Economies across the world have been struggling with tax frauds as long as the taxes have existed.

It is a two headed-snake. Because of the non-compliance of a few, honest taxpayers fall under greater scrutiny. In the long run, the tax evasion may lead to increase in alternate taxes or an increase in the tax rates again, harassing the compliant ones.

In fact, the presence of tax frauds further requires the government to invest resources in identification of tax frauds  and plugging the holes. This new layer, in turn, opens the Pandora’s box for further bribes and frauds.

GST was expected to help improve tax buoyancy. But tax evasion still continues to be an area of concern.  As an honest taxpayer, how can you identify the tax frauds? Are there any early signs to watch? Can all the non-compliance be tagged as fraud? And lastly, is there a way to identify the bad apples?

Is every GST non-compliance a Tax fraud?

Many a time, honest taxpayers fall prey to the tedious GST procedures and become non-compliant. In fact, a good part of the tax evasion occurs on account of unplanned mishaps, which include

• Missed due date (for which the taxpayer might be willing to face the applicable penalty.)
• Technical glitches and bug resulting in failed GSTR filing.
• Erroneous filing and missed invoices (amending the same is a cumbersome process in itself yet possible)
• Financial Condition
• Lack of knowledge (for instance, it is mandatory to file Nil GST even if the taxpayer has not procured any supply or purchase).
• Unavailability of manpower (or if the taxpayer is overburdened with business hassles)

While all of these reasons lead to non-compliance, the misses seem to be unintended and can be corrected. These cases do not lead to huge tax loss to the economy and are negated in few months’ time once the taxpayer is back on track.

Identifying a Tax Fraud

Tax Evasion is an issue of major concern in our country. Typically, instances of tax evasion encompass a wide range of malpractices such as

• non-issuance of invoices,
• under-reporting of sales,
• claiming false input tax credit,
• falsification of exports and claiming consequent refunds,
• collection of taxes but not depositing with the exchequer,
• wrong availment of exemptions,
• classifying products into lower rates by taking benefit of complex descriptions etc.

The very possibility of these practices to continue until unearthed makes them best practices for those who actually want to evade tax.

How are you affected if you are dealing with a GST non-compliant vendor?

Tax leakages eat up the economy. To stop that, the government has been trying to plug these leaks since the introduction of GST.

Various measures have been taken in this regard, which inter-alia, include, syncing GST registrations with PAN, invoice level reporting and matching, reconciliation of credits, generation of e-way bills, setting up of the office of GST Commissioner (Investigation), Directorate General of Analytics and Risk Management (for providing intelligence inputs using internal and external sources).

If your vendors are not filing their GSTR 3B timely then their GSTR 1 will be blocked. If GSTR 1 is blocked, then invoices will not be reflected in GSTR 2B (as 2B is populated only after GSTR 1 is filed). If no invoices in GSTR 2B, ITC cannot be claimed.

Blocking of E-way Bills if GST Returns not filed: If you are purchasing goods and the onus of generating an e-way bill is on the vendor, then up-to-date filing GSTR 3B or CMP-08 is necessary for an uninterrupted supply of goods.

Although these checks circle in those who are committing frauds. The honest taxpayer is left stranded if he is dealing with such non-compliant vendor.

• Your consignment will not move if your vendor has been non-complaint.
• Your payment cycle will suffer if your vendor is stuck in any legal proceedings

So, are there any early signs to identify tax frauds?

Early Signs to look for in identifying Tax Frauds

As the saying goes, “Once is a mistake, twice is a choice”.

A tax crime occurs in a repeated pattern over a course of time. While partaking into a business transaction with a tax defaulter, keeping an eye out for these patterns can help spot any early sign of tax evasion. Reporting these suspicious activities to the government can further help minimize the occurrence of tax evasions.

A person planning to commit a tax crime may often indicate at least one of the below-given signs

1. Manipulation of Cash-Flow

The basic of any monetary crime is the defaulters’ ability to manipulate the flow of cash. Same holds true in case of tax crimes as well. Manipulation of cash under GST can be accomplished simply by running a cash-intensive business, where no proof of business transaction is available. The defaulter may also maintain false records surrounding the transaction or seek payment into various accounts, thus covering the cash flow trail.

How to mitigate the risk: Ask for proper GST invoice for every transaction you do with your vendors. Avoid cash payments, go digital and maintain a trail of your money.

2. Suspicious Business Management

The way a person manages his business activity can also be indicative of yet another tax crime underway. For instance, a person might simply be using multiple GSTINs to distribute the inward and outward transaction or the profits among imaginary partners. Also, if a taxpayer switches business repeatedly, there may be possibilities of covering up transaction records.

How to mitigate the risk: You may monitor the business continuity by collecting business existence proof of the past 2 years for example.

3. Erroneous Invoicing

One of the most important red flag to tax crimes is invoicing practices followed by the supplier. These invoices may have faulty product costs, GST rates or backdated documentation for the supply of goods and services. Such erroneous transaction not only aid tax defaulters commit tax crimes, but also put honest taxpayers in jeopardy while filing returns and claiming refunds, especially since the introduction of 20% ITC capping rule.

How to mitigate the risk: Always take proper GST invoices in the month of business transaction itself. Cross-check your GST rates on GSTN Portal and ensure that product costs are mentioned a finalized before.

4. Filing Status

Needless to say, the non-compliant GST Return filing history could be the earliest sign a person can look for. Aligned with any one of the above-mentioned signs, it can provide a strong base to uncover a looming tax fraud. Persistent non-compliance of monthly returns can suggest the party’s intent to

• mess up with invoices,
• collect tax but not deposit with the exchequer,
• mixing GST rates, etc.

How to mitigate the risk: Ask for the GST Filing Health report with every invoice from your vendors. If not provided, you may check the health of your vendor’s GSTIN  with apps like IRIS Peridot to ensure a healthy filing state of your vendors.

IRIS Peridot allows the user to scan the GSTIN from the given invoice and display the compliance status, within a fraction of seconds.

Honest or not, both of these scenarios are 2 sides of the same coin, which eventually impact the stability of our economy. While it is the governments’ responsibility to ensure a scam-free economy, a taxpayer can also play his part in safeguarding the economy of his country by identifying frauds before they blow.

IRIS Peridot, which is available for free download from the Google Playstore and Appstore is also available as API. You can integrate IRIS Peridot with your ERP software with Peridot API and keep a track of your vendor’s GST compliance status while managing your business processes.

In case you would like to explore IRIS Peridot ERP Integration, Leave a feedback here for us to get in touch with you.