Strengthening GST Compliance: An In-Depth Look at Special Drive 2.0 Against Fake Registrations

The Government of India has launched "GST Special Drive 2.0" as part of its continuous effort to enhance the integrity of the Goods and Services Tax (GST) system, particularly targeting the rising issue of fake GST registrations. The drive, initiated under the guidance of Instruction No. 02/2024-GST issued on August 12, 2024, represents a comprehensive approach to detecting and mitigating fraudulent practices in the GST ecosystem.

Background and Objectives

The GST system, introduced in 2017, was designed to unify indirect taxes under a single umbrella, ensuring seamless credit flow and reducing tax evasion. However, over the years, the emergence of fake GST registrations has posed significant challenges, leading to revenue leakage and undermining the system`s credibility. In response, the government launched GST Special Drive 2.0, which builds on the success of previous initiatives and aims to further tighten the noose around fraudulent entities.

The primary objectives of GST Special Drive 2.0 are:

• Verification of Suspicious Registrations: A focused verification process to identify and eliminate entities that exist solely for the purpose of issuing fake invoices and claiming input tax credits (ITC) fraudulently.

• Enhanced Data Analytics: Leveraging advanced data analytics and artificial intelligence to cross-check the authenticity of registrations and detect patterns indicative of fraud.

• Field-Level Investigations: Coordinating with field officers for on-ground verification and ensuring that all suspicious entities undergo rigorous scrutiny.

Concept of Special Drive and also Misconception thereof-

The guidelines for GST Special Drive 2.0, outlined in Instruction No. 02/2024-GST on August 12, 2024, detail the procedures that GST officers should follow, stressing the application of existing CGST Act provisions. It’s important for businesses to note that this drive is conducted within legal boundaries and does not introduce new powers.

A common misconception among business owners is that this initiative grants GST officers novel powers for inspections and verifications. However, the drive does not introduce new laws or enhance existing powers but rather focuses on enforcing current GST Act provisions more rigorously. The drive operates based on government-issued directives, which are aimed at effective enforcement rather than the creation of new legal authorities.

There also exists safeguards to protect the interest of taxpayers. The powers of Inspection and/or Seacrh are contained in Section 67 or 71 both of which provide certain safeguards such as-

1. Authorization Requirements:

• Inspections and searches must be authorized by a proper officer who holds a rank of at least Joint Commissioner.

2. Mandatory Documentation:

• Before any inspection begins, a valid INS-01 form must be presented to the taxpayer by the inspecting officer.

3. Taxpayer Rights:

• Taxpayers have the right to request a copy of the INS-01 form during later stages of the inspection proceedings.

Scheme of Drive-

A. Period of Special Drive:       

The second Special All-India Drive is set to be conducted by Central and State Tax administrations from August 16, 2024, to October 15, 2024. This initiative aims to identify and eliminate suspicious or fake GSTINs through thorough verification and necessary remedial actions, thereby safeguarding government revenue and maintaining the integrity of the GST system.

B. Identification of Fraudulent GSTINs:

GSTN, in collaboration with the Directorate General of Analytics and Risk Management (DGARM) and CBIC, will use advanced data analytics and risk parameters to identify suspicious or high-risk GSTINs. These GSTINs will be flagged for verification by State and Central Tax authorities, and the details will be shared jurisdiction-wise with the relevant tax administrations. The State and Central Tax Authorities may also supplement this list through their own data analysis, utilizing tools like BIFA/GAIN, ADVAIT, NIC Prime, E-Way Bill Analytics, and insights from human intelligence, previous detections, and the first special All-India drive.

C. Actions for Field Formations:

1. Verification of Suspicious GSTINs: Upon receiving data from GSTN, tax officers are required to conduct a time-bound verification of these GSTINs. If a taxpayer is found to be non-existent or fictitious, the officer may initiate the suspension and cancellation of the registration in accordance with Section 29 of the CGST Act.

2. Blocking Input Tax Credit (ITC): The officer may block the input tax credit in the Electronic Credit Ledger as per Rule 86A of the CGST Rules. Recipients who have claimed ITC from such non-existent taxpayers will be identified through FORM GSTR-1.

3. Demand and Recovery: If the recipient GSTIN falls under the same tax jurisdiction, appropriate action will be taken for the recovery of wrongly availed ITC. If the recipient GSTIN is under a different jurisdiction, the case details will be sent to the relevant tax authority using the format in Annexure-B.

4. Coordination Among Tax Jurisdictions: Nodal officers will be appointed in each Zonal CGST Zone and State to facilitate the sharing of information across jurisdictions. The GSTN Back Office’s ‘Initiate Enquiry’ function in the Enforcement module will be used for this purpose.

5. Guidelines on Functionality: GSTN will issue detailed guidelines regarding the use of this functionality.

6. Further Actions: Authorities will also identify masterminds and beneficiaries behind these fake GSTINs and take necessary actions, including recovering government dues and attaching properties or bank accounts under Section 83 of the CGST Act. Any linked suspicious GSTINs discovered during verification will undergo similar action.

D. Feedback and Reporting Mechanism:

1. Weekly Reporting: Each State and CGST Zone will upload an action-taken report weekly on the designated portal through the nodal officer, as outlined in Annexure-A. This report will cover GSTINs identified by GSTN and those identified locally.

2. Novel Modus Operandi: Any novel modus operandi detected during verification or investigation should be reported. After the drive concludes, GSTIN-wise feedback on the verification results will be provided to GSTN using the format in Annexure-C.

E. Details on Annexures:

• Annexure A: This annexure includes the format for the action-taken report, which must be submitted weekly by the State and CGST Zones, detailing the actions taken on suspicious GSTINs identified by GSTN and those identified through local efforts.

• Annexure B: This annexure provides the format for sharing case details, including recipient GSTINs, with other tax jurisdictions when the recipient GSTIN pertains to a different jurisdiction.

• Annexure C: This annexure outlines the format for providing GSTIN-wise feedback on the verification results of suspicious GSTINs, which must be submitted to GSTN at the conclusion of the drive.

Challenges and Expected Outcomes

While GST Special Drive 2.0 is a robust initiative, it is not without challenges. The complexity of GST compliance, the vast number of registrants, and the ever-evolving tactics of fraudsters present significant hurdles. However, by employing a data-driven approach and ensuring inter-departmental collaboration, the government aims to minimize these challenges.
The expected outcomes of the drive include:

• Increased Compliance: By deterring fraudulent registrations, the drive is expected to increase overall compliance and enhance the credibility of the GST system.

• Revenue Augmentation: Curbing ITC fraud will prevent revenue leakage, thereby augmenting the government`s GST collections.

• Restoration of Trust: Ensuring that only genuine businesses operate under the GST regime will restore trust among compliant taxpayers and create a level playing field.

Conclusion

GST Special Drive 2.0 marks a significant step in India’s ongoing battle against GST fraud. Through a combination of technology, field verification, and stringent enforcement, the drive aims to safeguard the integrity of the GST system. For tax professionals and businesses, it is crucial to understand the implications of this drive, ensure compliance, and stay informed about the evolving regulatory landscape.

This initiative, while complex, demonstrates the government’s commitment to refining the GST system and ensuring that it remains a robust and transparent framework for indirect taxation in India​