How Has GST Data Been Used to Detect and Prevent Tax Evasion?

Adopting the Goods and Services Tax (GST) is a watershed moment in contemporary taxation, simplifying the indirect tax system and boosting economic openness. One of the most important benefits of GST is its ability to create massive volumes of data, giving tax officials unparalleled insight into the complexities of economic operations. The increased availability of data has proved to be a powerful instrument in the hands of tax authorities, allowing them to identify and deter GST tax evasion more efficiently than ever before.

The use of GST data to combat tax evasion represents a paradigm change in revenue collection and compliance monitoring. GST not only streamlines the tax system by combining different taxes into one framework, but it also establishes a digital record of transactions. This digital trail has proven to be a helpful resource for tax officials looking to discover abnormalities, disparities, and suspected GST tax evasion cases.

This article investigates how GST data has been used to identify and prevent tax avoidance. It goes into technical improvements that make data analysis easier, joint efforts between tax authorities and corporations, and the influence on compliance levels. As we traverse the complex world of GST data use, it becomes clear that the convergence of technology and taxes is more than just a trend but a need in the continuous fight against GST tax evasion.

GST Data – An Overview

GST data refers to the large volume of information that is furnished periodically by taxpayers in their GST returns and other statements. The key sources of GST data are:

• GSTR-1: Filed monthly by suppliers providing details of outward supplies, tax liability, and input tax credit.
• GSTR-2: Filed monthly by recipients reconciling inward supplies with suppliers’ GSTR-1.
• GSTR-3: Filed monthly by taxpayers summarizing outward and inward supplies and total tax liability.
• GSTR-9: Filed annually, reconciling the monthly returns and consolidating the annual accounts.
• E-way Bills: Generated for movement of goods valued over Rs. 50,000. Provides source and destination details enabling tracking of goods movement.
• E-invoices: Real-time, digitally signed invoices issued to buyers containing GST details and QR codes. Enables instant verification and reconciliation.
• ITC-04: Filed quarterly by taxpayers with over Rs. 5 crore turnover containing invoice-level details for verification of input tax credit claims.

Table: Difference in GST return fillings

The tax authorities process and analyze this massive amount of structured GST data using specialized data analytics tools and AI algorithms. The key benefits of GST data are:

• Provides a complete end-to-end view of transactions across the supply chain.
• Enables cross-verification of returns filed by suppliers and recipients.
• Facilitates data-driven risk assessment, profiling, and audit selection.
• Improves transparency and audit trail, helping investigations.

GST Tax Evasion

Tax evasion refers to illegal and intentional actions to avoid paying taxes by concealing income, sales or making fraudulent claims. It differs from tax avoidance, which uses loopholes in the law to reduce taxes.

Some common methods of GST tax evasion are:

• Under-reporting of sales: Not disclosing full taxable turnover to evade GST on concealed sales.
• False input tax credit claims: Availing fake ITC for non-existent purchases by creating counterfeit invoices.
• Fake exports and refunds: Obtaining fraudulent export refunds using forged documents for goods not actually exported.
• Suppressing margins: Reducing GST liability by inflating expenses to show lower net taxable value.
• Circular trading: Generating fake ITC through fake invoices circulating among multiple bogus firms.

GST tax evasion is estimated to be over 20% of total GST liability, resulting in an annual revenue loss of Rs. 1.5 lakh crore. It severely hurts honest taxpayers, distorts the tax base, and hampers economic growth.

GST Anti-Evasion Measures

The GST authorities have taken several measures leveraging GST data to detect and deter tax evasion, such as:

• Notices and summons: Issuing warnings seeking explanations for discrepancies in returns and calling taxpayers for questioning based on data analytics.
• Inspections and searches: Conducting surprise inspections at business premises and search operations to seize incriminating evidence.
• Blocking ITC and EWB: Blocking fraudulent ITC claims and E-way bill generation based on data analytics.
• Penalties: Imposing penalties up to 200% of tax evaded and arresting for tax evasion.
• Prosecution: Launching prosecution and imprisonment of up to 5 years for serious GST offenses.
• Recovery: Recovery of evaded taxes using garnishee proceedings, attaching bank accounts and assets.

