Anti Evasion Measures In VAT

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Anti Evasion Measures In VAT

• Best Practices In Maharashtra

Presented by- Shri. J.P.Dange Chairman, 4th State
Finance Commission Former Chief Secretary to
the Government of Maharashtra 14/08/2013
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TOPICS FOR DISCUSSION

• What is Sales Tax?
• Revenue Receipts under VAT
• Functional Branches
• Types of evasions
• Evasion Cases
• Policy options on fraud
• Anti Evasion Measures

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Organisational Structure

• Council of Ministers
• Finance Minister
• Finance Secretary
• Commissioner of Sales Tax (1)- Cadre Post IAS
• Special Commissioner of Sales Tax (1)- Cadre Post
  IAS
• Chief Vigilance Officer (Special IGP) (1)- IPS
• Additional Commissioners of Sales Tax (9)
• Joint Commissioners of Sales Tax (72)- IAS 3
• Deputy Commissioners of Sales Tax (401)
• Assistant Commissioners of Sales Tax (590)
• Sales Tax Officers (1191)

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Sales Tax

• In its present form, Sales Tax, a tax on
  transactions of sales, came into existence after
  First World War.
• The taxable event in case of Sales Tax is the
  sale of goods as in case of Customs is bringing
  of the goods into India and in case of excise,
  the manufacture of goods.
• The powers are derived by State Governments from
  Entry 54 of State List (List II) of the Seventh
  Schedule to the Constitution of India and they
  are subject to Entry 92A of Union List (List I)

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What Is Input Tax Credit (ITC)

• Input Tax Credit (ITC)- amount of tax credit
• Tax charged on the purchased goods
• Credit can be adjusted against the VAT payable on
  sales
• Balance of VAT has to be paid to the Government
• Any registered dealer who not opted to pay tax by
  way of composition
• Generally set-off for the full amount of tax paid
  on purchases,
• Including capital assets, raw material, trading
  goods, packing goods, parts, components, spares,
  purchases debited to profit and loss account is
  available
• Subject to retention in specified contingencies
  or other than on goods covered by a negative
  list

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MAHARASHTRA FROM ST TO VAT (contd.)

• Comprehensive Sales Tax Act, viz, Bombay Sales
  Tax Act, 1946, from 1st October 1946 and tax on
  goods dispatched to other States introduced in
  1949.
• Constitution came into effect from 26th Jan 1950.
  
• Powers of State to levy tax came to be controlled
  by Entry 54 of State List
• Bombay Sales Tax Act, 1953 was enforced from Mar
  1953 whereas Bombay Sales Tax Act, 1959 came into
  effect from 1st Jan 1960.
• Replaced by Maharashtra Value Added Tax Act, 2002
  from 1st April 2005.

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MAHARASHTRA FROM ST TO VAT

• Generally guided by best international practices
  with regard to legal framework
• Operating procedures and eliminates cascading
  impact of double taxation.
• Self-policing, self-assessment system
• Improved control mechanism for better compliance
• Comprehensive legislation covering works
  contract, lease transactions etc with Standard
  VAT rate 12.5

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SIMPLE VALUE CHAIN
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WHO PAY VAT TO GOVERNMENT

• Manufacturers
• Importers
• Wholesalers
• Distributors
• Retailers
• Works Contractors
• Lessers

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Benefits Of VAT Over Sales Tax(contd.)

• Lower and stable rates of tax (no frequent
  changes)
• Rationalization of tax burden
• Great reduction in number of rates of 5 and
  12.5
• Goods taxable _at_ 5 to be specified and
• Rest of others liable to tax _at_ 12.5
• Less scope for litigation and full set-off taxes
  paid at every stage

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Benefits Of VAT Over Sales Tax(contd.)

• Transparent system, greater reliance on self
  assessment and voluntary compliance by dealers
• Schedule A (tax free goods), B (gold, silver and
  precious stones), C (goods of national
  importance, industrial raw material, IT
  products), D (liquor and petroleum products) and
  E (goods not covered elsewhere) are lists of
  goods for which rates of tax are _at_ Nil or 0, 1,
  5, 20 or above and 12.5 respectively.

