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Mahesh

28/06/24 11:34 AM IST

GST Council recommended biometric-based Aadhaar authentication for new registrations

In News
  • The GST council recommended introducing biometric-based Aadhaar authentication for GST registrations, in a phased manner.
Frauds in Income Tax claim
  • Input tax credit (ITC) claims are a means to reduce tax liability by indemnifying the tax already paid on inputs for the tax liability computed on the output.
  • Let us say, a manufacturer pays Rs 120 as tax for purchasing certain inputs or raw materials for their business.
  • Now, their direct tax liability – which is based on the production incurred, is Rs 300. This is where the manufacturer can make an ITC claim.
  • Since s/he has paid a certain portion in taxes for the input procurement, the difference of Rs 180 would be the net payable tax. Rs 120 is offset by claiming ITC. 
  • Since the rollout of the GST regime, a large number of GST frauds involving the use of fake invoices to fraudulently avail an ITC claim, inflate turnovers and/or assist in money laundering have been observed.
  • These frauds are facilitated with the use of fake invoices, that is, invoices generated without the actual supply of goods or services.
  • Central Board of Indirect Taxes and Customs (CBIC) in a 2019 office memorandum had noted three ways in which this was executed.
  • The first is more direct, wherein the invoice is used, without receiving any goods or service, to show payment of tax. This is then used to avail an ITC claim translating to a loss for the exchequer.
  • The second entails issuing an invoice to one entity and the goods being diverted to some other entity.
  • The purchaser in this case may actually not be involved in creating an output product or service – a prerequisite of an ITC claim.
  • However, they too may avail a claim on their tax liability which could be unrelated to the transaction incurred.
  • All in all, it may potentially entail shifting ITC from exempted supplies to taxable supplies.
  • Finally, the last of these observed methods entails routing of invoices through a series of shell and/or dummy companies and transfer of ITC from one company to another in a circular fashion to increase the turnover.
  • Again, there is no supply of goods or services but the credit is availed based on fake invoices. In such instances, utilising inadmissible credit alongside the utilisation of credit emanating from actual regular supplies results in a loss to the exchequer. 
Motive of such frauds
  • CBIC has observed that the frauds facilitate money laundering and showing fake purchases for getting income tax benefits.
  • About the latter, showing reduced profit margins and higher expenses helps in reducing net profits while accounting.
  • This helps entities acquire income tax benefits. On the other hand, those seeking to present an inflated turnover could benefit from a higher credit limit or overdraft from banks, obtain bank loans and improve their valuations for a stake sale or an IPO, among other things.
  • The fake invoice paradigm could also be utilised to divert for company funds in a manner that helps the entity save up on taxes from the conventional route.  
Way forward
  • Industry hopes for a single biometric authentication across India, allowing one-time verification in any State for companies with a presence in multiple States.
  • This move would help streamline the process further and reduce redundancy.
  • While stating that the measures would avert fake invoicing to a large extent.
Source- Indian Express

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