Sally Fitzgibbons Foundation

Beginning the Academic Essay

GST failed to meet the expectations as the proposed method
of invoice matching is not implemented. The market-driven
checks and balances did not work in the expected manner. In
most cases of tax evasion, dealers, in their monthly tax-returns,
deliberately manipulate the actual details of their business
transactions with the motivation to evade the tax. Invoice
trading is a method to evade tax 17, in which, a dealer sells
goods to a end user without issuing the invoice but collects
the tax. Later, he issues a fake invoice to a third party, who
can use it towards input tax credit to minimize his tax burden
as shown in Figure 2.
These tax manipulations can be spotted by tax enforcement
officials. To hide these manipulations, malicious dealers create
a well-entrenched “racket,” where a large number of bogus
firms(shell firms) are created to manipulate the title of goods
in the first place and then follow it up by making fake transactions
among them to outwit easy systemic detection. Malicious
dealers show heavy illegitimate sales and purchases among
malicious dealers and dummy dealers(shell firms) without any
potential value-add as given in Figure 3.
In Figure 3, the transactions represented using thick redlines
going from from A to D, A to C and D to C are transactions
corresponds to fake invoices(invoice trading), which
can be used by C and D to minimize tax liability. With the
motivation of confusing tax authorities, these dealers superimpose
several illegitimate transactions(dummy transactions)
on these fake transaction as represented using thin yellow
lines. Note that they superimpose illegitimate transactions such
that tax liability of any dealer remains the same, i.e., tax
paid on illegitimate purchases is same as the tax collected
on illegitimate sales.As the value-add due the illegitimate transactions equals
zero value, they do not pay any tax on these illegitimate
transactions in addition to creating confusion to the tax officials
about the fake transactions. Note that there is heavy
illegitimate sales and purchase transactions among malicious
and dummy dealers compared to genuine sales and purchase
transactions with the others. This technique of tax evasion
technique is known as circular trading 6,4,15. Hence the
malicious dealers complicate the process of identifying their fake transaction(invoice trading). Figure 4 shows a real world
example of circular trading.

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