Mechanism to curb GST fraud in ITC claims

The Union Ministry of Finance is working to develop a mechanism to check fraudulent input tax credit (ITC) claims for goods and services tax (GST) paid under the reverse charge mechanism (RCM), to reliable sources.

Under the GST framework, certain businesses must pay tax through RCM, meaning the recipient of goods or services is responsible for paying the tax instead of the supplier. This approach aims to expand the GST’s reach into various unorganised sectors, where suppliers may not be registered, and to ensure that services imported from abroad are taxed appropriately.

After paying the tax and issuing an invoice, the recipient can claim ITC. However, there have been instances where ITC was claimed even when the recipient hadn’t paid the GST under RCM, or where the claimed ITC was excessive. The CBIC aims to address this issue by ensuring that the ledger accurately reflects RCM related data.

Unscrupulous actors often exploit the identities of others to obtain fraudulent GST registrations, allowing them to deceive the government.

These non-genuine registrations are then used to illegally transfer input tax credits by issuing invoices without any actual supply of goods or services.

At present, a similar ledger exists under GSTN for non-RCM transactions.

The creation of an ‘ITC ledger’ to track ITC disbursement could enhance transparency, reduce tax evasion, and ensure that businesses comply with GST regulations more effectively.

In a written response in the Lok Sabha, Minister of State for Finance Pankaj Chaudhary revealed that fake ITC detection surged by 50 per cent in FY2024 to over Rs 36,000 crore.

As transactions-wise purchase and sale data is available with GSTN, the government can leverage advanced analytical technologies, data analytics, and artificial intelligence to create new mechanism for detecting improper credit claims and resulting revenue leakages.

The challenges arise from masterminds who generate fake ITC by managing a complex network of entities across various jurisdictions.

DECEPTION GAME

• In FY2024, Central GST officers booked 9,190 cases involving fake ITC worth Rs 36,374 crore
• 182 individuals were arrested, with Rs 3,413 core voluntarily deposited in these cases
• Detection of fake ITC claims rose by 51% from FY23, when Rs 24,140 crore was flagged in 7,231 cases