New ITC Ledger System to combat GST Fraud in ITC Claims expected in November

The Union Ministry of Finance is increasing its efforts to combat fraudulent claims for Input Tax Credit (ITC) under the Goods and Services Tax (GST) system. A top official from the Central Board of Indirect Taxes and Customs (CBIC) has revealed that a new mechanism is in the works, primarily to combat fraud related to the Reverse Charge Mechanism. This initiative, developed in conjunction with the Goods and Services Tax Network (GSTN), is scheduled to debut in November 2024.

Currently, businesses can claim ITC for GST paid on purchases, but fraudsters have been exploiting loopholes, notably under RCM, where the recipient is responsible for tax payments rather than the provider. This new ITC ledger system will allow firms to track and verify RCM transactions, preventing them from improperly claiming ITC without paying GST or inflating their claims.

RCM applies in certain situations, such as transactions with unregistered suppliers or the import of services from another country, where the buyer bears the tax liability rather than the seller. The current GST ledger system includes non-RCM transactions, but this new ledger will improve the accuracy and transparency of RCM-related data, closing loopholes that fraudsters have previously exploited.

To avoid fraudulent ITC claims, the Ministry of Finance intends to use advanced data analytics and artificial intelligence (AI) to detect suspect ITC claim patterns. These tools will help the government identify fraudulent activity more efficiently and ensure that only legitimate claims are authorized. The initiative is in response to a 50% rise in bogus ITC claims in FY24, totalling more than INR 36,000 crore.

While tax experts are optimistic about the new system, they warn that businesses will need to adjust to new reporting standards to prove their ITC claims. The implementation of this ITC ledger system is expected to promote compliance, eliminate tax evasion, and increase transparency across the GST ecosystem.

With the launch of this new ITC ledger system, the government has taken a big step in combating bogus ITC claims and protecting revenue. Businesses should plan for these changes and make sure that their ITC claims are supported by accurate and transparent data to prevent compliance difficulties.