The Directorate General of GST Intelligence (DGSTI) recently made a number of arrests in cases involving fake invoices. It has found that the main purpose of the persons arrested was not to evade tax but to falsify balance sheets and get more loans. Furthermore, the GST liability arising out of the alleged fake transactions was also discharged.
The investigators have come across cases of circular transactions through various companies which are spread across the country. First, fake invoices are generated as sales by an originating firm – generally a shell company – came back to it at the end of the cycle, in the form of fake purchases.
Over a week ago, this issue was discussed in a meeting of senior-level officers in the department. An internal circular has also been issued which directs field officers to inform of such cases to banks from where such firms have acquired loans or applied for credit.
An originating firm issues invoices for goods and also pays GST arising out of the deal. However, the goods are never supplied anywhere, and only invoices are raised. The receiving company continues the chain by issuing invoices to sell same fictitious goods to another entity after some value addition. The second entity claims ITC on tax paid at the time of purchase and also pays the tax due on value addition.
The chain continues and spreads across India, finally ending at the originating company or one of its subsidiaries. This means the same fictitious goods which were sold at the start of the chain are purchased back by the first company through fake invoices, while also claiming ITC or even refunds.
Since the transactions have cut across multiple states, the originating company also gets a chance to claim IGST, the refund of accumulated ITC, when the chain ends. On account of these revelations, the GST field offices have been instructed to report the amount of claimed IGST refund to the finance ministry.