GST failed to meet the expectations as the proposed methodof invoice matching is not implemented.
The market-drivenchecks and balances did not work in the expected manner. Inmost cases of tax evasion, dealers, in their monthly tax-returns,deliberately manipulate the actual details of their businesstransactions with the motivation to evade the tax. Invoicetrading is a method to evade tax 17, in which, a dealer sellsgoods to a end user without issuing the invoice but collectsthe tax. Later, he issues a fake invoice to a third party, whocan use it towards input tax credit to minimize his tax burdenas shown in Figure 2.These tax manipulations can be spotted by tax enforcementofficials.
To hide these manipulations, malicious dealers createa well-entrenched “racket,” where a large number of bogusfirms(shell firms) are created to manipulate the title of goodsin the first place and then follow it up by making fake transactionsamong them to outwit easy systemic detection. Maliciousdealers show heavy illegitimate sales and purchases amongmalicious dealers and dummy dealers(shell firms) without anypotential value-add as given in Figure 3.In Figure 3, the transactions represented using thick redlinesgoing from from A to D, A to C and D to C are transactionscorresponds to fake invoices(invoice trading), whichcan be used by C and D to minimize tax liability. With themotivation of confusing tax authorities, these dealers superimposeseveral illegitimate transactions(dummy transactions)on these fake transaction as represented using thin yellowlines.
Note that they superimpose illegitimate transactions suchthat tax liability of any dealer remains the same, i.e., taxpaid on illegitimate purchases is same as the tax collectedon illegitimate sales.As the value-add due the illegitimate transactions equalszero value, they do not pay any tax on these illegitimatetransactions in addition to creating confusion to the tax officialsabout the fake transactions. Note that there is heavyillegitimate sales and purchase transactions among maliciousand dummy dealers compared to genuine sales and purchasetransactions with the others. This technique of tax evasiontechnique is known as circular trading 6,4,15.
Hence themalicious dealers complicate the process of identifying their fake transaction(invoice trading). Figure 4 shows a real worldexample of circular trading.