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REVENUE RECEIPTS TREND(source STD web site)
Revenue receipts FY 1970-71 Rs. 160 crores
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COMPARATIVE TAX COLLECTION (vat)
YEAR MAHARASHTRA (Actual) WEST BENGAL (Actual)
FY 2006-07 23574 3878
FY 2007-08 27052 4550
FY 2008-09 29809 5454
FY 2009-10 32154 6797
FY 2010-11 41512 8826
FY 2011-12 50562 10198
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FUNCTIONAL BRANCH
FUNCTIONAL BRANCH EXPECTED WORK
Survey- New Branch under VAT Identify unregistered dealers, follow them up for getting registered bring them into tax net, collating data collected from outside agencies, door to door or survey in selected areas
Registration (threshold limit Rs 5 lakhs) Registration of dealer- Bring evidences about business businessman on record in proper manner- PAN based TIN
Returns Monitor periodic filing of returns, Ascertain Non filers and Short filers follow them up
Advisory New Branch under VAT Educate dealer about provisions of law, monitor initial filing of returns and risky category cases
Central Repository- New Branch Issuance of declarations under CST Act (Form C, H, F, EI, EII) with proper scrutiny
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FUNCTIONAL BRANCH
FUNCTIONAL BRANCH EXPECTED WORK
Refund New Branch Carry out Refund Audit to ascertain correctness of excess ITC claim over payable VAT and grant refunds
Business Audit- New Branch Carry out audit of business- cases identified on various risk based criteria
Investigation Detection of cases of concealment of sales and purchases, gather market intelligence, study modus operandi of evasion of taxes
Recovery Recovery actions under Land Revenue Code
Issue Based Audit- New Branch Scrutiny of only communicated particular issue
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VAT FRAUDS

• VAT fraud a SCHEME
• Avoid paying VAT on sales and
• Claim refunds of VAT never paid by procuring
  bogus purchase invoices
• Actualize criminal intents using different
  methods
• Investigating and checkmating VAT frauds costly
• Huge amounts of money required

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TYPES OF VAT FRAUDS

• Under reported sales
• Inflated Refund Claims
• Fictitious Traders
• Domestic sales disguised as Inter State Sales
• Failure to get registered
• Misclassification of commodities
• Taxes collected but not remitted
• Goods coming from outside the State escaping tax
• Credit claimed for VAT on purchases that are not
  credible
• Bogus traders

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UNDER REPORTED SALES

• Conceal actual sales in domestic market
• Evade obligation to pay VAT
• Enables to claim more refunds (credit) than they
  deserve
• Has the potential of boosting the business of
  such traders
• Will encourage patronage due to relatively cheap
  goods

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INFLATED REFUND CLAIMS(HAWALA BENEFICIARIES)

• Traders acquire invoices for purchases they never
  make
• Intent is to claim inflated refunds than they
  deserve
• Acquire fake invoices needed to claim refunds
• Give evidence of merchandise purchase on which
  refundable VAT is paid
• Established crime network (HAWALA) dealing in
  such fabricated invoices
• purchased to defraud Government

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FICTITIOUS TRADERS

• Traders set up unreal enterprises
• Get themselves registered for VAT
• Creating fictitious traders of themselves
• Issue fake sale invoices and
• Prepare ground for VAT refund claims
• Before being exposed, make fast profits and
  disappear quickly

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LOCAL SALES AS INTER STATE SALES

• Traders sell goods in local market but claim to
  have sold them in Inter State Trade
• For this purpose,
• fake invoices
• Fake transport documents
• Fake declarations under CST Act are arranged
• Concessional rate of CST applies and
• VAT paid on purchases become refundable
• Instead of accruing incremental tax

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FAILURE TO GET REGISTERED

• Small businesses operating close to the threshold
  level of turnover
• At which registration becomes compulsory
• Failing to get registered
• Saving VAT as well as VAT compliance costs
• Mainly retailers predominate this group

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MISCLASSIFICATION OF COMMODITIES

• Sales liable to tax at different rates, or
• Being goods exempted from VAT
• May reduce tax liability
• By exaggerating the proportion of sales in the
  lower tax categories

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TAX COLLECTED BUT NOT REMITTED

• By false accounting or
• By engineering bankruptcy before tax is paid or
• missing trader fraud wherein registered
  business disappears

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GOODS COMING FROM OUTSIDE THE STATE ESCAPING TAX

• Levy of tax accounts based
• No tax levied at the State border
• No record of goods entering into the State
• Scope for goods coming from outside the State
  escaping the tax
• No machinery to check that goods meant for Inter
  State Resale entering State have gone out without
  being unloaded

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INPUT CREDIT CLAMES THAT ARE NOT CREDIBLE

• in two forms
• business supplies variety of outputs- subject to
  VAT and exempt there from
• incentive to allocate inputs to production of the
  taxed items
• than the exempt
• Ineligible Inputs misrepresented as eligible
• VAT liability reduced.

