save taxes.

Here are some precautions that businesses should take:

• Prepare invoices as per the provisions of section 12 of the CGST Act, 2017, with the date of issue being the supplier’s invoice date or the last date required to issue the invoice under section 31 for the supply. Note that advances received for goods payment are not subject to GST from November 15, 2017, as per Notification No. 66/2017.
• Periodically reconcile physical stocks with books of accounts.
• Reconcile GSTR-2B with the books of accounts. Take ITC in line with GSTR-2B. Discrepancies may occur due to reasons such as non-filing of GSTR-1 by the supplier or delayed filing after the 11th of the next month.
• In case of ITC taken in Reverse Charge Mechanism, self-preparation of invoices is compulsory. Many instances have been observed where businesses claim ITC for RCM inward supplies but fail to prepare invoices for the same.
• Understand the suppliers. It is crucial to understand their return filing procedures, whether they file quarterly or monthly, and whether they file returns in a timely manner. This information can be tracked on the GST portal under the search tab.
• Avoid engaging in transactions where friends or relatives ask for the taxpayer’s GST number to purchase capital goods like mobile phones or laptops, aiming to save GST. Such practices can easily be tracked by GST officers and may result in hefty penalties.
• Declare all warehouses/godowns as additional places of business on the GST portal and display relevant information on a board outside, including the firm’s name, address, GST number, and nature of business.

The current indirect tax system requires taxpayers to be knowledgeable and compliant with all rules and regulations; otherwise, they may face significant penalties for non-compliance.

Through this article, I have addressed important issues prevailing in the current indirect tax regime and provided guidance for businesses to tackle these problems. I have attempted to keep the explanation simple for a general audience without extensive knowledge of indirect taxation.