As a multi-stage levy, the goods and services tax (GST) was supposed to make evasion difficult, but the figures for the first nine months of the current fiscal show either evasion has increased or its detection has become more efficient under the GST regime.

As a multi-stage levy, the goods and services tax (GST) was supposed to make evasion difficult, but the figures for the first nine months of the current fiscal show either evasion has increased or its detection has become more efficient under the GST regime.

In April-December of FY19 (the first fiscal year in which GST existed right from the start), the Centre’s machinery has detected evasion of GST and the central taxes (excise and service tax that got subsumed in it) of Rs 48,555 crore, up 50% over comparable evasion detected in the whole of FY18. Of course the pre-GST and GST periods are not strictly comparable as state VAT also collapsed into GST.

But it needs to be noted that the Centre’s administrative jurisdiction over indirect taxes has only shrunk after GST launch (it now handles only 50% of the assessee above Rs 1.5 crore turnover whereas in the pre-GST regime, all manufactures above Rs 1.5 crore and service providers above Rs 10 lakh turnover were under its administrative control).

Tax experts say rather than an increase in evasion GST has allowed easier detection of such instances and more efficient recovery of the taxes because of the centralised database and the IT platform GSTN. The arrests made by tax officials across the country for GST evasion show a large part of such practices could be traced to companies dealing in metal scraps and ores.

For instance, Gurugram Zonal Unit of the Directorate General of GST Intelligence (DGGI) in September last year arrested two businessmen for issuing fake invoices amounting to Rs 450 crore of supplies and `79 crore of evasion. These companies issued invoices to fraudulently claim input tax credit (ITC) without actual supply of goods.

“They (the businesses) are involved in issuing fake bills/invoices to each other in a circular manner without any concomitant movement of goods or payments for such transactions thereby wrongful availing and utilising fake ITC. On verification of corroborated documentary evidences and statements of various persons it was established that there was no movement of goods against the invoices raised,” the government said.
Similarly, in two other arrests effected in Delhi last year, the tax department detected aggregate evasion of `230 crore. One of the companies was part of the copper industry supply chain while the other produced plastic granules. In the two arrests made by Bengaluru division of GST, fake invoices worth over `1,200 crore were found to have been issued by businesses trading in ferrous and non-ferrous metal scraps.

Fraudulent dealings in metal industry is nothing new, it existed in the pre-GST regime as well. Experts said that such fraudulent practices are rampant in the metal industry as metal items are more expensive than other building materials like cement.

“Metal is a major component of infrastructure costs but its credit is not always available. Thereby there are surplus bills circulating in the market at throwaway prices at any given time,” Rajat Mohan, partner at AMRG & Associates, said. Under GST, if a company used steel for building its office it won’t be allowed ITC for the purchase but the same is available if it uses the metal in building machinery or plants. So a lot of unusable (for ITC) invoices get generated.

Tax officials also say that their enforcement activities are hobbled by the lack of proper return-filing mechanism as was envisaged at GST’s inception. The assessees currently file a monthly summary return GSTR-3B and a detailed GSTR-1 containing outward sales details. The GST Council, after four months launch, suspended GSTR-2 (inward sales details) and GSTR-3 (summary of tax liability and ITC) due to its cumbersome nature.

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Large-scale evasion is one of the reasons for floundering GST collections. This is reflected in the average monthly collection of `96,700 crore for April-December period this fiscal as compared with the target of around Rs 1.1 lakh crore to meet the budget estimate for FY19.