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BOGUS TRADERS

• Businesses set up solely to generate invoices
  to allow recovery of VAT
• Invoice prima facie evidence, unless otherwise
  proved, that earlier tax has been paid
• invoice mills exploit practical impossibility
  of crosschecking
• Frauds known as Hawala in India and as
  carousel fraud in western countries.

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SIMPLE HAWALA OPERATION
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BASIC CAROUSEL FRAUD
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UNETHICAL PROFESSIONALS
DECLARATION MISUSED BY WHOM MODUS OPERANDI
Form C under CST Act during Sales Tax period Sales Tax Practitioner (STP) In moffusil areas, Sales Tax offices are located at District Headquarters. A STP, coming from a Taluka on a State boarder used to appear before Registering Authority submit application on behalf of dealer of Taluka place for registration under BST as well as CST Act. Immediately after receipt of CST RC No, he used to submit application, already with him on which signature of the said businessman was obtained by fraud, for declarations in Form C. These declarations then were sold to those who want them for a consideration. Later on he was caught and prosecuted.
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UNETHICAL PROFESSIONALS
DECLARATION MISUSED BY WHOM MODUS OPERANDI
Form BC under BST Act during Sales Tax period Chartered Accountant (CA) Units from backward areas of the State were given Sales Tax Incentives, either by way of deferment of taxes collected on sales or exemption from payment of taxes, for dispersal of industries. To claim exemption from payment of taxes while purchasing the raw material required by the unit, declaration in Form BC was required to be issued. Units were required to get the forms printed on their own and get blank forms authenticated from Assessing Authority concerned. A Chartered Accountant got forms printed, used fake Seals and Stamps of authorities as well as units operating in Beed District and sold forms for consideration. Was caught during cross checks and prosecuted.
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EVASION METHODS MEASURES
EVASION METHOD EVASION PURPOSE ANTI EVASION MEASURES BY WHOM
Imaginary name TIN, such Fabricated Tax Invoices accounted for in books of accounts To defraud exchequer by claiming wrong ITC ITC verification report will flag such cases
Hawala Operator will issue Tax Invoices, as per requirement. No tax deposited into Govt Treasury. To defraud exchequer by claiming wrong ITC ITC verification report will flag such cases
Genuine Tax Invoices fabricated to alter amounts or multiply their numbers To defraud exchequer by claiming wrong ITC ITC verification report will flag such cases
Local sales claimed as Inter State Sales Pay 2 CST and claim ITC at a rate which is higher than 2 BCP to monitor movement of goods outside State, Central Agency
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EVASION METHODS MEASURES
EVASION METHOD EVASION PURPOSE ANTI EVASION MEASURES BY WHOM
ITC claim on purchases more than tax liability shown by seller To claim incorrect amount of ITC Analysis of VAT Audit Report as well as ITC report to flag such cases. Confirmation from seller required for allowance of such claims
ITC claim on purchases from particular dealer but seller not showing any sales to the claimant To claim incorrect amount of ITC Analysis of VAT Audit Report to flag such cases. Confirmation from seller required for allowance of such claims
ITC claim more than tax liability disclosed by seller in his return for corresponding period To claim incorrect amount of ITC ITC verification report to flag such cases. Confirmation from seller required for allowance of such claims
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EVASION METHODS MEASURES
EVASION METHOD EVASION PURPOSE ANTI EVASION MEASURES BY WHOM
Concealment of Sales Purchases To deprive exchequer of its legitimate tax Can not be detected by analytical tools being unrecorded transactions. Answer Investigation visits.
Local sales claimed as stock transfer/consignment sales outside State To claim NIL tax liability as these are Non Sale Transactions BCP to monitor movement of goods outside State.
You run business but all property in the name of spouse. Intention of defrauding the state Legal issues.
Misclassification of purchases for claiming ITC To claim wrong ITC At present manually only
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POLICY OPTIONS ON FRAUDS

