One too many routes to GST evasion

Recently, the Minister of State for Finance informed Parliament that the government has detected GST evasion to the extent of ₹38,896 crores in the period April-October 2018.

The fact that such an accurate number can be publicly announced proves two things — evasion of GST is increasing and that the government is aware of this.

Things are moving so rapidly that a couple of weeks back, the Patiala House Court denied bail to Rajesh Jindal and Adesh Jain who were found guilty of opening bogus companies in the name of dummy proprietors and through these companies had issued fake invoices worth crores with no actual supply of goods just to enable the recipients of the invoices to claim input tax credit.

Fake claims of input tax credit have been reported in other jurisdictions also making this the go-to area for tax evasion.

Input tax credit

Under the erstwhile Cenvat Credit Rules, there were a number of rules enunciated to claim input tax credit. A valid tax invoice was the principal document on which credit could be claimed, but there were restrictions on claiming credits as well as requirements to pay the invoice amount to the counter-party.

The Cenvat Credit Rules have a long history beginning from the days of the Modified Value Added Tax (MODVAT).

Though there were some issues in taxpayers claiming improper credits, the law evolved over a period of time to minimise tax evasion on a large scale. Many of the rules and restrictions for claiming input tax credit were copied from the Cenvat Credit Rules and pasted into the Central GST (CGST) Act. However, GST laws were banking on the magical concept of automatic matching of invoices on the portal to prevent tax evasion.

The surge in cases of false ITC claims can be attributed to the failure of this concept. The frequent deferral of the automatic matching of invoices as well as the ease with which credit could be claimed in the GSTR 3B gave taxpayers in India a precious gift — the gift of time.

With time on their hands, some taxpayers had the luxury of claiming credits initially and then figuring out how to work around the documentation and compliance. Rajesh Jindal and Adesh Jain took KYC documents from poor people, paid them some small consideration and registered proprietorships in their name from where GST tax invoices were issued.

Tax authorities have been able to nab and arrest offenders in cases in which ITC claims were extremely high and the sheer amount of the claim could raise many eyebrows. It is hoped that the new system of filing returns that is planned to be introduced from April 1, 2019, is able to cull out cases of ineligible credits faster.

Invoicing

One of the unstated objectives behind the introduction of GST was to lure as many businesses as possible into the tax network. Initially, the CGST Act had a Section 9(4) which proposed that GST be paid on reverse charge for purchases made from unregistered persons.

Implementation of this section has been deferred till September 2019 due to ground-level difficulties in enforcing the provision. Statistics show that there has been an increase in the number of registrations under GST.

However, one should consider the fact that under the erstwhile Central Excise era, no tax was payable for clearances not exceeding ₹150 lakh (for manufacturing SMEs) — many of these units may not have registered under the Central Excise Act. One of the oldest tricks resorted to by taxpayers in the erstwhile era to postpone registration was to invoice under different names, thereby making maximum use of the threshold exemption limit of ₹10 lakh (under service tax).

The tale of a physics professor giving private tuitions from his house in a residential layout in Bengaluru, earning more than ₹30 lakh annually, but not paying any service tax because he was collecting the money in the names of different members of his family stands out as an example of how the system of invoicing under different names worked.

A few months after the introduction of GST, there was a consensus of opinion that the law was complicated and the portal was not working — encouraging many taxpayers to opt for the easy route of invoicing under multiple names.

Multiple PANs

One of the good things that GST laws did was to sync registrations to PANs (permanent account numbers). Due to chinks in the system of getting PAN earlier, there have been instances wherein a single business has more than one PAN — thereby creating another GST registration wherein tax need not be paid for supplies till ₹20 lakh (now ₹40 lakh for goods and ₹20 lakh for services).

In the normal course, taxpayers should ask for cancellation of the additional PAN but a threshold exemption of ₹20 lakh for services and 40 lakh for goods, could be a temptation that very few can resist.

HSN codes

Compliance with GST involves providing details of HSN code-wise details of outputs and inputs. If the HSN code system was simple, compliance would have been a no-brainer. Unfortunately, the GST tariff as it stands today has an bewildering list of HSN codes with different rates of tax and extremely complex descriptions of items within the codes. During the transition, the government has attempted to fit items into the nearest higher rate whereas during compliance, some taxpayers made use of the complex descriptions to fit their products into the nearest lower rate thereby minimising their tax outgo.

The ideal tax environment is one where tax rates are reasonable, rules are simple, taxpayers are compliant and tax officers aren’t demanding. The environment in India ticks none of these boxes.

Tax evasion occurs when taxpayers are well aware of the loopholes in a patchy law and the tax department is always playing catch-up.

There are enough and more penal provisions in GST laws to punish the evaders. All that the government needs to do is to ensure that the GST environment improves holistically — they have made a start with the tax rates but appear to have forgotten the rules and to be less demanding.

The writer is a chartered accountant