Fake Inverted rated refund using hand pumps

Introduction:

A recent scam has come to light in Uttar Pradesh, where fraudsters have been using hand pumps to claim fake refunds under the Inverted Duty Structure (IDS) mechanism of the Goods and Services Tax (GST).

Understanding the Inverted Duty Structure (IDS):

The IDS allows taxes on inputs to be deducted from the tax on the final product, resulting in a net deposit with the government. However, this mechanism does not apply in cases where inputs attract higher tax rates compared to the final product, as seen with hand pumps under GST.

Fraudsters’ Operating Methodology:

The Directorate General of GST Intelligence (DGGI) discovered that three taxpayers based in Agra were availing fake Input Tax Credit (ITC) on raw materials allegedly used for manufacturing hand pumps. These fake ITCs were then utilized to issue fake invoices for hand pumps to non-existent entities without any actual manufacturing or supply.

Fraudulent Refunds and Evasion:

Through this scheme, taxpayers managed to obtain fraudulent refunds under IDS, resulting in evasion amounting to ₹15.27 crore. The mastermind behind the operation, who is now under judicial custody, admitted to the fraud and voluntarily deposited ₹5.21 crore.

Nationwide Drive Against Fake Firms:

The Finance Ministry reported identifying over 29,000 fake firms and detecting over ₹44,000 crore of GST tax evasion in a nationwide drive between May and December 2023. This drive aimed to detect suspicious/fake GSTINs, conduct verifications, and take remedial action to eliminate fake billers from the GST ecosystem.

Measures Against Fake Invoices and Registrations:

Fake invoices, used to fraudulently avail ITC, and fake/non-genuine registrations pose a serious problem, causing revenue loss to the government. Authorities are taking measures to suspend and cancel registrations of non-existent taxpayers, block ITC in Electronic Credit Ledgers, and identify recipients involved in fraudulent transactions.

Conclusion:

The exploitation of hand pumps for fake GST refunds highlights the sophistication of fraudulent schemes in tax evasion. Through concerted efforts by tax administrations, including verification drives and remedial actions, authorities aim to curb such fraudulent practices and safeguard government revenue from further losses.