GST Scam: Fraudsters Use Hand Pumps for Tax Evasion

A startling scam has been uncovered in Uttar Pradesh, revealing a scam where fraudsters exploited hand pumps to claim false refunds using the Inverted Duty Structure (IDS) mechanism under GST.

GST Scam Unearthed: Under normal circumstances, taxes on inputs are deducted from the tax on the final product, and the net amount is then deposited with the government. However, IDS operates differently, with inputs attracting higher tax rates compared to the lower rates on the final product. This results in taxpayers being eligible for refunds under IDS. A limited number of goods under GST fall into the IDS category, and hand pumps happen to be one of them.

According to Sanjay Kumar Agarwal, Chairman of the Central Board of Indirect Taxes & Customs (CBIC), the Lucknow Zonal Unit of the Directorate General of GST Intelligence (DGGI) took action after officers detected a scam involving three taxpayers based in Agra. These taxpayers were allegedly claiming fake Input Tax Credit (ITC) on raw materials purportedly for manufacturing hand pumps. “The fake ITC on raw materials, which attracted GST at 18 per cent, was then used to generate bogus invoices for hand pumps, attracting GST at five per cent, issued to non-existent entities without any actual manufacturing or supply,” Agarwal explained in a communication to all CBIC officers and staff.

Agarwal further disclosed that through this scam, the taxpayers managed to secure fraudulent refunds under IDS, with evasion totalling ₹15.27 crore. “The mastermind behind the entire scam, now in judicial custody, has admitted to the fraud and voluntarily deposited ₹5.21 crore,” Agarwal added without revealing the identity of the accused.

This scam highlights just one instance of using fictitious firms for evasion purposes. Previously, the Finance Ministry reported the identification of multiple GST scams involving over 29,000 fake firms and the detection of over ₹44,000 crores in GST tax evasion during a nationwide drive conducted between May and December 2023. All Central and State tax administrations joined forces for a special All-India Drive on May 16, 2023, aimed at identifying suspicious or fake GSTINs, conducting necessary verifications, and taking corrective actions to eliminate fake billing from the GST ecosystem and protect government revenue.

The plan involved sharing details of such suspicious GSTINs, categorized by jurisdiction, with the relevant State/Central Tax administrations to launch verification drives and take appropriate action. Upon thorough verification, if a taxpayer is found to be non-existent and fictitious, steps will be taken to suspend and cancel their registration. Additionally, consideration will be given to blocking Input Tax Credit (ITC) in the Electronic Credit Ledger. Efforts will also be made to identify the recipients who received such fake ITC from non-existent taxpayers and pinpoint the masterminds behind these scams.

Fake invoicing refers to the issuance of invoices without any actual supply of goods or services, solely for the purpose of fraudulently availing Input Tax Credit (ITC). Unscrupulous individuals misuse the identities of others to obtain fake or bogus registrations under GST, aiming to deceive the government. These fake registrations are then used to unlawfully transfer input tax credits to dishonest recipients through the issuance of invoices for non-existent supplies of goods or services. Such fraudulent activities have become a significant concern, leading to revenue losses for the government.

Also Read: Clarification of GSTN on Complains of Delay in Registration Despite Successful Aadhar Authentication 

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