While these measures have detected massive tax evasion, the recovery rate is low at around 10-15% due to legal complexities. There are also challenges due to the need for more integration between GST and income tax data and coordination between the Center and States.

The tax authorities need to focus on enhancing data quality and system integration, cross-agency coordination, and increasing taxpayer education to maximize the impact of GST anti-evasion measures.

GST Impact on Tax Evaders

The extensive use of data analytics and strict anti-evasion actions under GST has profoundly impacted the behavior and attitudes of tax evaders:

• Deterrence effect – The high probability of getting caught and strict punishments have discouraged many taxpayers from attempting willful tax evasion.
• Compliance effect – To avoid scrutiny, many businesses have proactively taken steps to improve compliance, such as timely tax payments and reconciling books with returns.
• Evasion effect – However, some habitual offenders continue to evade using new tactics like generating fake bills below the Rs. 50,000 threshold to avoid e-invoicing.
  

According to experts, the number of taxpayers under GST has increased by 50% driven by formalization of the economy and new registrations. The tax-to-GDP ratio has risen by almost 1% due to GST implementation.

Table: GST Compensation Gap for 6 states

In a survey, 75% of taxpayers admitted to enhancing compliance due to fear of penalties and prosecution under GST. This indicates the tangible impact GST is making on improving tax compliance and curbing evasion. However, more work is needed to tackle invoice-level tax evasion, which remains rampant.

Common Methods and Strategies of GST Tax Evasion

Some of the most common methods and strategies adopted by fraudsters to evade taxes under GST include:

• Under-reporting of Sales

One of the most common methods of evasion is concealing actual sales volumes and under-reporting turnover to lower GST liability. This is done by accepting cash payments and not recording transactions, maintaining double accounts books, inflating expenses, and under-invoicing sales.

• Fake ITC from Bogus Invoices

Fraudsters collude to create long chains of fake dealers and generate fake purchase invoices. This helps each dealer claim input tax credit for non-existent purchases which is encashed or adjusted against GST liability on concealed sales.

• Circular Trading

In circular trading, fake dealers create layers of fake purchases and sales among themselves without the actual movement of goods. This generates exponential ITC claims for fraudulent beneficiaries.

• Tax Evading Export Refund Claims

Exporters attempt to illegally claim refunds of accumulated input GST credit by falsely showing exports using forged shipping bills and documents without actually exporting goods.

• Suppressing Taxable Turnover

Businesses try to artificially reduce turnover below exemption thresholds by splitting a single entity into multiple firms, showing inter-branch transfers as sales, or merging costs into expenses. This suppresses taxable margins and GST liability.

Measures Taken by Tax Authorities to Curb GST Evasion

Using the extensive GST data, the tax authorities have taken the following steps leveraging data analytics to identify and control GST fraud and tax evasion:

• Risk-based Analytics and Audits

Data analytics models are used to detect abnormal or at-risk patterns like sudden spikes in input tax credits or exponential increases in turnover. Audits are then conducted on such high-risk taxpayers.

• Surprise Visits and Searches

Surprise visits and search and seizure operations are conducted at the premises of suspicious dealers to seize incriminating documents and evidence.

• Real-time Invoice Level Verification

E-invoicing and e-way bill integration enable real-time verification of invoices during the transit of goods to prevent bogus billing.

• Blocking of Fraudulent ITC

ITC claims of risky taxpayers are blocked to prevent the encashment of fake ITC. Their registrations are also canceled in order to avoid further ITC generation.

• Linking GST with PAN and Aadhaar

Linking GST registrations with PAN and Aadhar enables better taxpayer profiling and prevents multiple bogus registrations.

• Coordinated Action with Income Tax

GST authorities share data with the income tax department to enable coordinated action against tax evaders and fraudulent entities.

Impact of GST and Anti-Evasion Measures on Tax Evaders

GST implementation has positively impacted the behavior and psyche of tax evaders in the following ways:

• Increased Compliance

Many taxpayers have voluntarily stepped up tax compliance by timely tax payments, proper invoicing, and filing accurate returns to avoid scrutiny.

