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Anti Evasion Measures In VAT

Anti Evasion Measures In VAT. Presented by- Shri. J.P.Dange Chairman, 4 th State Finance Commission & Former Chief Secretary to the Government of Maharashtra 14/08/2013. Best Practices In Maharashtra. TOPICS FOR DISCUSSION. What is Sales Tax? Revenue Receipts under VAT

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Anti Evasion Measures In VAT

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  1. Anti Evasion Measures In VAT Presented by- Shri. J.P.Dange Chairman, 4th State Finance Commission & Former Chief Secretary to the Government of Maharashtra 14/08/2013 Best Practices In Maharashtra

  2. 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

  3. 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)

  4. 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)

  5. 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;

  6. 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.

  7. 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%

  8. SIMPLE VALUE CHAIN

  9. WHO PAY VAT TO GOVERNMENT • Manufacturers • Importers • Wholesalers • Distributors • Retailers • Works Contractors • Lessers

  10. 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 @ 5% to be specified and • Rest of others liable to tax @ 12.5% • Less scope for litigation and full set-off taxes paid at every stage

  11. 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 @ Nil or 0%, 1%, 5%, 20% or above and 12.5% respectively.

  12. REVENUE RECEIPTS TREND(source: STD web site) BST MVAT Revenue receipts FY 1970-71 Rs. 160 crores

  13. COMPARATIVE TAX COLLECTION (vat)

  14. FUNCTIONAL BRANCH

  15. FUNCTIONAL BRANCH

  16. 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

  17. 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

  18. 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

  19. 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

  20. 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

  21. 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

  22. 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

  23. 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

  24. TAX COLLECTED BUT NOT REMITTED • By false accounting or • By engineering bankruptcy before tax is paid or • “missing trader” fraud wherein registered business disappears

  25. 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

  26. 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.

  27. 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.

  28. SIMPLE HAWALA OPERATION

  29. BASIC “CAROUSEL FRAUD”

  30. UNETHICAL PROFESSIONALS

  31. UNETHICAL PROFESSIONALS

  32. EVASION METHODS & MEASURES

  33. EVASION METHODS & MEASURES

  34. EVASION METHODS & MEASURES

  35. 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

  36. POLICY OPTIONS & RISKS

  37. 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.

  38. RATIONALE FOR BCP • CST Receipts during FY 2011-12 @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.

  39. 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

  40. WHY BCP

  41. HOW BCP WILL WORK

  42. 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

  43. 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.

  44. 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.

  45. 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.

  46. 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;

  47. 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

  48. e-704 (…contd.) • Electronic Audit Reports from FY 2008-09 • Facility to upload e-report available 24*7; • 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;

  49. 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

  50. 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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