• Essence of fraud that money is made quickly
• Time gap between sale transaction remittance of
  tax to Government
• Once money disappears, tracking recovering
  unjustified credit time consuming costly
• Audit or Investigation post transaction, while
  important, unlikely to forestall loss of revenue
• Difficult balance to strike- Ensure not to
  impose excessive burden on business in general
  but system not unduly exposed to fraud
• More bureaucratic measures may reduce VAT frauds
  but may have less desirable side effects

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POLICY OPTIONS RISKS
OPTIONS RISKS
Slowing down VAT refunds relative to collection of VAT due Will impose severe cash flow burden on legitimate business
Higher checks on firms seeking to register for VAT Only genuine business may be affected.
Requiring guarantee in dubious cases Dubious case will have to be defined invite protests
Adopting or strengthening joint several liability rules by which trader held responsible for fraud elsewhere in the chain they are expected to be aware of Will invite protests
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TRANSITION BST TO VAT ERA

• During Sales Tax era, cross verification of ITC
  or Set-off non existent. Claims allowed without
  question. Limitations of manual process. With
  advent of computerized systems, cross checking of
  every single transaction possible. Hawala
  transactions flagged
• Transition not without protests- all kinds of
  excuses made to stall transition- Government
  tackled protests skillfully but went ahead with
  them. Armed with High Court decision- that
  process being carried out electronically no
  manual interference or subjectivity, in favour,
  there is no looking back
• Earlier Inter State Sales or Stock Transfer/
  Consignment Sales claims allowed on production of
  documents, no independent authentication of them.
  Now BCP Central Agency acting as Clearing House
  will map them.

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RATIONALE FOR BCP

• CST Receipts during FY 2011-12 _at_2 CST Rs 3804.98
  Cr. Size of Inter State Sales effected by
  registered dealers only work out to 190249 Crore.
  
• Add to this transactions of unregistered dealers
  of which no precise figures are available.
• Add to this, transactions claimed as stock
  transfers or consignment transfers outside the
  State for which no consolidated data available
  other than individual case
• Stock transfer transactions no less than Inter
  State Sales considering Maharashtra as leading
  manufacturing State.

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Objectives Border Check Posts

• To capture real time data/ information of
  incoming outgoing goods and capture real time
  movement of goods vehicles
• Verify whether turnover of all taxable goods
  imported into State by the dealer is disclosed in
  the returns and corresponding taxes have been
  paid
• THIS IS AN ENTIRELY NEW MEASURE ADOPTED
• 22 BCP common to State Transport Department,
  State Excise Sales Tax Cost 1000 crore
• 8 BCP exclusively for Sales Tax covering Mumbai
  Port Trust, JNPT, Mumbai Air Port Railway
  Terminus

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WHY BCP
WHAT ACTUALLY HAPPENS WHAT IS PRETENDED OBJECTIVE
Goods sold locally Claimed as ISS, 2 CST paid ITC on input claimed (which is higher than 2 ) Ascertain whether goods have moved outside State receipt outflow by way of ITC is genuine
Goods sold locally Claimed as Non Sale transactions like Stock Transfer or Consignment Sales Ascertain whether goods have moved outside State
Imported goods at JNPT sold locally Goods imported at JNPT were transported to other State Ascertain whether goods have moved outside State
Goods meant for export at JNPT coming from other States sold locally Goods meant for export at JNPT Ascertain whether goods are really exported
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HOW BCP WILL WORK
ENTITY INVOLVED PROCESS INVOLVED
Registered Dealer of Maharashtra dealing in Inter State Sales/ Purchases Will upload Way Bill on BCP website using TIN authenticated on Mahavat website
Unregistered entity dealing in Inter State Sales/ Purchases Will upload Way Bill on BCP website using PAN/UID/TAN. PAN to be authenticated on NSDL website on real time basis
Transporter To be enrolled first. User ID allotted. Will upload Transporters Way Bill/ Transit Pass along with Transaction ID of RD/ URD
Transit Pass for dealers outside Maharashtra Transporter will upload declaration for Transit Pass on BCP website
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TRANSIT PASS

