B2C sectors, including construction and scrap, prone to fake invoicing: CBIC Chairman

Central Board of Indirect Taxes and Customs (CBIC) Chairman Vivek Johri

Certain business-to-consumer (B2C) sectors, including construction and scrap, are prone to generating fake Goods and Services Tax (GST) invoices as some part of their chain is outside the tax net, Central Board of Indirect Taxes and Customs (CBIC) Chairman Vivek Johri said.

"There are certain lines of trade where it's quite easy to generate fake invoices because some part of the chain is outside the tax net. Certain parts of the construction sector are not in the tax net. For example, individuals, who build their own houses in India procure construction materials that may not be invoiced properly. That is a B2C transaction that has the opportunity to use the gaps that are getting exploited in the system," Johri told Moneycontrol.

Likewise, B2C consumers do not insist on invoices or receipts, which gives a cushion for bills to be used for fake invoicing. These give the opportunity for bogus invoicing, he said.

Another segment where bogus invoicing is largely found is scrap. The scrap that is aggregated from large, organised players does not have much scope for generating bogus invoices. The stream of scrap from imports is also accounted for.

"The stream of scrap collected from households and businesses by informal players in the unorganised sector opens opportunities for fake invoicing as they do not pay tax at the point of origin. This scrap is used for the manufacturing of steel. There is an increased use of bogus invoicing for scrap. That is a loophole that we are trying to plug," Johri said.

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A two-month special drive by CBIC, which ended on July 15, was a crackdown on entities using fake invoices to claim an input tax credit (ITC). During the drive, 60,000 entities were identified as risky, 25 percent of them were found bogus, and over Rs 15,000 crore worth of fake input tax credit claims were identified.

"These drives for fake ITC will continue throughout the year," Johri said.

The invoices of these B2C supply transactions are used by businesses trying to cut corners, as they may have a tax liability to discharge or may be short of working capital. They bridge that gap by procuring these fake invoices.

"Unfortunately, we get to know only when ITC is actually encashed. It can be used to pay tax or claim refunds so that it gets monetised. We get to know when it has entered the system," he said.

The CBIC continues to identify entities that are in the system only to generate bogus invoices.

"If one watches their behaviour over a period of time, there are tell-tale signs of units exhibiting suspicious behaviour. For example, there's a new entrant and suddenly they generate a very large volume of invoices in the first two to three months. There could be a new entrant with no income tax footprint, no previous financial standing, and yet there's a lot of activity," he said.