India has always been suspected to have a gigantic parallel cash economy which was primarily the reason for tax evasions and frauds. With the intent to curb transactions happening under such a parallel cash economy, the Government took various significant steps such as demonetisation, GST roll-out, etc. However, even after such drastic measures, the Government has instigated various drives to check rampant tax evasion under GST in form of fake invoicing, fake credit scams, etc.
Though the repeated efforts can be appreciated and acknowledged, the truth remains that there are still large sections of the economy that are impacted by these scams. India is not the only country that has fallen into the traps of GST frauds; such means and ways have been uncovered even in Malaysia, Australia, and other countries as well. The good news is that the Government is taking proactive steps to curb and check the fake invoice and ITC scams.
While there is no doubt that fraudsters are always under the surveillance of the investigators, unfortunately, sometimes even honest taxpayers get trapped in these scams.
In this blog, we aim to highlight the key impact of these scams on honest taxpayers and the possible safeguards that can be implemented by such organisations.
The honest businesses and industries which are truthfully and diligently complying with all requirements and compliances may think that they are untouched from such scams and fraudulent practices. However, the fact of the matter is that till the time there is even a single trader falsifying invoices or passing fake Input Tax Credit (ITC), the loop doesn’t stop, and it may reach and taint the honest taxpayers as well. There are plenty of ways how these scams can reach and impact honest taxpayers, some of these are mentioned below:
- Sales reported in GSTR – 1 to pass ITC to the recipient but GSTR-3B is not filed and GST remains unpaid.
- Mentioning incorrect/illegitimate addresses on invoices and/or creating a false figurehead to sign the invoices.
- Non-filing of returns by vendors and non-payment of taxes which hampers ITC claims of genuine buyers.
Impact On Business
Some broad areas where the business may get impacted due to fraudulent practices are:
- Financial Impact: The most obvious and hard-hitting is the financial impact that an organisation goes through after a scam. The heavy penalties and interest liabilities defined under the law can cause a huge dent in the finances of the company. Moreover, the litigation cost is an added outflow that is not anticipated by organisations.
- Goodwill Impact: Any scam or fraudulent tax practice can put the company’s name in a negative light. Moreover, in the age of social media, it becomes difficult to contain the disaster. Further, any goodwill impact also results in financial impact as the organisations are wary about the people with who they deal; any negative news could impact the business adversely.
- Harassment of Management: While the management may not be involved or aware of any fraudulent practices, they are held liable, even personally in some cases. Moreover, the repercussions could even stretch to imprisonment in severe cases. Facing such harsh punishments for something which one has no clue about, becomes distressing for the management and other key personnel.
Although one can never be 100% sure, necessary steps need to be taken to safeguard an organisation from such scams. We have listed down a few key points which may help in this regard:
- Put Technology First: The Government has used technology extensively to uncover or unearth these scams. Recently, the CBIC and the CBDT signed a Memorandum of Understanding to exchange data through API. Thus, the obvious bit of getting cautious is using technology in the best possible manner. If the Government can tie up data from all sources to arrive at any anomaly, so can the organisations. Such anomalies can lead to the fact-finding of any scams being targeted at the organisation. Moreover, this can help in avoidance – entering into any business transactions with not genuine companies, availing any incorrect ITC, passing on undue ITC to businesses.
- Vendor/ Customer Master Data: The entire GST regime is based on an ecosystem of recipients and suppliers conducting transactions and reporting these transactions accurately and timely on the GSTN portal. Therefore, each business should have its vendor/ customer master data in place. These masters should be updated from time to time basis to amend any changes in GST registration, return filing status, etc. This can save the businesses from any unpleasant events like blocking of ITC due to non-payment of taxes by a supplier or due to suspension of registration of supplier.
- Being Updated with Changes in the Law: With the frequency that the law keeps changing, it is extremely difficult for the industry to keep track of the changes. Swindlers and fraudsters sometimes take the shelter of these amendments and carry out their illegitimate transactions in the guise of amendments in law. This could include charging an excess tax rate from a buyer and pocketing the differential amount of tax, etc.
- Putting Checks and Balances in Place: Fundamental checks like maker-checker, recording of audit trail, holding teams accountable are the basic steps that could go a long way in protecting organisations from falling prey to frauds and tricksters. The tightening of internal control measures and having a Standard Operating Procedure (SOP) could also contribute to discouraging any fraudulent activities.
Frauds and scams can result in a downward turn for any decently running organisation. The repercussions are such that sometimes the businesses even face existential risk. There is a lot at stake and certainly, things cannot be taken for granted. Organisations need to invest more in technology to ensure all steps are being taken to curb fraudulent practices. Accounting and GST software can provide necessary tracking and flag off any suspicious transactions, creating a safety net for an organisation.
The government is doing its bit and is actively tracking these fake networks. However, with the help of the industry, the issue of fake invoices and ITC can be plugged from its root.
Frauds and scams can result in a downward turn for any decently running organization. The repercussions are such that sometimes the businesses even face existential risk. Read more on Frauds and how to avoid them – views by our MD and Founder Mr. Niraj Hutheesing.