More Than Detection Campaigns, Real GST Reforms Will Fix Fake Invoicing

A two-month campaign starting from 16 May aims to detect and weed out fraudulent and wrongful GST registrations.

Image used for representation only

(Photo: Aroop Mishra/The Quint)

The government achieved the highest monthly Goods and Services Tax (GST) collections of Rs. 1,87,035 crore in April 2023 though year on year growth was quite muted at 11.64 percent. Both Central GST (CGST) & State GST (SGST) constituents of the GST collections recorded reasonably good growth. The CGST at Rs. 38,440 crore was higher by 15.93 percent and SGST by 13.44 percent. There was, however, a notable slowdown in the IGST collections. At Rs. 89,158 crores, Interstate GST (IGST) was higher by only 8.81 percent.

This sub-par performance was most conspicuously evident in IGST collections on imports, which at Rs. 34,972 crores, were actually less, even in absolute numbers, than Rs. 36,705 crores in April 2022. April 2023 IGST on imports also recorded negative growth of 17.86 percent over the collections in March 2023. The GST growth record since 2018-19 has not been that extraordinary either. Average per month GST collections in 2018-19 were Rs. 97,947 crore. Since 2019-20, GST receipts increased from Rs. 12,22,117 crore to Rs. 18,06,047 crore in 2022-23 recording a CAGR of 13.90 percent.

The CAGR of GST performance in the second term of Modi Government since 2018-19 is still lower at 11.34 percent. Nominal GDP has grown from Rs. 2,00,74,855 crore in 2019-20 to Rs. 2,73,07,752 in 2022-23 recording a CAGR of 10.8 percent. Gross GST collections growth of 13.90 percent and nominal GDP growth of 10.8 percent yields a buoyancy of 1.29.

GST buoyancy gets further diluted if the effect of the extraordinary increase in imports during 2022-23 is taken into account. GST minus IGST on imports of Rs. 4,66,565 crore in 2022-23 was Rs. 13,39,482 crore. GST minus IGST on imports of Rs. 2,67,276 crore in 2019-20 was Rs. 9,54,841 crore. CAGR of GST minus import IGST turns out to be only 11.94 percent bringing down the GST buoyancy to only 1.11. This is hardly any spectacular performance.

Government Announces a Two-Month Campaign

The government has announced a two-month special drive to detect fraudulent claims of GST inputs credit to improve the GST collections. As there are reportedly large numbers of fake registrations and input tax credits in the system, a well-executed plan can definitely improve the GST collection numbers and efficiency.

This two-month campaign starting from 16 May aims at detecting and weeding out fraudulent and wrongful GST registrations, fake GST invoices generated to lower GST liability and fake GST invoices created without actual sales to claim bogus GST tax credits by buying entities.

The government has been undertaking campaigns with similar objectives almost every year since 2019. The 2021 campaign was the first major well-publicised one and claimed to have detected fraudulent claims of about Rs. 40,000 crore. Government has reportedly detected questionable claims exceeding 3.08 crore until end March 2023, with fake claims exceeding a lakh crore rupees detected in 2022-23 alone. The Government would definitely be expecting the current campaign to yield better results.

Getting Rid of Fraudulent GST Registrations

One of the most important goals of institutionalising GST in the country in 2017 was to bring all businesses (though with turnover above a prescribed threshold) within the GST ambit. Not surprisingly, increasing the GST dealers/taxpayers registrations became the success marker for achieving this goal. The government proudly claimed at the end of March 2020 that taxpayers registered under GST had risen to about 1.04 crore, which, besides 64.38 lakh incumbent taxpayers from the erstwhile indirect-tax regimes, included as many as 39.56 lakh new registrations.

GST registrations reached 1.40 crore by the end of March 2023. There was a subdued increase in GST registrations in two years of 2020-21 and 2021-22. But, registrations recorded a significant jump in 2022-23. Government suspects that a part of these registrations are fake and being misused to generate fake invoices for either facilitating fraudulent claims of GST input credit or for avoiding the generation of e-way bills for supply of goods by misclassifying the goods as the supply of manpower or other non-taxable services.

Actual reported recoveries from the campaigns launched in the last five years have been about onefifth of the amount claimed to have been detected. In 2022-23 also, recoveries reported are about Rs. 21,000 crore. Though quite important from the viewpoint of weeding out non-genuine or fraudulent business practices and for protecting the revenues, in the total revenue of GST, which crossed Rs. 18 lakh crore in 2022-23, the contribution of the detected revenue is relatively quite small (a little over 1 percent).

The government must continue with this campaign with all the vigour it requires. The real difference, however, will be made by completing the remaining GST reforms agenda, which undoubtedly is harder, but worth undertaking in the larger national and revenue interest. 

The Real Unfinished GST Reform Agenda

The GST system works best when every business which supplies any goods or services on commercial consideration is a GST registered business and part of the GST network. Unfortunately, on socialist, low-income or technical considerations, a large chunk of about 8 crore businesses in India remain outside the GST network. Businesses with less than Rs. 40 lakh goods turnover (Rs. 20 lakh for service businesses) are not required to even register under the GST. Businesses with less than Rs. 2 crore turnover (smaller for services) can opt for a composite assessment.

There are composition schemes for many other specific sectors with larger turnover as well, for example, gold, construction and specified type of restaurants. All these businesses- below the threshold or under composite schemes- create enormous disturbance & discontinuity in the value-added chain. Such registrations are quite susceptible to misuse of their status for generating fake invoices as well. Though it is a tough call, with the development of electronic payment technologies and with the smallest businesses accepting electronic payments through UPI or otherwise, it is high time that every business- tiny, small, or medium- is brought within the GST network.

This will require making the registration of all businesses compulsory under GST. The Government will still have the policy space to exempt businesses with turnover lesser than the prescribed threshold from the payment of GST. In fact, the Government can go one step further, without much loss to revenue, and permit small businesses to retain the tax collected through GST paid invoices generated by them electronically. This will be a real service to such small businesses.

The only condition which needs to be imposed is that total turnover of these businesses would be counted only on electronically recorded sales, supported by the electronic bank account and invoices. The other reform which needs to be urgently completed is to make it compulsory for all the registered businesses to generate online sales invoices ( present limit is businesses with annual turnover higher than Rs. 5 crore a year).

Making Use of Technology

It is possible now to design and generate real simple GST invoices electronically, as part of the payment process for the goods or services sold. This technology must be leveraged to make everyone generate a GST invoice in real-time. The payment received should land in her bank account and a copy of the invoice generated becomes part of the GST network database. This will also ensure that the Department has all the information and tools.

By using artificial intelligence and other smart analytic tools, every fake invoice or under invoice could be detected with convincing data trails and proof seamlessly. There are several other reforms- rationalisation of rate structure, integration of petroleum products and electricity duty and other outside GST businesses like construction etc.- which needs to be undertaken.

However, to fix the GST system of the leakages, these two reforms, compulsory and universal registration of all businesses and generation of an electronic copy for all sales transactions for the GST network, are the key. The real test of the GST having really arrived and the reform process completed is when every taxi driver or barber or a roadside vegetable vendor, receiving payment from you reader electronically by UPI, credit card or otherwise, generates an electronic invoice for you along with the payment received.  

(The Author is the Chief Policy Advisor, SUBHANJALI, Author: The $10 Trillion Dream and Former Finance and Economic Affairs Secretary, Government of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)