Nagpur: Investigations by directorate of GST intelligence, which is conducting a series of raids and arrests these days, have revealed that evaders had an almost free hand during the initial days of the tax regime. Glitches in the system and policy allowed fast registration with minimal documentation, which led to mushrooming of shell companies in the GST network.
Sources say companies even filed empty PDF files in the name of documents. Random Aadhaar numbers and PAN were also given to avail GST registration.
A notification issued in November this year finally calls for Aadhaar authentication. This will lead to cross verification that the applicant has filed his own Aadhaar. However, taxmen are also scanning registrations from July 2017 to February 2020 to find cases of fraud that may have taken place during this period. In Nagpur alone, more than 150 such registrations have been unearthed on the basis of data mining tools. Sources say this is just the tip of the iceberg.
Raids and arrests have happened all over the country as the frauds are traced, said a source. Such firms have been used as conduits to claim fraudulent input tax credit (ITC) against fake purchases.
The system grants a deemed registration if the case is not approved within three days of application. Due to glitches in the system the registration was deemed granted even before an application reached the concerned officer’s dashboard. The time lag has now been done away with.
However, earlier this allowed registration of a number of firms with fake documents like empty PDF files and random Aadhaar numbers. Since there was no means of cross verification, such companies easily booked fictitious sales in their books. These sales were further recorded by other companies as purchases in their accounts to avail fraudulent ITC, said a source.
A drive to cross verify certain red-flagged registrations was mooted in December 2017, which did not take off. In August this year, another plan to cross verify the Aadhaar numbers was put up, which too was not taken further.
Finally, in November, the order was issued to carry out Aadhaar verification for registration. There have been suggestions that even biometric verification should be done. This has not been implemented yet.
Amit Agrawal, a chartered accountant, said in the VAT and central excise regime physical inspection of premises used to happen before registration. As the provision was done away with, there was misuse of the law under GST. The recent measures to plug the loophole are welcome but it may be too harsh for start-ups. Such entities may be sharing work spaces and may not be able to produce a lease deed, he said.
Chartered accountant Pritam Mahure said, “The earlier loopholes indeed led to misuse of the system. PAN and Aadhaars of daily wagers were given to get registration of shell companies. Now the loophole will be plugged. However, registration is just the entry point. The authorities need to keep regular watch.”