After Foreign Airlines, GST Authorities Now Allege Evasion Of ₹1.5 lakh Crore By Shipping Companies; The Rise Of The GST Dragon In India And If It Has Been Successful So Far?

According to sources, GST authorities have alleged that shipping companies are involved in tax evasion amounting to ₹1.2 to ₹1.5 lakh crore. 

The Directorate General of GST Intelligence (DGGI) in Ahmedabad is leading efforts to combat GST evasion, and shipping liners have reportedly submitted detailed representations to the Finance Ministry, the Central Board of Indirect Taxes and Customs (CBIC), and the DGGI, seeking resolution. 

However, DGGI alleges that shipping companies have evaded taxes on services imported from their overseas head offices while operating through branch offices in India.

Under the GST law, a company’s establishments in India and outside India are considered separate entities, and any service provided by the company’s head office to its branch office is viewed as a supply, even when provided without any payment.

These shipping companies are said to transfer their operational costs, such as lease rentals, fuel charges, and crew expenses to their overseas head offices without charging their Indian branch offices for these services. 

According to sources, under GST law, any imported service is subject to taxation, even if provided without payment.

Experts have weighed in on the matter, noting that the recent CBIC circular from July 2023 might not provide relief to the shipping liners, as some of the services provided by the liners fall under exempted categories. Thus, the argument for revenue neutrality may not apply in this case, based on precedents from the service tax era.

In the words of Abhishek A Rastogi, who has argued cases before the Delhi High Court, “The import of services will be subject to tax when the place of provision with respect to these expenses is in India. Some of these expenses could be in the nature of pure reimbursements, and the concept of pure agency may come into play.” 

He also noted that the government and the GST Council aim to avoid coercive recoveries and unnecessary summons that could harass top management, as several circulars have been issued to protect the interests of the industry.

Amit Maheshwari, a partner at AKM Global, a tax and consulting firm, drew parallels between this case and previous tax evasion by foreign airlines in India.

He explained that services provided by the overseas head office to a branch office in India, even without consideration, are not exempt from the GST regime; the investigation could uncover instances where expenses were booked at the head office or branch office for administrative convenience but should have been taxed under reverse charge.

The Rap On Foreign Airlines

Just a few days ago, reports came in that the DGGI had conducted searches at the India offices of several foreign airlines, including Etihad, Emirates, Saudi Airlines, Qatar Airways, Air Arabia, Oman Air, and Kuwait Airways, in relation to alleged tax evasion concerning the import of services from the airlines’ head offices by their Indian branch offices.

According to sources cited in the report, these airlines were found to be recording expenses like lease rentals, crew charges, and fuel charges at their head offices without charging these costs to their Indian offices; thus, the practice raised concerns of potential tax evasion under India’s Goods and Services Tax (GST) regulations.

Under GST laws, establishments of companies within India and abroad are considered separate entities, making it imperative for transactions between a foreign airline’s head office and its Indian branch office to align with stringent GST regulations. 

This is operable even when services are provided without a monetary exchange, the GST framework treats them as taxable supplies, as stipulated in Schedule 1 of the Central Goods and Services Tax (CGST) Act. 

Abhishek A Rastogi, the founder of Rastogi Chambers, explained that the import of services is subject to tax under reverse charge only when actual import services are received, and in many cases, expenses were recorded at the head office or branch office solely for administrative convenience.

The Story So Far

The Finance Ministry has reported that the DGGI has identified GST evasion totaling Rs 57,000 crore from April 2020 to September 2023, involving over 6,000 cases of fraudulent input tax credit (ITC) claims, resulting in the arrest of 500 individuals. 

In the current fiscal year (2023-24), 1,040 fake ITC cases, involving Rs 14,000 crore, have been detected, leading to the apprehension of 91 individuals involved in fraud.

Since June 2023, DGGI has been particularly focused on identifying and apprehending the masterminds and dismantling syndicates operating across the country; a special drive was initiated against the practice of fraudulent ITC claims to prevent revenue leakage for the government, dating back to 2020.

Data analysis and advanced technical tools have been instrumental in unveiling these cases of tax evasion, leading to the apprehension of tax evaders. 

The statement from the Finance Ministry also pointed out that tax syndicates often manipulate unsuspecting individuals, enticing them with promises of jobs, commissions, bank loans, etc., to obtain their know-your-customer (KYC) documents; these documents are then used to create fake or shell companies without the individuals’ knowledge or consent.

To combat GST evasion, DGGI employs advanced tools for data analytics and leverages its intelligence network across the country to gather relevant information in new areas of tax evasion. 

In FY 2023-24, Rs. 1.36 lakh crore has been detected as overall GST evasion, including cases of fake ITC, and a voluntary payment of Rs 14,108 crore has been made in response to these findings.

GST; A Revolution

The implementation of the Goods and Services Tax (GST) in India has heralded an unprecedented revolution in the nation’s tax domain. 

With its motto, “One nation, One market, One tax,” GST was introduced to streamline the indirect taxation system for India’s vast population of 1.4 billion citizens with the aim of a comprehensive tax reform sought to unite all stakeholders, from governments to taxpayers and administrators, under a single, integrated tax framework.

GST laid the foundation for a seamless national market, reshaping India’s tax landscape and driving economic growth. The GST portal ensured smoother business compliance by digitising processes from registration to return filing, fostering a tech-enabled environment. 

Moreover, it paved the way for other significant indirect tax reforms, including e-way bills and e-invoicing, promoting transparent data sharing between businesses and the government.

GST Impact So Far

GST’s impact on the manufacturing sector has been remarkable; eliminating the cascading effect of taxes and reducing manufacturing costs has played a pivotal role in the sector’s growth. 

The GST treasury has witnessed substantial growth despite the challenges posed by complexities in return forms, ambiguities in tax rates, and disputes over goods and services classifications. 

The resurgence of businesses post-COVID-19, along with the sustained momentum of the “Make in India” initiative, has significantly contributed to this economic growth. Nonetheless, challenges such as tax fraud persist, leading to stringent compliance measures and the detection of fraudulent businesses. 

The government’s recent efforts to identify fake GST registrations and automated return scrutiny are aimed at ensuring compliance and weeding out non-compliant entities. This endeavour, while necessary, has also increased the responsibility of honest taxpayers to maintain 100% accuracy in their compliance.

The Last Bit,

As India continues to embrace the transformative power of GST, it sets the stage for further harmonization and prosperity. 

GST has shown immense promise, reshaping the economy, driving digitization, and boosting economic growth; it remains a new reform with the potential for phenomenal growth and harmonization in the years to come.

To ensure the continued success of GST, areas that deserve attention include the taxation of petroleum crude, diesel, petrol, natural gas, and aviation fuel, as well as the inclusion of other levies like electricity duty and stamp duty. 

Moreover, the evolution of the tax system to adapt to the digital world and technological advancements, along with addressing issues related to electric vehicles, discounts, tax rate rationalization, and emerging sectors like online gaming and cryptocurrency, has been on the agenda.