India’s tax authority has arrested two men on charges of tax evasion under the Goods and Services Tax system, the first arrests under the fledgling regime. The Income Tax Department made two March 1 arrests in Mumbai on the grounds the companies evaded a total of $1.1 million in taxes by claiming input credits against fake purchase of goods, according to an announcement. The government hasn’t named the individuals.

The purpose of allowing companies to take credits against taxes paid during purchase of inputs was to ensure that GST was levied only at the point of sale of a good or service, thus simplifying and consolidating the previous tax system. The government is signaling taxpayers that the laws authorizing tax officers are working, even though all aspects of the Goods and Services Tax regime aren’t finalized

Whether this is a win for the Goods and Services Tax or not, its too soon to say, but I do know this is meant to tell companies that tax officers can make arrest where there is clear wrongdoing by taxpayers

The Goods and Services Council will meet again on March 10 to evaluate the returns filing process, the online GST portal and rollout of the eway bill system—all of which have been causing procedural and compliance issues for taxpayers since the implementation of GST on July 1.

Finding Tax Cheats

An established pattern of tax evasion could help the government’s case when charging the arrested Mumbai men. it is important for tax authorities to investigate the track records of the two companies under the previous regime to establish that the companies were acting with malicious intent and draw out other cases of tax fraud.

Tax authorities are compiling a list of suspected tax cheats on a zonewise basis to step up the punitive action from its end.

The Central Board of Excise and Customs is scrutinizing GST return filings and has zeroed in on suspicious transactions in sectors including iron and steel, tobacco, construction, consumer goods. The CBEC is especially interested in cases where input tax credit is being availed using fake invoices in absence of actual business activity, like with the two arrests.

According to sections 122 and 132 of the Goods and Service Tax Act, the two men could face between three and five years of imprisonment plus fines based on the tax amount evaded by each company.

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