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GST - A tale of SEZ, fake exports and breathtakingly mega ITC fraud

Published: Sep 25, 2019

By TIOL News Service

AHMEDABAD, SEPT 25, 2019: FRAUDULENT ITC Refund under GST is indeed an All-India phenomenon, now! But what may shock even the community of fraudsters is the magnitude of the fraud being detected by the DGGI sleuths. Working on a piece of intelligence, the preventive agency put in operation its surreptitious sleuthing to zero in on the real battleground. And they predictably landed up in Kandla SEZ which has 'unenviable records' to its credit!

The DGGI came to know that some KSEZ units, in connivance with about 20 exporter firms based in the National Capital Region (NCR) have hatched a major conspiracy to defraud the exchequer. The modus operandi detected indicated huge overvaluation to the extent of 3000% of the market value of goods exported to the SEZ (zero rated supply) and claiming of refund of Input Tax Credit (ITC) obtained by fraudulent means. Evidences confirm that the source of ITC claimed as refund against exports itself is fraudulent.

In what seems to be a meticulously planned conspiracy, the commodity selected by the entities for the fraudulent act has been found to be sin goods viz "manufactured tobacco and other related products" falling under CTH 2403 which is subject to tax at the rate of 93% and 188%, including Cess. Due to high incidence of taxes on such goods the scope to claim refunds of ITC against refunds is manifold more than the goods which are subject to tax at lower rate of 28% or 18%. Thus, the conspirators have aimed at deriving maximum illegal gain out of fraudulent transactions. It is noteworthy to mention that tobacco products are mostly Business to Consumer (B2C) supply items and it is relatively easier to obtain from the market GST paid invoices "without corresponding goods, as the goods often get sold in the market without corresponding bills.

It has been revealed that low grade material like scented jarda, kimam (tobacco extract), filter khaini etc. which have been manufactured clandestinely without payment of tax by a few Noida based units or procured from the local market at the rate of Rs. 150 to 350 per kg have been exported to the SEZ based units at the rate of Rs. 5000 to 9000 per kg and subsequently, refund of accumulated ITC, sourced fraudulently, in excess of Rs. 400 crores has been claimed by the exporters from the jurisdictional GST authorities.

The agency has been able to identify more than 25 such suppliers located in States like Assam, Bihar, Delhi, Haryana, MP and UP who have issued fake invoices of more than Rs. 1000 crores to the NCR based exporters without supply of goods to facilitate refunds. These suppliers are either non-existent or are being indirectly controlled by the exporters themselves.

To give a semblance of legitimacy to the otherwise sham transactions, low value goods manufactured in Noida or procured locally in Delhi have been dispatched to SEZ units under the cover of invoices. Thus, while the Input Tax Credit has been obtained fraudulently from one source, the low value goods have been procured from another source and both the streams have converged at the end of exporters who have made highly overvalued supplies to the SEZ units for illegal gains through ITC refund route.

Due to the proactive steps taken by the DGGI, refund claims of ITC in excess of Rs. 300 crores in the process of getting disbursed by the jurisdictional authorities, have been withheld from going into the hands of scamesters. In addition, the surplus ITC of more than Rs 100 crores still lying in the credit ledger of such exporters has also been prevented from getting siphoned off by way of likely refunds claims. Thus, an act of indiscretion has been nipped in the bud.

The illegitimate export incentives availed by the SEZ units shall also be further investigated by the Customs Authorities.

The agency has been able to identify the key conspirators and the actual beneficiaries of the scam who are on the run. Efforts are being made to bring them to the book.

This is a major detection of export fraud coupled with fraudulent ITC refunds though SEZ based units. This investigation is an outcome of specific intelligence input which was further refined by rigorous analysis of data available on the GST Network and the E-way Bill system.

The case is indicative of the resolve of DGGI to implement the directives of the Government to ensure tax compliance and to strive to provide a level playing field to the honest entrepreneurs who are the wealth creators of the Nation.