Frauds possible under GST?
Goods and Services Tax (GST) is believed to be full proof tax structure.
It is believed that with GST there will no or very less possibilities of tax evasion. Is it possible to still commit frauds under GST.
Let me clarify what frauds means.
Fraud is any activity which helps a person to evade tax.
Is it possible to evade tax under GST? If yes, then how?
We have seen that many people wrongly claimed huge input credit in form Tran-1. Department is investigating these cases. But this was just a one time opportunity.
Do we have more opportunities available to evade tax?
If yes, then how can GST council make sure that these possible opportunities are finished. First to be honest, I believe one should pay his taxes on time and in right manner.
Your strength in business should not be your capability to evade tax or profiting because of evasion of tax. Everyone should pay taxes on time and as per law.
I am writing this article, after first big fraud under GST was in news.
Possible ways one can avoid GST registration
First level of fraud can take place to avoid entering into GST itself. One can avoid GST registration by dividing his turnover under different individual businesses started on name of different family members.
GST registration is required to be taken if one have turnover in excess of Rs. 20 lakhs in a single financial year. Turnover limit is Rs. 10 lakhs in case of special states.
What if instead of showing sales on a single proprietor, different proprietorship firms are opened.
This practice was very much used to avoid excise registration. Similar behaviour we can see under Income Tax where declared turnover and profit increases with increase in basic exemption limits.
One solution to this can be bringing same provision of excise here. Registration should be mandatory if total turnover of all business whether on a single PAN or different PAN managed by a single person or in a single premise cross 20 lakhs.
Further a thought should be given to combining turnover of HUF and its Karta. We know most of people create HUF only to evade taxes. Though there is nothing wrong in forming HUF, but as I said government should make sure that one should not have tax as a factor to beat market competition.
At presently a single person can avoid GST registration by forming a proprietorship (20 lakhs), HUF (20 lakhs), multiple partnership firms. To make it straight, you can avoid GST registration up to twenty lakhs multiplied by number of adult members in your family. Then again partnership firms with different combinations.
A family with 5 members, can form 5 proprietorships, and multiple partnerships. But in reality, all these businesses will be managed by a single person.
Wrong input credits (bogus purchase and sells, dealing with fake purchase bills)
This is the main game in which most of consultants, professionals and business owners are involved.
This is the ultimate route people take to increase or decrease revenue/profit. Similarly they use this method to evade GST payment.
The first big GST fraud also involves the same method.
Companies buy only purchase bills and no actual supply takes place.
Expert players ensures that transaction looks genuine. They make Eway bills and rotate cash that looks genuine.
This method is the main culprit for tax evasion. If government and experts can tackle this method, most of tax evading frauds can be avoided.
Dealing with bogus purchase invoices, not only helps in GST revenue leakage but also income tax revenue. Loss making units provide bogus sales bills to profit making units to avoid GST and also income tax payouts.
Government departments should employ tech experts to analyse industry standard margins with margins declared by different businesses. This can provide a base to scrutinize transactions and select samples for special investigation audits.
Multiple consingments with a single E-way bill
People generate one single Eway bill and using this single document can dispatch multiple consignments.
For example, A has to supply materials to B. A can generate E-way bill for single invoice and ship materials throughout day unless E-way bill is checked during transit. E-way bill within city remain valid for 24 hours.
Government can stop this by enforcing out time in E-way bill at the time of dispatch and in case a consignment is caught, strict penal action should be taken. With this step, businesses will not take risk of sending multiple consignments since distance, speed and out time will not correlate.
Stock transfer and selling within 10 KM to avoid E-way bill tracking
In this method, suppose A supplies majority of his items to B. A can form a branch very near to premises of B. Everytime A can dispatch material to its branch and from branch goods can be rotated with a single invoice without requirement of E-way bill.
I don't understand why E-way bill should not be generated within 10 kms limits? E-way bill is not only a transit document but can help government to stop revenue leakage.
Cash sales without issuing tax invoices
The ultimate and main source of generating black money, avoiding tax, tax theft and damaging overall economic health of country. Boosted by greed and public with no civic sense.
Cash sales without issuing tax invoice can be named as number one source of evading tax liability.
Wait, if you think you can evade tax and government will not catch you. You are wrong. GST law, provisions, rules and tech system is strong enough to catch culprits in 90% of cases.
As of now (03/03/2018), GST is not rolled out as was expected.
GSTR-1, GSTR-2 and E-way bill system are strong enough to catch culprits. Whether you are dealing in fake bills or shipping multiple shipments with a single E-way bill, technologies are strong enough to catch you.
We need to wait for at least 1 more year to see the real result.
2 important technologies that will change taxation system are Big data analysis and Artificial intelligence. Government under E-governance program is working on these. Unfortunately GST tech stack is full of faults as of now. Once tech stacks are improved we will be able to see benefits.
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............[ Part 2 will be available soon ]
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