Why the GST Council recommended biometric-based Aadhaar authentication for new registrations: Explained

GST council recommends biometric Aadhaar authentication for GST registrations to combat fraudulent ITC claims and GST frauds.

The story so far: On June 22, the GST council recommended introducing biometric-based Aadhaar authentication for GST registrations, in a phased manner. In a media interaction after the conclusion of the council meeting, Finance Minister Nirmala Sitharaman stated that the measures endeavour to combat fraudulent input tax credit (ITC) claims made through fake invoices. She highlighted that the measure was formalised based on “good inputs” received from pilot projects run in Gujarat and Puducherry, in addition to a study in Andhra Pradesh. This is soon expected to be implemented across India.

Input tax credit (ITC) claims are a means to reduce tax liability by indemnifying the tax already paid on inputs for the tax liability computed on the output. Let us say, a manufacturer pays Rs 120 as tax for purchasing certain inputs or raw materials for their business. Now, their direct tax liability – which is based on the production incurred, is Rs 300. This is where the manufacturer can make an ITC claim. Since s/he has paid a certain portion in taxes for the input procurement, the difference of Rs 180 would be the net payable tax. Rs 120 is offset by claiming ITC.  

Since the rollout of the GST regime, a large number of GST frauds involving the use of fake invoices to fraudulently avail an ITC claim, inflate turnovers and/or assist in money laundering have been observed. These frauds are facilitated with the use of fake invoices, that is, invoices generated without the actual supply of goods or services.

Central Board of Indirect Taxes and Customs (CBIC) in a 2019 office memorandum had noted three ways in which this was executed. The first is more direct, wherein the invoice is used, without receiving any goods or service, to show payment of tax. This is then used to avail an ITC claim translating to a loss for the exchequer.

The second entails issuing an invoice to one entity and the goods being diverted to some other entity. The purchaser in this case may actually not be involved in creating an output product or service – a prerequisite of an ITC claim. However, they too may avail a claim on their tax liability which could be unrelated to the transaction incurred. All in all, it may potentially entail shifting ITC from exempted supplies to taxable supplies. 

Finally, the last of these observed methods entails routing of invoices through a series of shell and/or dummy companies and transfer of ITC from one company to another in a circular fashion to increase the turnover. Again, there is no supply of goods or services but the credit is availed based on fake invoices. In such instances, utilising inadmissible credit alongside the utilisation of credit emanating from actual regular supplies results in a loss to the exchequer.

In May last year, CBIC had launched a drive against bogus registrations and issuance of fake invoices. Over a seven-month period since its initiation, the drive had detected a total of 29,273 bogus firms involved in suspected ITC evasion totalling to Rs 44,015 crore, a report in January 2024 noted. The CBIC further informed that the discovery translated to savings of Rs 4,646 crore, of which Rs 3,802 crore was because of the blocking of ITC claims. Rs 844 crores were saved by way of recovery. Lastly, 121 arrests were made in this regard.