The Government has raised a serious red flag over the
growing menace of fake GST firms and fraudulent Input Tax Credit (ITC)
claims. Over the last five financial years, the scale of GST fraud has expanded
rapidly, prompting authorities to launch stronger compliance and verification
measures.
According to official data, more than 42,000 cases of GST
fraud were detected during FY 2020–21 to FY 2024–25, involving a
massive ₹1.78 lakh crore worth of fake ITC. While detection of such
cases has increased sharply, arrests have not grown at the same pace,
highlighting gaps in enforcement and legal follow-through.
Why Fake GST Firms Are Rising
Fake firms are created primarily to generate bogus invoices
without actual supply. These invoices help other businesses wrongfully
claim ITC and reduce their tax liability. The common patterns observed include:
- Creation
of non-existent or shell companies
- Use
of fake Aadhaar/PAN or rented identities
- Circular
trading to inflate turnover
- High-value
invoices issued immediately after registration
- No
real business activity, premises, or stock
Such practices not only cause major revenue loss but also
distort the formal economy.
Government Measures to Crack Down on Fake ITC
1. Strict ITC Claim Rules
- ITC
can be availed only for invoices appearing in GSTR-2B, which is
auto-populated from the supplier’s GSTR-1.
- This
prevents fraudulent or mismatched ITC claims.
2. Sequential Filing Mandated
- Businesses
must file GSTR-1 before GSTR-3B.
- This
ensures consistency and transparency between outward supplies and tax
payment.
3. E-Invoicing for B2B Entities
- Mandatory
for firms with turnover above ₹5 crore.
- Every
invoice is authenticated by the government portal, limiting scope for fake
invoices.
4. Stronger Registration
Verification
To stop fake firms at the source:
- PAN
and OTP verification
- Biometric-based
Aadhaar authentication
- Physical
verification of risky applicants
This ensures only genuine taxpayers enter the GST system.
5. Suspension of Suspicious
Registrations
GSTINs are automatically suspended in cases of:
- Non-filing
of returns
- Non-updation
of bank details
- Abnormal
ITC patterns
Businesses remain suspended until verification is cleared.
6. Invoice Management System (IMS)
- Enables
buyers to accept or reject invoices, preventing misuse of someone
else’s GSTIN for ITC claims.
7. Fake ITC Made Non-Bailable
- Fake
ITC offences are now cognizable and non-bailable, ensuring stronger
legal deterrence.
- Beneficiaries
are also liable for penalties, attachment, and prosecution.
Advanced Tools to Track Repeat
Offenders
The Government now relies heavily on data analytics and
integrated monitoring:
- 360°
risk profiling of taxpayers
- Blocking
of ITC for suspicious credits
- Provisional
attachment of bank accounts and
properties
- Cancellation
of registration for non-genuine entities
- Non-Genuine
Taxpayer (NGT) Tracking Module
for repeat violators
These tools help break large invoice chains and catch
masterminds behind fake GST networks.
Conclusion
The rise in fake GST firms and fraudulent ITC claims is a
major challenge for India’s tax ecosystem. However, with the introduction of e-invoicing,
biometric verification, strict ITC rules, and AI-driven risk profiling, the
Government has significantly strengthened its fight against GST fraud.
As compliance systems become more intelligent and
integrated, the gap between fraud detection and enforcement is expected to
narrow — leading to cleaner tax practices, better revenue protection, and a
more transparent GST regime.
