GST Registration By Startups May Come Under More Scrutiny
Union Finance Minister Nirmala Sitharaman and Finance Secretary Ajay Bhushan Pandey at the 39th GST Council meeting (Source: PTI)

GST Registration By Startups May Come Under More Scrutiny

On Nov. 18, the Law Committee of the GST Council is expected to consider a proposal that increases scrutiny of the indirect tax registrations of companies that don’t have a financial track record like filing of income tax returns. By nature, these would be mostly new companies or startups. The government is seeking to crack down on invoice frauds and has hence proposed detailed physical and financial verification of such companies by tax officers, before their GST registrations are accepted.

But, in an effort to catch crooks, these enhanced registration scrutiny measures will hurt innocent companies, experts told BloombergQuint. They will increase bureaucracy and making companies vulnerable to harassment and corruption by tax authorities.

The proposal runs counter to efforts of the Finance Ministry towards ease of paying tax, such as faceless assessments for income tax, they said.

The Problem

In October, a chartered accountancy student, also a partner at an accounting firm, was arrested by GST authorities for allegedly registering 115 fake companies to fraudulently claim an input tax credit under goods and services tax.

Residing in Ahmedabad, the third-year CA student has been accused of creating fake firms spread over nine tax commissionerates. These firms issued fake invoices for supply of manpower, asset management and consultancy services to claim input credit of Rs 50.24 crore, according to information shared by two government officials in October. They spoke on condition of anonymity as it is an ongoing case.

With the help of data analytics, tax authorities claim they found 55 of these 115 companies had similar registered mobile numbers and email IDs. Location of these firms was traced through the internet protocol address used for registration and filing returns. They were paying very less amount in cash for payment of GST liability while a high percentage of credit was being used to pay the tax due, one of the officials cited earlier said.

It was also found that these companies availed and claimed the same amount as the input tax credit for filing monthly GSTR-3B returns.

The modus operandi is common to many such GST frauds—pop up firms that issue GST invoices without any underlying supplies and pass on input credit to other businesses for a fee. This is done without actually making a purchase or a sale, and just making account entries.

In the three years of GST implementation, the government has made 408 arrests for alleged evasion of Rs 93,462 crore in tax, according to data shared by it.

The Proposed Solution

The GST authorities think such frauds are on account of the ease of getting a GST registration, according to another government official, also speaking on condition of anonymity.

The government’s intention is to ensure only genuine businesses get a GST registration, he said.

Hence, the proposal to:

  • Physically and financially verify the existence of businesses that do not have a commensurate financial track record (such as payment of income tax).
  • Allow quick suspension of registration if any suspicious activity is found. To be restored only after detailed physical and financial verification by tax officers.
  • Also consider changes for automatic registration under GST law under which if verification is not done in seven days, registration is automatically granted.

An email sent to the Ministry of Finance didn’t elicit a response.

The Impact

While the government is justified in seeking to curb such fraud, the step could have adverse consequences on genuine new businesses, said Abhishek Jain, a partner at EY India.

Physical verification of a taxpayer’s premises may cause inconvenience to new businesses, Jain said, adding that such a step would hinder with government’s intention of ease of doing business in the country.

Currently, physical verification by tax authorities is done only for some taxpayers in a few states, said Rajat Mohan, a partner at tax consultancy firm AMRG & Associates. Expanding this for granting registration to all businesses may lead to widespread corruption with officials either seeking favours or conniving with offenders, he said.

“This goes against the government’s faceless digital drive, pushing taxpayer harassment without solving the actual problem,” he said.

To protect genuine businesses, there should be clear guidelines for physical and financial verification, keeping physical interaction to a minimum, Jain said.

The alternatives proposed by tax experts range from the geo-tagging of registered office at the time of GST registration to use of data analytics for fraud discovery. To be sure, the Ministry of Corporate Affairs already requires companies to geo-tag their registered office as part of their mandatory filings.

Since the GST was rolled out, the system hasn’t been prepared to perform important steps such as invoice matching—and filing of just summary GST returns without any validation—has been the root cause of this problem, said Krishan Arora, a partner at Grant Thornton India LLP.

The government should now focus on implementing e-invoicing system and automated return filing system for all taxpayers for real-time matching of supply and purchase transactions rather than taking severe measures that could cause undue hardship to genuine taxpayers, Arora said.

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