GST was thought to be the economic integration of the nation with the slogan of one nation one tax. The system of GST taxation has undergone a roller coaster ride since the day of its implementation. A large number of changes were made into the original idea of GST in order to suit the needs of the nation and the technical preparedness. One of the pivots of GST was invoice matching but keeping in view the technical unpreparedness and needs of the smaller business, it was done away with. This doing away of invoice matching opened the Pandora of modus operandi leading to large scale of tax evasion. The business came out with new ideas of evasion be it huge credit availment in tran-1 returns, profiteering (non-passing of benefits of tax reduction on different goods and services to the ultimate consumer), registration of large number of fake firms (as registration norms made lenient) and many more other tactics harnessing the loopholes into the GST systems.

In the recent times, a large number of fake firms have been caught up by various anti evasion and tax investigation agencies which has estimated tax implication to the tune of 15000 crores (figure from the recent statement of ministry of finance) or may be more upon the economy. These fake firms were involved in the sale and purchase of fake invoices thus passing on of the input tax credit without any actual business. This can be understood as “Credit laundering”. Input tax credit means one can avail credit of tax already paid by the person or business behind him in the supply chain so that there is no double taxation. The investigating agencies who caught these fake firms say that these fake firms integrated themselves in the chain and were passing on the credit first to different other fake firms and then ultimately to one actual business firm after many layers, which seems synonymous to concept of placement, layering and integration as in money laundering.

However, there is more than just passing on of the ineligible input tax credit or credit laundering. There have been two kinds of modus operandi used by these fake firms. In the first kind there is no actual movement of goods or no sale of actual goods but only trading of fake invoices is carried out and on the basis of these fake invoices, input tax credit is availed and passed on. In the second type, there is actual supply of goods as well without paying any tax. In this case, there is a complete system of parallel economy or supply chain which is completely out of the purview of GST system. It can be substantiated by a recent statement of the ministry of finance, where it was said that GSTN is sharing data of people who are generating e way bills but not filing tax return. This parallel system can be understood analogous to clandestine removal of goods without paying any tax. Suppose a firm ‘A’ is a manufacturer producing Rs 100 value of goods. He wants to pay tax only on 20 rupees. So what ‘A’ does, create a fake firm ‘B’ in the name of some labourer or driver and invoices 80 rupees’ value goods through this fake firm ‘B’ to another fake firm ‘C’ which has been created by actual buyer say ‘D’ who purchases goods. Further, there can be a number of fake firms between ‘A’ and ‘D’ in order to layer the transaction to mislead the investigating agencies. It has also come to the fore that on the strength of such GST business done with these fake firms, the owner who runs the whole racket also claims loans from the banks by inflating their turnover. This loan money gets diverted to other areas.

Now the question is how to bottle this genie of credit laundering. The system of matching of inward and outward supply invoices needs to be brought back and to be made mandatory for availment of input tax credit. The E way bill generation should be regulated and needs to be linked with return filling. Only those taxpayers who have filed their returns should be allowed to generate E way bills. Furthermore, there should be adequate checks in place at the time of registration of the firms so that fake registrations are reduced. The banks must reconcile the returns of the taxpayer with the GST department or on the GST services portal before financing on the basis of turnover declared in GST returns. The burgling with government revenue cannot be allowed in the name of ease of doing business when in actual there is neither any business nor any benefit to the small and medium businesses as was expected in GST regime.