Government steps up fight against fake GST registrations

India's tax authorities are on a warpath against businesses that exist only on paper. The Central Board of Indirect Taxes & Customs (CBIC) has announced a nationwide special drive targeting fake GST registrations. Set to run from 16 August to 15 October, this initiative seeks to safeguard government revenues and ensure the integrity of the tax system. 

The move, in accordance with Instruction No. 02/2024-GST dated 12 August 2024, follows the success of a similar campaign last year that uncovered nearly 22,000 fake registrations and over ₹24,000 crore in suspected tax evasion.

Understanding fake GST registrations

GST registrations are deemed fake or bogus when entities are established solely to defraud authorities by falsely claiming Input Tax Credit (ITC) without any actual supply of goods or services. 

These fraudulent set-ups often use shell companies to manipulate invoices and inflate turnover. The department employs risk profiling and scrutiny of taxpayers to detect such entities, focusing on red flags like multiple GST identification numbers (GSTINs) for a single address or discrepancies between declared premises and the volume of goods transacted.

Key objectives of the special drive

The CBIC’s special drive will focus on identifying and eliminating suspicious GST registrations. Upon detection of non-existent or fictitious entities, the following measures will be implemented:

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Suspension and cancellation of registrations: Under Section 29 of the CGST Act, 2017, fraudulent GST registrations will be suspended and subsequently cancelled.

Blocking of Input Tax Credit (ITC): ITC linked to these fake registrations will be blocked in accordance with Rule 86A.

Recovery actions: The department will deny ITC to recipients who have transacted with these bogus entities, recovering the availed credit along with interest and penalties.

Provisional attachment of assets: To protect government interests, authorities may temporarily attach bank accounts and properties under Section 83 of the CGST Act during ongoing investigations. This allows the authorities to freeze these assets during ongoing investigations or proceedings. If your property is attached, it cannot be transferred or sold until the proceedings conclude. The provisional attachment will be lifted once the commissioner determines there is no longer a risk of revenue loss.

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During the drive, CBIC will leverage advanced data analytics and risk assessment tools to identify high-risk GSTINs. This will be followed by physical verification of the principal place of business by GST officers to confirm the legitimacy of operations and compliance with GST regulations.

Precautionary measures for taxpayers

While the crackdown targets fraudulent activities, compliant businesses must take certain precautions to avoid adverse consequences during the drive:

Prominent display of GSTIN: Ensure your GSTIN is clearly displayed at your primary and additional business locations.

Visible GST registration certificate: The GST registration certificate should be easily accessible and visible at your business premises.

Maintain essential documents: Keep key documents, such as PAN, Aadhaar, electricity bills, rent agreements, and municipal tax bills, readily available.

Adherence to documentation requirements: Follow the documentation guidelines under Section 35 of the CGST Act, 2017.

Potential penalties for non-compliance

Non-compliance during the GST Special Drive could result in significant penalties:

Display and documentation penalties: Failure to display the GSTIN or GST registration certificate can lead to penalties of ₹25,000 each for CGST and SGST.

ITC violations: Incorrectly claiming ITC without a valid invoice can attract a penalty equal to the higher of ₹10,000 or the amount of ITC availed, plus 18% interest.

Tax payment shortfalls: Non-payment or underpayment of tax (without fraudulent intent) could result in penalties of the higher of ₹10,000 or 10% of the tax involved.

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General violations: General breaches of GST provisions may incur penalties up to ₹25,000 each for CGST and SGST.

If a registration is found to be fake, it will be cancelled, and penalties will be applied as per Sections 122 to 128 of the CGST Act, along with the necessary interest charges.

Dainik Gohel is managing partner at DGNM & Associates LLP.