• Reduced Tax Evasion

Extensive data trails and tech-enabled tracking have increased the risk of getting caught, deterring intentional tax evasion, especially among SMEs and smaller dealers.

• Shift to New Methods

Habitual evaders continue to evade taxes by shifting to new methods like under-reporting turnover through cash sales using smaller fake bills under thresholds.

• Registrations and Tax Base Rise

The number of GST registrations has doubled, indicating the formalization of the economy. The tax-to-GDP ratio has increased by 1%, showing a wider tax base due to GST implementation and anti-evasion steps.

Thus, while GST has positively influenced compliance attitudes for the majority of taxpayers, hardcore evaders continue to pose challenges requiring additional policy and administrative efforts to curb tax evasion.

Conclusion

GST implementation has provided a vital platform for the tax administrators to leverage the power of technology and data to detect and deter tax evasion, which was rampant under the previous indirect tax regime. The seamless flow of invoice-level data has enabled the effective use of analytics for risk profiling, audits, surprise actions, and focused enforcement drives against tax evaders.

However, realizing the full potential of GST in curbing tax evasion requires continued efforts to improve data quality, coordination between centers and States, upgrading technology infrastructure, and enhancing taxpayer education and compliance. The COVID-19 pandemic has provided a suitable time for both the tax authorities and businesses to reset and align themselves to the new GST compliance paradigm.

With growing digitization and data availability, technologies like machine learning and blockchain will be game changers for enhancing compliance and enforcement under GST. Overall, the tax departments’ strategic and persistent use of GST data is expected to accrue huge dividends in the long run by creating a transparent and compliant tax environment, boosting revenues, and promoting economic growth.

FAQs

• What is GST data?

GST data refers to the large volume of information furnished by taxpayers in their GST returns, e-way bills, e-invoices, and other statements that provide details of outward and inward supplies, tax liability, input tax credit, and movement of goods.

• How does GST data help prevent tax evasion?

The comprehensive and real-time GST data enables effective tracking of transactions, invoice-level verifications across the supply chain, data-driven risk assessment, and focused enforcement actions against suspicious taxpayers to uncover tax evasion.

• What are some common methods of tax evasion under GST?

Some common methods include under-reporting sales, availing fake input tax credits using bogus invoices, circular trading, suppressing turnover to remain under thresholds, fraudulent export refund claims, and non-payment of collected taxes.

• How are fake input tax credits identified in GST?

Fake ITC claims are identified by matching invoices in the supplier’s GSTR-1 and recipient’s GSTR-2, checking the genuineness of suppliers, tracking circular trading patterns, and verifying document authenticity using QR codes on e-invoices.

• How are risky export refund claims tackled?

Refund claims are verified using the Compliance Information Portal, ICEGATE data, and physical verifications to check the actual export of goods using submitted documents like shipping bills before sanctioning refunds.

• How does e-invoicing help tax authorities?

E-invoicing enables real-time tracking of invoices, quick QR code-based authentications, and invoice-level verifications across the supply chain to identify bogus transactions and fake billing.

• How do TDS and TCS under GST help tackle tax evasion?

TDS and TCS provide a trail of transactions, which helps tax authorities cross-verify transactions, ensure tax collection, and take action against entities not filing returns or under-reporting supplies.

• What technology tools are used for GST data analysis?

Tax authorities use AI, ML, and data analytics tools to analyze massive GST data to detect suspicious patterns, surface discrepancies, identify networks of fraudsters, and build targeted audit cases automatically.

• How are unregistered dealers tracked under GST?

Tax authorities are leveraging various data sources like bank turnover, utility bills, import-export data, etc., and conducting surveillance using geospatial tagging to identify unregistered dealers.

• What new measures can further strengthen GST compliance?

Measures like integration of GST e-way bill with FASTag, VAHAN database, tighter TDS/TCS implementation, invoice matching automation, and unified taxpayer database can significantly boost GST compliance.

Aaryan Singh

B.Com degree with finance and accounting Specialisation in Goods and Service Tax (GST) and taxation system Completed certification course on GST from ICAI in 2022 Online GST practitioner course completed in 2023 from Indian Institute of Skill Development and Training.

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