Input Tax Credit Frauds: Challenges in 2021

Input Tax Credit Frauds: Challenges in 2021

Recently, there have been headlines flashing about the GST frauds, ITC frauds, and many other malpractices.

About INR 700 Crores have been recovered by the Central Board of Indirect Taxes and Customs (CBIC) from the fraudsters with about 215 arrests in January of 2021.

No matter how much transparent the government tries to make the GST structure, leakage points are being found by these conmen.

The underlining fact of these events is that many professional experts including Chartered Accountants, Company Secretaries and lawyers are being engaged in such activities.

Doing business with any of the GST defaulters is always going to harm your firm too.

So you must always verify the business entity you are getting in business with.

In this short article, we will see some of the instances of such frauds and how you can save yourself and the business from such malpractices.

Importance of Input Tax Credit

Input Tax Credit is the most lucrative feature of the GST structure. However, it is complicated at the same time.

Let me discuss this with an example:

Consider 3 entities:                           

  1. Fun Traders (The Supplier)
  2. Ajay Bhai (The retailer)
  3. Consumer

Fun Traders (Wholesale Supplier)

FactorAmount  
Supplies Goods to Ajay BhaiRs.1,00,000 (Received)
Collects GST (18%)Rs.18,000 (Received)
Total invoice valueRs.1,18,000 (Received)
Total Ta collected from Ajay BhaiRs.18,000
Total Tax Paid to GovernmentRs.18,000
Direct incidence of taxNil (paid as received from retailer)

While on Retailer’s Side:

The retailer sells goods further to the consumer.

Ajay Bhai (Retailer)

FactorAmount  
Value of Goods (With Profit included)Rs.1,20,000
Collects GST (18%)Rs.21,600
Total invoice valueRs.1,41,600
Total Tax collected from ConsumerRs.21,600
Tax Paid to Fun TradersRs.18,000
Tax Paid to the GovernmentRs.3,600
Direct incidence of taxRs.3,600

Now, let us see the impact of this chain on the consumer:

Common Man ( Consumer )

FactorAmount  
Value of goods (paid to the retailer)Rs.1,20,000
GST Paid (18%)Rs.21,600
Total invoice valueRs.1,41,600
Total Tax paid to the retailerRs.21,600
Direct incidence of taxRs.21,600

From this example, we understand that,

  • Fun Traders (Supplier) collects a GST of Rs.18,000 from Ajay Bhai (Retailer) & pays this complete sum to the Government as the GST return.
  • Now, Ajay Bhai collects 21,600 from the Consumer as GST. But, he pays only Rs.3, 600 to the Government. The balance amount i.e. Rs.18,000 is deducted from the GST to be given to the Govt. This happens because Ajay Bhai had already paid a GST of Rs.18, 000 on his input & hence he can claim an Input Tax Credit of Rs.18,000.

This is how the whole chain of the Input Tax Credit under GST functions.

Now, it is evident that the chain of how ITC functions are interlinked, and failure or mismatch from either supplier’s or retailer’s side can cause a blockage of the cash flow.

Hence, the ITC holds high importance when it comes to the smooth cash flow in the GST structure.

Factors that can block your ITC & lead to ITC Frauds

Following listed are some of the most prominent reasons which may lead to blocking of your Input Tax Credit:

  • Input Tax Credit is availed based on the invoice issued by a non-existing supplier or on the supply which was never received by the recipient.
  • ITC is availed on such an invoice for which the tax has NOT been paid to the government.
  • The person demanding the ITC has no proper invoice to support his claim.
  • The person who is availing of the Input Tax Credit is not authentic and DOES NOT function from the registered place of business.

Any of the above-mentioned reasons can cause blocking of your ITC and will be considered as an Input Tax Credit or GST fraud.

Measures you can take to stop your ITC from getting blocked

There are some very easy steps any taxpayer can take to keep the Input Tax Credit complications in check.

We list some of the major points which you must remember for a smooth Input Tax Credit chain of cash flow:

Verify your supplier–

  • Before getting into any transactions, it is advised that you verify the validity of the taxpayer you are going to do business with.
  • You can verify the GSTIN of any entity on the GST portal using the GSTIN/UIN or the PAN card details.
  • You can use the link here to verify any GSTIN.

