28 Jun GST Council Recommends Biometric Aadhaar Authentication for GST Registrations to Combat Fraud
The story so far: On June 22, the GST Council recommended introducing biometric-based Aadhaar authentication for GST registrations in a phased manner. During a media interaction after the council meeting, Finance Minister Nirmala Sitharaman stated that the measure aims to combat fraudulent input tax credit (ITC) claims made through fake invoices. She highlighted that the measure was formalized based on positive feedback from pilot projects conducted in Gujarat and Puducherry, as well as a study in Andhra Pradesh. This initiative is expected to be implemented nationwide soon.
What fraud is the measure trying to mitigate? Input tax credit (ITC) claims allow businesses to reduce their tax liability by offsetting the tax already paid on inputs against the tax liability on the output. For instance, if a manufacturer pays Rs 120 as tax on inputs and their total tax liability is Rs 300, they can claim ITC to reduce the net payable tax to Rs 180.
Since the introduction of the GST regime, numerous frauds involving fake invoices have been detected. These frauds involve using fake invoices to fraudulently claim ITC, inflate turnovers, and facilitate money laundering. Fake invoices are generated without any actual supply of goods or services.
In a 2019 office memorandum, the Central Board of Indirect Taxes and Customs (CBIC) identified three main methods of executing these frauds:
- Direct Use of Fake Invoices: Invoices are used without receiving any goods or services to show tax payment and avail ITC claims, resulting in a loss to the exchequer.
- Diversion of Goods: Invoices are issued to one entity, but goods are diverted to another. The purchaser may not be involved in producing output, yet they avail ITC claims unrelated to the transaction, potentially shifting ITC from exempted to taxable supplies.
- Circular Transactions: Invoices are routed through a series of shell companies to transfer ITC in a circular manner, increasing turnover without actual supply. This mix of inadmissible and legitimate credit results in revenue loss.
In May last year, the CBIC launched a drive against bogus registrations and fake invoices. Over seven months, the drive detected 29,273 bogus firms involved in ITC evasion totaling Rs 44,015 crore. This translated to savings of Rs 4,646 crore, with Rs 3,802 crore blocked ITC claims and Rs 844 crore recovered. Additionally, 121 arrests were made.
What is the motive behind these frauds? Apart from GST evasion, these frauds facilitate money laundering and fake purchases for income tax benefits. Showing reduced profit margins and higher expenses helps in reducing net profits for tax benefits. Entities can also present inflated turnovers to obtain higher credit limits, bank loans, and improve valuations for stake sales or IPOs. The fake invoice scheme can also divert company funds to save on taxes.
Would these measures help? Tax experts believe that the measure is “progressive in nature” and would help achieve its stated goals. However, the success depends on each state government’s readiness, including resources and training for GST officials. The functionality must also be user-friendly for large-scale implementation.
One expert noted that focusing on high-risk applicants with a history of cancelled or suspended registrations underscores the commitment to a “credible and transparent GST system.” Supported by the Directorate General of Analytics and Risk Management (DGARM) and GSTN, the measure would enhance the security and integrity of the registration process. The industry hopes for a single biometric authentication across India, allowing one-time verification for companies with a presence in multiple states, thus streamlining the process and reducing redundancy.
While acknowledging potential discrepancies in Aadhaar information, experts agree that the majority of future registrations would gain credibility due to this exercise.
Source: The Hindu
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