CBIC

The Central Tax formations under the Central Board of Indirect Taxes and Customs (CBIC) have uncovered a significant amount of fake Input Tax Credit (ITC) in the Financial Year (FY) 2023-24. In this period, Rs. 36,374 crore worth of fake ITC was detected, involving 9,190 cases. This information was shared by the Union Minister of State for Finance, Shri Pankaj Chaudhary, in a written response to a question in the Lok Sabha.

Breakdown of Fake ITC Cases

Here is a detailed comparison of the fake ITC cases detected over the past two fiscal years:

Additionally, the number of cases booked over the past three fiscal years is as follows:

Understanding Fake Input Tax Credit (ITC) in GST

Fake Input Tax Credit (ITC) refers to fraudulent claims made by businesses to reduce their GST liability without actual transactions or legitimate payments. This deceptive practice involves creating or using fabricated documentation to claim tax credits. One common method is issuing fake invoices for transactions that never occurred, allowing businesses to claim credits for taxes they never paid. Another tactic involves using bogus suppliers—shell companies that exist only on paper—to issue these fake invoices. Additionally, businesses may inflate the values of genuine purchases to claim higher ITC than what is legitimately due.

These fraudulent activities are designed to exploit the GST system by creating a facade of legitimate business transactions. The goal is to unjustly reduce tax liabilities, thereby gaining an unfair financial advantage. To counteract this, the government has implemented stringent measures like biometric Aadhaar authentication, physical verification of business premises, and rigorous bank account verification. By restricting ITC claims to verified invoices and enforcing a proper sequence in GST return filings, the authorities aim to curb such fraudulent practices and maintain the integrity of the tax system.

Government Measures to Combat ITC Fraud 

To address and prevent ITC fraud, the government has implemented several strategic measures:

1. Aadhaar Authentication for Risky Applicants: A new rule requires biometric-based Aadhaar authentication for registration applicants deemed risky based on data analytics.
2. Physical Verification for High-Risk Cases: Even if Aadhaar is authenticated, physical verification is mandated for high-risk cases.
3. Bank Account Verification: Applicants must provide a bank account in the name of the registered person, linked with PAN and Aadhaar (for proprietorships), within 30 days of registration or before filing GSTR-1.
4. ITC Restrictions: ITC can only be claimed on invoices and debit notes reported by the supplier in their outward supplies statement.
5. Mandatory Sequential Filing: GSTR-1 must be filed before GSTR-3B, ensuring a proper sequence in tax return filings.
6. Penalties for Beneficial Owners: Beneficial owners involved in fraudulent activities face the same penalties and prosecution as actual suppliers/recipients.
7. Provisional Attachment of Property: The law now allows for the provisional attachment of property belonging to any person benefiting from fraudulent transactions.
8. E-way Bill Restrictions: Non-compliant taxpayers face restrictions on generating e-way bills.
9. Lower E-invoice Threshold: The threshold for mandatory e-invoicing in B2B transactions has been reduced from Rs. 10 crore to Rs. 5 crore as of August 1, 2023.
10. Data Analytics for Risk Identification: Continuous use of data analytics helps identify and track risky GST registrations to detect tax evasion.

These proactive steps are designed to enhance compliance, prevent ITC fraud, and protect government revenue. By implementing these measures, the government aims to create a more transparent and trustworthy tax system, ensuring that honest taxpayers are not at a disadvantage.

This crackdown on fake ITC and the accompanying reforms demonstrate the government's commitment to maintaining the integrity of the tax system and preventing revenue loss due to fraudulent activities.