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GST - Abuse of ITC by crème de la crème! Bad omen for Second-Gen Reforms!

TIOL - COB( WEB) - 894
NOVEMBER 16, 2023

By Shailendra Kumar, Founder Editor

WHEN the GST was rolled out waaaay back in 2017, it had landed like a meteorite reform, promising low-hanging fruits for all the stakeholders! It was indeed hailed with a cacophony of yips and tingling excitements! The architects of the reform did not yield the floor to its doomers as they were convinced that such a mega reform in the extant constitutional federal framework was as rare as hen's teeth! But, after six years, one may call them whippersnapper as the inadequacies in the laws have triggered a cascade of problems! Yech, one may need a grab-bag to count the number of problems for all the stakeholders, not the taxpayers alone! The wheels of implementation have bumped into puzzling bottlenecks! If I am asked for my comment, the only three words I may like to utter are - Bewitched, bothered and bewildered!

What bothers me is the multi-pronged abuse of the system of input tax credit (ITC) which happens to be the bloodline as well as the soul of the VAT system worldwide! Greater the sprawl of ITC abuse, lesser would be the zeal and the zing among the policy-makers to undertake second-generation reforms! Unless the Centre and the States mop up the 'benchmarked' revenue, less roomy would be the GST Council's agenda for future reforms. Interestingly, ITC sits in the nucleus of the GST system. But its abuse has sadly become too rampant with two faucets sucking out 'liquid' from the exchequers' piggybanks! One is outright scandal of fake ITC which has become an organised fiscal scam being perpetrated by the syndicates of ferociously smart criminal minds. The magnitude of such scams could be close to Rs one lakh crore. The CBIC database has details of over one lakh companies which are suspected to have played active role in canoeing non-existent ITC from one supplier to another. And this is called 'Doctrine of multi-layering' of fake invoices which are used to generate fake ITC on paper (without supply of goods or services). Fake ITC cases abound in our system and the Revenue keeps struggling to unearth them; book the scammers and recover the lost revenue! Unless drastic systemic changes are made in the legal provisions, I do not see the endgame in the near future!

What bewilders me more than fake ITC frauds is the abuse of ITC kitty, not by MSMEs or traders, but by trophy-aggregating star companies of exquisite pedigree! Here, I am not referring to cases booked for inadvertent utilisation of ITC! Such cases may be seen as peccadillos! I am actually jaw-jawing about well-meditated abuse of ITC by leading companies belonging to the Crème de la crème sector of the economy! Yuck! And they are just too many and too rapacious to goose their profits! Perhaps FOMO effect! It may sound unbelievable except that it is not! They appear to be allergic to the provisions of Section 16 of the GST law! It is Kafkaesque! Though such organised utilisation of ineligible ITC is pervasive in the economy but I would like to focus on the Insurance Sector which has grabbed headlines in recent times.

The DGGI has detected GST evasion of over Rs 800 Crore and recovered over Rs 200 Crore as voluntary deposits through DRC-03. ICICI Prudential alone has paid Rs 100 Crore out of over Rs 400 Crore of suspected evasion. As many as 20 insurance sector biggies have been booked for organised abuse of the ITC provisions! Brusque disregard for laws! Let's first fathom their alleged modus operandi. As per DGGI sleuths, the NBFCs engaged in micro-financing business tend to cross-sell single premium credit-linked insurance policies of various insurance companies. Apart from the IRDA-approved nominal commission, they bargain extra commission on their beyond-target sales. To bypass the IRDA-sanctioned route, these insurance companies are alleged to have made use of intermediaries like advertising and event management companies to hedge such commission payments. In such cases, NBFCs issue invoices to intermediaries and avail ITC without any supply of service. Likewise, intermediaries also issue invoices with mark-up to insurance companies which also end up availing ITC without any actual supply of service. The term which is commonly used for such a phenomenon in China and Hong Kong is - sap sap seoi, which means a piece of cake - for all the players! And, based on intelligence, the DGGI has booked several NBFCs including L&T Finance, and dozens of insurance companies which went adrift!

Aha! It is a hair-on-fire situation! Taking a cue from the cases of these insurance companies, the DGGI has further detected another modus operandi by General Insurance Companies providing motor vehicle insurance services. As many as 15 companies were found evading GST towards the sale of scrap or salvage at the time of settling insurance claims. What is their secret sauce? How is scrap generated in this case? The normal practice is that the insured gets the repair work done from an authorised workshop which replaces parts and raises invoices in the name of insurance companies. However, the scrap of damaged auto parts lying with the workshops are adjusted in the final bill settlement but no GST is paid on such supply of scrap bought by the workshops. Another instance of tax evasion was found wrapped in the case of claims settled in reimbursement mode. In case of reimbursement claims made by the insured who pays for the repair to the workshop but the final invoice is generated against the names of insurance companies which reimburse the costs but tend to avail ITC without actually receiving the service. The DGGI sleuths have been scrutinising many more such practices being commonly implemented by the insurance companies in India.

But the larger question is - In this case, the DGGI is able to investigate and recover a part of tax liability only because it got some actionable intelligence about such modus operandi. However, if similar practices are being followed by dozens of other organised sectors in the rapidly formalising Indian economy, how is the Revenue going to detect them? If the CGST and SGST authorities undertake intensive drives, will India not look like a tax-policing state? Will it not give rise to more legal skirmishes? I wish that the sector-regulators also come up with better corporate governance norms and penal provisions if the alleged violations tend to finally stick, judicially! Secondly, stock market regulator also needs to align its penal laws with the tax laws so that acts of mens rea if established, should cost the tax evaders prohibitively. Let's not let go large limited companies in which common investors have put in their savings, to demonstrate such impoverished appetite for tax compliance! So far as fake ITC scams are concerned, the policy makers just need to undertake a nationwide drive to verify physical establishment of 1.4 Crore taxpayers - just one-time drive and the data pooled together can spawn enough insights for the AI to come up with risk assessment indices to keep an eye on habitual scammers.

Secondly, it is high time that entry threshold walls are fortified so that new registrants do not enjoy the carte blanche of raising invoices of any sum and keep on passing fake ITC. Ideally, a minimum deposit of Rs 50,000 may be prescribed for registration and the same may be locked in cash ledger for six months - enough time to judge how fatalistic a new registrant can be for the Revenue!. Such an innocuous measure itself would end up weeding out a good number of new registrants joining the tax base with foul intent of committing frauds! A tantalising solution, perhaps! In a nutshell, time has ripened for the GST Council to wield a new system with a knife and fork so that fake ITC frauds thin out in the months to come! Yup, many taxpayers would be salty about such provisions but this is also equally true that boilerplate measures cannot put a lid on the tsunami of ITC scams which have multiplied into an unimaginable number! Secondly, the Governments also need to keep an eye on the departmental 'fox' watching the 'hen house'! Let's all look for a ray of sunshine and ensure that the GST does not decay into the erstwhile Central Excise quagmire! Amen!