Income Tax Department unearthed network of 232 fake money changing companies evading Rs.1000 crore via fraudulent ITC claims

The Income Tax Department discovered a network of 232 fake money changers and found tax evasion totalling Rs.1,000 crore through fraudulently created Input Tax Credits under the Goods and Services Tax (GST) regime.

Sanjay Kumar Agarwal, Chairman of the Central Board of Indirect Taxes and Customs (CBIC), detailed the scam technique, stating that the incident was discovered when the Meerut CGST Commissionerate busted a group of firms fraudulently claiming ITC.

“Interestingly, the investigation revealed that ‘Full Fledged Money Changer Companies (FFMCs)’ were used for parking/routing of funds generated through fraudulently passed on ITC with no real recipient of the foreign currency,” he stated.

Furthermore, he stated that the accounts used to route money had been provisionally attached. “Three persons have been arrested for their role in the entire fake billing racket,” he went on to say.

A fake invoice indicates that there is no actual provision of goods or services; it is just invoice issuance that is fraudulently utilized to obtain input tax credit (ITC). Unscrupulous individuals use the identities of others to obtain a fake/bogus GST registration in order to defraud the government.

Such fake/false registrations are used to fraudulently transfer input tax credits to unscrupulous recipients by generating invoices with no underlying supply of goods or services, or both. Fake registrations and the issuance of bogus invoices to pass off fake ITC have become a major issue, since dishonest individuals engage in dubious and complex operations, resulting in loss of revenue to the government.

Last month, a scam was discovered in Uttar Pradesh, with fraudsters utilizing hand pumps to claim fake refunds under the Inverted Duty Structure (IDS) under the GST regime. Taxes on inputs can be subtracted from taxes on finished products, and the difference is deposited with the government. However, this is not possible under IDS, as inputs are taxed at greater rates than the finished product. So, under IDS, the taxpayer receives a refund. A hand pump is one of the very few GST commodities that fall within the IDS category.

The Lucknow Zonal Unit of the Directorate General of GST Intelligence (DGGI) filed a case after authorities discovered that three Agra-based taxpayers were allegedly claiming fraudulent Input Tax Credit (ITC) on raw materials used to manufacture hand pumps. The fake ITC on raw materials (attracting 18% GST) was then used to create fake invoices for hand pumps (attracting 5% GST) to non-existent firms with no actual manufacturer or supplier. The accused voluntarily deposited Rs.5.21 crore of the total 15.27 crore of evasion uncovered.

These are only a few examples of evasion through the use of fake firms. Previously, the Finance Ministry revealed that over 29,000 fake firms were uncovered and over Rs.44,000 crore of GST tax evasion was discovered in a statewide drive between May and December 2023. It was planned to communicate jurisdiction-specific details of such identified suspicious GSTINs with the relevant State/Central Tax agency in order to launch a verification exercise and take appropriate action. If, after detailed verification, it is found that the taxpayer is non-existent and fictitious, action will be initiated for suspension and cancellation of the taxpayer’s registration.

Further, the matter may be examined for blocking the ITC in the Electronic Credit Ledger. Efforts will also be taken to identify the recipients to whom such non-existing taxpayers have passed the input tax credit, identify the mastermind, and act.