Massive tax fraud in Kerala: Raids unearth scrap traders used fake bills worth Rs 1,000 cr

Photo: Shutterstock/Dmitry Demidovich

Eyebrows were raised when, on May 20, the Kerala Goods and Services Tax (GST) Department began a six-day residential training session for its 200-odd staff at a five-star property in Kochi. The government had sanctioned Rs 46.65 lakh for the training, and Rs 38.10 lakh was used up for accommodation alone. Such extravagance, by a wing of the Finance Department itself at a time of intense fiscal distress, was seen as odd.

As it turned out, the training was a red herring, a diversionary tactic. On the fourth day of the training, on May 23 (Thursday), surprising even the participants, the GST special commissioner Abraham Renn S launched what has been officially christened 'Operation Palm Tree' and touted as the biggest tax raid in the history of Kerala. Tax evaders in the state were caught completely off-guard.

Operation Palm Tree, carried out simultaneously in seven districts using over 200 tax officials, has reportedly unearthed fake invoices worth nearly Rs 1,000 crore in the illegal scrap market. A top tax official said that input tax credit (ITC) of nearly Rs 200 crore could have been illegally pocketed by unscrupulous traders using such fake invoices. 

The ITC is the money a dealer/purchaser can claim on the purchase of a value-added product; it is the tax that has been paid in the earlier stage of production and is meant to avoid double taxation. A fake invoice is one that is raised without any supply. It is created to fraudulently claim ITC.

The scrap sector which mostly supplies to steel industries is a hub of tax evasion because of the peculiar manner in which the GST regime impacts it.

Steel scrap is of two kinds: 'old scrap' that is the result of white goods and automobiles discarded by households and 'new scrap' that is made up of leftovers of a manufacturing process.

The trouble is with the 'old scrap'. It is sold by households to unregistered scrap dealers, and both are out of the GST net. So when a steel trader purchases scrap from an unregistered dealer, he gets a product for which GST has not been paid. But this trader, when he sells this 'old scrap' to a bigger player, say a steel manufacturing company, will have to pay GST (18%) to the government for his supply. And because his supplier, the unregistered scrap dealer, has not paid GST, he cannot claim input tax credit. 

This is where the fraud comes in. The trader, let us say X, who could not claim ITC will then resort to illegal means to get back the 18% GST he has paid. X usually does this by creating ghost firms or shell companies to which he would use fake documents to establish the supply of goods. These fake companies, all created by X, will do ghost transactions with each other and eventually supply back to X. Now, X will claim input tax credit for this purchase. This fraud, in tax parlance, is called 'circular trading'.

A source said hundreds of shell companies have been detected in the raid. During the inspection, the officials found fake bills and identified individuals who took fake registrations and did business using these bills. Officials said the extent of the fraud can only be ascertained after the perpetrators are interrogated in detail. There are reports that this could be one of the biggest GST scams in the state.

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