The Directorate General of GST Intelligence (DGGI) and its units across the country issued over a thousand tax notices to businesses in the weeks leading up to 5 August, enquiring about alleged short payment of taxes and wrongful use of tax credits in 2017-18, two persons aware of the matter said.

The notices were issued across industries and states as the extended statutory period for issuing notices for short payment of taxes or fraudulent use of tax credits, wilful misstatement or suppression of facts was coming to an end on 5 August, said one of the persons on the condition of anonymity.

The notices issued under Section 74 of the Central GST Act follow the investigating agency's review of companies' tax compliance, which in many cases involved matching the sales data reported in the goods and services tax (GST) returns with that in the annual financial statements and analyzing information received from other parties in the supply chain.

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Fake input tax credits

The DGGI has been active in detecting tax compliance lapses, complementing the government's efforts to widen and deepen the tax base. The numbers speak for themselves. 

"Over the last few years, GST evasion of about ₹5 trillion has been detected, and of this, ₹1.2 trillion has been paid voluntarily by the assesses," the first person said.

A large chunk of the total tax evasion detected—about ₹1 trillion—accounts for using fake input tax credits, said the person. The value of the taxable sales in these cases would be significantly higher than ₹5 trillion as GST is levied only as a percentage of the sale value.

The Central Board of Indirect Taxes and Customs (CBIC), earlier this week, said it would launch a second drive against fake GST registrations to weed out entities dealing in bogus tax credits.

Tax evasion is suspected in the supply of both goods and services. "The services sector, by nature, is prone to tax evasion as end consumers, in many cases, do not insist on an invoice. In the case of goods, iron and steel, cigarette, cement and metal scrap related businesses are prone to tax evasion," said the person. 

Airlines, shipping companies, asset management companies and insurers had previously come under the probe agency's scrutiny.

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An email sent to the DGGI on Tuesday seeking comments for the story remained unanswered at the time of publishing.

The spurt in investigations and enquiries has led to businesses having to extract data from their systems for past periods, prepare extensive reconciliations and re-evaluate earlier positions, said M.S. Mani, partner at Deloitte India.

"All of these activities, in addition to being extremely time intensive, are also quite complex considering the various changes in the GST legislation, especially during the first two years of GST and the paucity of precedents and case laws even after seven years of GST," said Mani.

Litigation burden

Tax experts acknowledged that a large number of notices were issued to businesses in the first week of August under Section 74, which is invoked in cases of fraud and wilful misrepresentation. A higher penalty could be levied under this section. Also, they said penalties have been imposed on many promoters and directors of the companies in these notices.

"The directors, promoters or individuals can be subject to personal penalties only under specified circumstances provided in the statute," explained Abhishek A. Rastogi, founder of Rastogi Chambers, who has filed petitions against penalties levied on individuals.

"In a lot of these cases, the benefit has not been retained by these individuals, and hence any penalty invoked on individuals will be subject to the test of being manifestly arbitrary before the jurisdictional high court."

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The increased formalisation of the economy, the surge in digital payments, enhanced data capture of the movement of goods across the country, and greater disclosure requirements, including e-invoices for business-to-business transactions, have aided the agency in detecting lapses in tax compliance.

An industry executive, on the condition of anonymity, said large businesses, especially listed ones, would always try to remain compliant, but big tax claims on account of differences in the interpretation of the law would invariably lead to litigation. The total extent of evasion detected as part of the latest drive is not available immediately.

For 2017-18 sales, the due date for businesses to file annual GST returns was 5 February 2020 and the investigating agency had to issue notices at least six months before the completion of five years. Hence the notices were issued before 5 August and the final orders are likely to come by 5 February 2025. For 2018-19 sales, the DGGI has time till 30 June 2025 to send notices.