Crores of Input Tax Credit fraud have been found in the state-wide inspections conducted by the GST department under “Operation Palm Tree” in Kerala. This fraud was revealed after a joint operation by the Kerala Goods and Services Tax (GST) Intelligence/Enforcement Wings occurred early yesterday morning.
The Kerala GST Department started a six-day residential training session for its 200-odd employees at a five-star Kochi property on 20 May. However, the training turned out to be a ploy to divert attention.
On Thursday, 23 May, the fourth training day, GST special commissioner Abraham Renn S began “Operation Palm Tree.” It is the most significant tax raid in Kerala’s history, and the state’s tax evaders were unprepared for it.
Three hundred fifty officials started inspecting about 140 suspicious scrap trading centres in the state. The tax evaders’ residences and businesses were searched simultaneously in seven districts.
It is reported that they found fake invoices worth Rs 1,170 crore in the illegal scrap market. According to a senior tax officer, dishonest traders may have unlawfully taken an input tax credit (ITC) worth Rs 209 crore by utilising these fictitious invoices.
ITC is a refundable tax that dealers and buyers can claim when buying value-added products. It intends to prevent double taxation by accounting for taxes paid earlier in production. A fraudulent invoice is one raised in the absence of products. It is made to falsely claim ITC.
There are two types of steel scrap: “new scrap,” composed of leftovers from a manufacturing process, and “old scrap,” resulting from white goods and cars that households abandon. The unique way the GST regime affects the scrap industry, which primarily supplies the steel industry, makes it a hotbed of tax fraud.
The problem is the ‘old scrap’. Households sell it to unregistered scrap dealers, neither of whom is subject to GST. Thus, a steel trader obtains a product for which GST has not been paid when he buys scrap from an unregistered dealer.
However, this trader must pay the government GST (18%) for his supply when he sells this “old scrap” to a more prominent operator, such as a steel production company. Additionally, he cannot claim input tax credit because his supplier—the unregistered junk dealer—has not paid GST.
The fraud begins here. The trader will turn to illicit methods to recover the 18% GST he paid because he could not claim ITC. They set up shell companies and attach fictitious paperwork to prove the items’ supply.
The scrap mafia procures fake business registrations using ID cards collected from migrant workers and other individuals after promising them employment. Based on preliminary information, the GST registrations taken in the name of 148 individuals across the state have resulted in a tax loss of Rs 209 crore.
All these ghost businesses founded by the trader will engage in phantom trades with one another before returning goods to him. He will then submit an input tax credit claim for this transaction.
This deception is known as “circular trading.” It is a fraud scheme that creates artificial trading activity by passing invoices among a closed group.
As per reports, hundreds of shell firms were found during the GST raids. Officials discovered fake invoices during the inspection. They also identified those who had obtained phoney registrations and used this money for business purposes.
According to officials, the fraudsters must be thoroughly interrogated before the full scope of the scheme can be determined. It is feared this might be one of Kerala’s largest GST scams. Most scrap dealers in Kerala belong to a particular community that hates paying taxes.
A special drive was conducted nationwide to act against fake billing. Strong measures are being taken against such tax evasion in Kerala too. Investigation and action against such tax evasion gangs will continue vigorously.