• Transit of goods by road through the State
  require transit pass u/s 68 to be delivered at
  last check post or barrier before exit from
  State
• Failure to comply, to attract penalty equal to
  twice the amount of tax leviable on the goods
  transported

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ITC VERIFICATION Audit Report

• Matching of VAT Audit Report of Seller and
  Purchaser
• disclosed tax liability by seller in respect of a
  dealer matched with ITC claim by purchaser in
  respect of that seller.
• Claimant purchaser given opportunity to prove
  claim by obtaining confirmation from seller in
  case of discrepancies, otherwise claim to be
  disallowed.

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ITC VERIFICATION Return Status

• Seller doing business with number of entities.
• Tax payable by seller, as per return, must be
  equal to greater than ITC claim of claimant for
  the said corresponding period.
• In case of discrepancies, confirmation from
  seller dealer required for allowing ITC
• If no returns furnished by seller disclosing his
  tax liability, confirmation required for allowing
  ITC
• Purchases from identified Hawala and from
• TIN cancelled cases are flagged in the
  verification report.

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ITC VERIFICATION AREAS NOT COVERED BY ANALYTICAL
TOOLS

• There are certain areas which are not covered by
  analytical tools and has to be dealt with
  manually currently
• Ineligible Inputs for ITC (NEGATIVE LIST)
  covered by rule 54
• Retention, u/r 53, under contingencies the
  specified
• Goods purchases of which debited to Profit Loss
  Account or Trading Account-Gifts or other as
  Sales Promotion expenses
• Misclassification of commodity for claiming ITC.
  Example Software, being goods of incorporeal or
  intangible nature, are eligible for ITC to
  traders only. Purchasers classify them as
  Computer Spares to avoid detection and claiming
  ITC.

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ELECTRONIC DATA

• Major internal data sources
• e-Registration
• e-Returns
• e-Payments
• e-704 Audit Reports
• e-501 Refund Applications
• Central Repository
• Major external data sources for exchange
• Central Board of Excise and Customs (CBEC)
• Central Board of Direct Taxes (CBDT)
• Customs for Import data
• Central Excise Service Tax

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Economic Intelligence Unit (EIU)

• Audit Form (e-704) data analysis
• Inter State data analysis
• Registration data analysis
• Return analysis
• Dealer Profiling (Star Rating) commodity
  analysis
• Analysis of Profession Tax
• Package Scheme of Incentives
• Data Management feedback analysis
• Cyber Forensic
• 360 Degree analysis
• Business Intelligence Data Warehouse

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e-704 (contd.)

• Electronic Audit Reports from FY 2008-09
• Facility to upload e-report available 247
• 2 lakh dealers liable to file report out of 6.61
  lakh registered dealers, others to file annexure
• Details of sales and purchases which become
  available help cross checking electronically
• Dealer wise Input Tax Credit claim is matched
  with the tax liability disclosed by the seller
• Detection of hawala operators easier

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e-704 (contd.)

• Mandatory to the dealers
• Having turnover more than 60 lakhs
• Liquor dealers
• Dealers enjoying benefits under Package Scheme of
  Incentives
• Audit Report by Chartered Accountant or Cost
  Accountant
• Auditor to advise dealer on his findings of audit
  on the tax liability of the dealer

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e-Annexure

• For dealers not filing e-704 VAT Audit report
• This way entire data of sales and purchases
  carried out by every dealer is captured
  electronically
• Tax Deducted at Source (TDS) Certificates
  received and issued by the dealer
• Declarations under Central Sales Tax Act received
  and yet to be received by the dealer
• Declarations for sale in the course of export
  (Form H) received by the dealer
• Customer wise sales
• Supplier wise purchases

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TINXSYS

• TINXSYS (Tax Information Exchange System) in
  coordination with other States to plug revenue
  leakages in inter state transactions of sales,
  purchases or stock / consignment transfers
• Exchange of data of declarations issued under CST
  Act to dealers for claiming reduced rate of CST

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Vigilance Branch

• Under the direct control of Chief Vigilance
  Officer of the rank of Special Inspector General
  of police (IGP)
• Watchdog on complaints against employees
• Control over Investigation Proceedings on real
  time basis.

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THANK YOU !