Understanding fake input tax credit and how to unplug them

Understanding fake input tax credit and how to unplug them

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Created By Admin Last Updated Tue, 24-Nov-2020

The tax which is paid by the buyers on their purchases is ITC (Input Tax Credit) thus when these taxes are reduced from liability payable on outward supplies is basically termed to Input Tax Credit. In July 2017 GST was introduced in India for taking the tax burden down that falls both on companies and the consumers and to provide a structure that can easily track both the government and business owners but there are shortfalls in it and the major one is the creation of fake invoices that leads to creating revenue loss to the government. To make this concept understand to you let me explain it with the help of an example.

Mr. X decides to open up a company and with it other fake firms and organizations too in that way he will get a commission on a regular basis until caught up by the investigations authority.  He will book fake invoices without any actual delivery of goods from the intended party and later passes the fake entry of the payable in the book that is received by their firm or company. This action can only be noticed when you closely observe the accounting entry, in this case, the name of the payable party will be found different, in his accounting book and in the bank statements. The one can come to know only on deeper scrutiny.

Now once the money reaches the above-said firm, with the help of couriers he can easily convert bank money to cash for a commission of 4-5% on each transaction that will be his income but after ITC imposing it can move forward to 13-18% and that will be a big game for the one with having the intentions of fraud. With some simple registration formalities, these people can get GSTIN (Goods and Services Tax Identification Number) and can easily exploit the ease of doing business. The disadvantage of the liberalized norms can be easily taken up in this way. Later on, the fake electricity and rent were also uploaded to the GST portal to obtaining the GST registration. The intention of doing all these is to usurper Input Tax Credit.

Motives behind these fake invoices-

·         Conversion of an excess of Input Tax Credit into cash.

·         Increasing turnover for different purposes like overdraft from banks, obtaining loans, obtaining contacts, etc.

·         For getting the income tax benefits.

·         Money laundering.

Conclusion – Before the GST registration the business owners who do not have a commensurate financial track record have to provide detailed physical and financial verification to tax officers. The finance ministry takes a close look at such GST registration process for ensuring the run of genuine businesses.