How GST has now helped catch a suspected bank loan fraud

With the Nirav Modi – PNB case, bank loan frauds have attained importance. Various dubious means are used by businessmen sometimes in collusion with bankers or sometimes fooling them as well, to extract undue loans and credit facilities. It appears another such racket has been busted, but thanks to GST.

GST’s mandate is not to catch bank frauds, but the systems in place in the GST law have helped trace such a potential fraud. Today it was reported that two people were arrested by the Mumbai commissionerate of the Central Board of Excise and Customs for allegedly exchanging paper invoices without any movement of goods and claiming false input tax credit. The two accused are Sanjiv Pravin Mehta, director of Shah Brothers Ispat Pvt. Ltd, and Vinay Kumar Arya, director of V.N. Industries Pvt. Ltd.

The cause for arrest was violation of GST laws. As per the GST law, issuance of an invoice without an actual supply of goods and wrongful availing or utilisation of input tax credit can lead to arrest. In the current case, the department has alleged that Mehta and Arya, through their companies, exchanged fake invoices, without any actual goods sold. Thus they would claim credit of the “purchases” they made. While the input tax credit claimed by Mehta amounted to Rs 5.2 crore, it was Rs 2.03 crore in the case of Arya.

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While more details have not been divulged, it is not too hard to imagine what was happening. Mehta’s company could have been making fake sale invoices to Arya’s company. And Arya’s company would make corresponding fake sale invoice to Mehta’s company, either directly, or via round-tripping it through various companies. The companies would then claim credit of GST paid on “purchases”. This was in violation of GST law.

But why would someone simply inflate sales? Inflating sales with fake invoices would mean higher income and correspondingly higher taxes. Investigation have apparently revealed that these invoices were being made with a “malafide intention to defraud the exchequer by opening Letters of Credit (LCs) on fake purchase transactions”. The game was simple: create fake transactions and extract credit facilities from banks based on these fake transactions.

GST has now caught them in the act. This has become possible because the clauses embedded in the GST law, mandate that for claim of any tax credits for purchases, “invoice matching” is needed and this is done on the GST portal. Thus all the transactions, including the fake invoices, are mapped on the system, with the respective GST numbers. Thus, it becomes easy to detect cases where invoices are fraudulently generated and round-tripped across the economy. The GST department has added that it was possible that similar fraud had taken place in several other companies linked to above two companies, and that the investigations are still on.

While this modus operandi has been detected as of now, using this route will become even harder in future. The GST council is expected to soon implement the “e-way bill” provisions. An e-way bill is an electronic document which needs to be generated every-time goods are moved, and has to accompany the vehicle transporting the goods. Once this comes, every sale invoice will also need an e-way bill and thus will also trace the movement of goods. The people who have been arrested probably felt that since there is no e-way bill needed as of now, they could get away with fake bills.

The above arrests signal a decisive shift in the way GST has been administered. Till now, the Government and GST department were going slow on the tax-payers, allowing them to get used to the new law. Now it appears, the department has had enough, and will slowly tighten screws on errant businesses.


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