Identify GST defaulting Suppliers

  • This step is very important to stop your Input Tax Credit from getting blocked.
  • Reconciliation of the ‘Purchase Data’ and the ‘GSTR-2A’ (automatically generated from your seller’s GSTR-1) can help you to identify the mismatches between your Purchase Data record and the outward supplies data (GSTR-1) of your supplier.
  • There are government-appointed GST Suvidha Providers or GST Software which provide the facility of the Purchase vs. GSTR-2A reconciliation.

Notifying GST defaulting Suppliers

  • Your supplier may miss out on furnishing the outward supply data corresponding to your invoice in his GSTR-1 filing.

As this may be a case of an error, you should immediately inform the concerned supplier about this discrepancy and ask him to rectify it.

If this, error is not corrected before the due date; your Input Tax Credit will get affected.

NOTE: Currently, a taxpayer can avail of 5% excess/provisional ITC of the total eligible ITC.

If your supplier is NOT filing the outward sales details on-purpose, then this can be a major ITC fraud.

Hence, you should have a habit of reconciliation of your Purchase data against the GSTR-2A (which is based on your Seller’s GSTR-1 records).

Important Update-Budget 2021:

According to the recent addition of Clause (aa) in the Sub-section (2) of Section 16 of the CGST Act,

  • Input Tax Credit on invoice or debit note can be availed ONLY when the details of such an invoice or debit note have been furnished by the supplier in the statement of his outward supplies and these details have been communicated to the recipient of such invoice or debit note.
  • In case of failure of either of the actions, the registered person will not be able to avail the ITC for that particular invoice or debit note.

From this update, it is now clear that the Supplier has to now furnish the invoice or debit note in his outward supplies and the same should be communicated with the recipient.

This provision will help in regularizing the cash flow in the ITC chain, however, failure to do so may cause the ITC blocking of the recipient.

Hence, it’s an obligation on the supplier’s part to furnish his outward supplies data in his GSTR-1.

Implications of GST or ITC Frauds

As discussed in the above segments, it is evident that your ITC stands blocked if you are involved in the ineligible availing of Input Tax Credit.

Moreover, other serious implications can affect your business and you as a citizen.

  • Arrest for committing tax fraud
  • Your GST Registration may be suspended or canceled by the GST Officer after proper scrutiny.
  • Judicial custody until the probe goes on.

Consistent efforts are being taken to sanitize the taxation system. However, there are cases of tax evasion, ITC frauds, and tax leakages being reported frequently.

It is important that an honest taxpayer stays away from such fraudulent activities and avoid further complications in the business.

To conclude

As far as the ITC frauds are concerned, the taxpayer needs to take some preventive measures to stop him from getting into these ITC frauds.

ITC reconciliation also plays an important part in spotting the defaulting suppliers and thus, it is advised that every taxpayer should use the ITC Reconciliation tools which can safeguard you from the malpractices as well as comply with all the rules of the GST which keep on changing.

Honesty pays and it pays well.

So it’s our humble request to all the taxpayers to refrain from such activities and make our taxation system more transparent and stronger than ever!

Stay tuned for more such informative articles like this “Input Tax Credit Frauds: Challenges in 2021”

Until the next time…

About the Author– GSTHero– Making GST Simple! GSTHero is the best GST filing, e-Way Bill Generation & E Invoicing Software in India. GSTHero is a government authorized GST Suvidha Provider. Both Businesses and Tax Practitioners can file GSTR 1, GSTR 3B, GSTR 9 and GSTR 9C with all supporting reports. 1 Click Auto Reconciliation & report-matching feature helps you in claiming up to 100% ITC and finds your GST Defaulting Suppliers. GSTR2A vs GSTR-3B, GSTR-1 vs GSTR-3B, ‘GSTR-1, GSTR-2A & GSTR-3B’ annual report matching is also provided by GSTHero.

GSTHero ERP Plugins provide 1 Click e-Way Bill & E-Invoice, Generation, Operation & Printing from your own ERP like Tally, SAP, Marg, Busy, Microsoft Dynamics, Oracle & others itself with high data security

Thanks for Reading Our Article on “Input Tax Credit Frauds: Challenges in 2021”

You May Also Like: Expenses Incurred for Corporate Social Responsibility (CSR) are Eligible for Claiming ITC in GST: AAR Uttar Pradesh