GST Loopholes
Under GST, those with an annual turnover less than Rs 20 lakh do not require a GST number if they do not engage in inter-state sales. Again, a person with a GST number can sell goods worth Rs 2.5 lakh per month to a person who doesn’t have a GST registration. It is not the seller’s responsibility to ascertain the identity of the purchaser without a GST number. His sales are genuine, his bills too are – and he will report his sale invoice to GST so that it matches with his purchase invoice.
However, the clause allowing a person with a GST number to sell goods worth Rs 2.5 lakh per month per unregistered person can be exploited.
In the example above, the distributor can legitimately sell one pack of the aerated drink at Rs 134.50 (to the tune of Rs 2.5 lakh) to the wholesaler, who will claim he does not have a GST number as his annual turnover is less than Rs 20 lakh. Since the distributor’s deal is legitimate, he can claim input credit as before.
But the name under which the wholesaler’s bill for Rs 134.50 has been issued could be fictitious. The wholesaler’s purchase, therefore, disappears from the audit trail. No doubt, the wholesaler foregoes input credit, but he will not have to pay GST either – and, therefore, not submit purchase and sale invoices. This means he need not show Rs 2.5 lakh worth of the aerated drink purchases in his turnover.
The wholesaler will sell the aerated drink pack onwards to the retailer in cash, without a bill. Since the wholesaler does not have to pay GST (as he claims his annual turnover is less than Rs 20 lakh), he can sell the pack to the retailer at a discount of 84 paise – the amount equivalent to the tax the wholesaler would have otherwise had to pay the government as GST per pack. Likewise, the retailer can sell the pack onwards to the consumer in cash, without a bill, at Rs 1.40 cheaper than packs on which GST is charged.
They need not sell the pack cheaper. Just escaping GST alone makes sense as it will enable them to suppress their overall turnovers and income.
Dealers handle products manufactured both by the organised and unorganised sectors. The organised sector usually has systems in place. But goods stocked from the generic or grey market will likely be transacted in cash, without bills, stretching the cash trail further. more
However, the clause allowing a person with a GST number to sell goods worth Rs 2.5 lakh per month per unregistered person can be exploited.
In the example above, the distributor can legitimately sell one pack of the aerated drink at Rs 134.50 (to the tune of Rs 2.5 lakh) to the wholesaler, who will claim he does not have a GST number as his annual turnover is less than Rs 20 lakh. Since the distributor’s deal is legitimate, he can claim input credit as before.
But the name under which the wholesaler’s bill for Rs 134.50 has been issued could be fictitious. The wholesaler’s purchase, therefore, disappears from the audit trail. No doubt, the wholesaler foregoes input credit, but he will not have to pay GST either – and, therefore, not submit purchase and sale invoices. This means he need not show Rs 2.5 lakh worth of the aerated drink purchases in his turnover.
The wholesaler will sell the aerated drink pack onwards to the retailer in cash, without a bill. Since the wholesaler does not have to pay GST (as he claims his annual turnover is less than Rs 20 lakh), he can sell the pack to the retailer at a discount of 84 paise – the amount equivalent to the tax the wholesaler would have otherwise had to pay the government as GST per pack. Likewise, the retailer can sell the pack onwards to the consumer in cash, without a bill, at Rs 1.40 cheaper than packs on which GST is charged.
They need not sell the pack cheaper. Just escaping GST alone makes sense as it will enable them to suppress their overall turnovers and income.
Dealers handle products manufactured both by the organised and unorganised sectors. The organised sector usually has systems in place. But goods stocked from the generic or grey market will likely be transacted in cash, without bills, stretching the cash trail further. more
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Oct 31
Madam, I has just gone through the Rules for invoices and the requirement of uploading information on the GSTN. Address of the unregistered customer is mandatory in case the value of the invoice is more than INR 50000. I have not been able to find this figure of 2.5 lakh per month anywhere in the Rules. Even a registered dealer is not required to issue an invoice if value of the goods is less than INR 200. Considering that the data on the invoices is to be uploaded at 4 digit HSN level, the number of records to be uploaded in the data base is unprecedented and difficult to handle. Such kind of an exercise is unique in India. Therefore, there is no mandate for a Registered Dealer or a Wholesaler to upload all the invoices. He need to upload only those invoices where the recipient is to take VAT credit. This is intended to keep the data to bare minimum till the systems stabilize and data base can handle larger volume. The issue flagged by you is know to everyone but the tax involved at this stage is so meager that it is to be ignored in the larger interest of compliance where it matters. It may also be pointed out the limit of 20 lakh for registration is mainly intended for service providers and those entities who are involved in one time transactions or a few transactions in goods in a year. You must keep in mind that limit of 20 lakhs and the Composition Scheme upto turnover of 75 lakh is intended to keep most of the Village and small town economy out of complex processes of GST. A retailer with a turnover of 20 lakh in a year will not be able to generate a margin on more that 2 lakh from which his establishment expenses are to be deducted to determine his profit. Such retailing business is not viable unless it is carried out in a small village from ones house. 90% of the revenue is generated by top 10% of the entities. Tax authorities are mainly concerned with the evasion by such entities. Tax department deploys only limited resources on these 10%. more
Jul 24
Very informative. Attended the subject with a wider thought and study. The intention of the GST statute is made clear. We have to carry the Big ones as well as retailers / small traders in the GST vehicle. So some kind of accommodation is needed by these small category who are actually the last link to the village consumers and low income groups in the urban . Organized
retail traders like More,Reliance etc are just above the hands of very low income / downtrodden people because of the high value of goods and services. It can be seen in those retail shops. No poor or down trodden people will visit and purchase goods from these MNC outlets. With this in mind may be the GST council made some adjustments and compromises to the retail sector. Thanks You Sir. more
retail traders like More,Reliance etc are just above the hands of very low income / downtrodden people because of the high value of goods and services. It can be seen in those retail shops. No poor or down trodden people will visit and purchase goods from these MNC outlets. With this in mind may be the GST council made some adjustments and compromises to the retail sector. Thanks You Sir. more
Jul 24
It appears that escaping GST is simple. But I assure you that there will be random raids by concerned tax evasion departments to selected dealer/ distributor/ whole seller & retailers to check the stock, books of purchase & sale documentation by cordoning the market area and imposing heavy penalty. That will be eye opener for all the nearby traders. Like benami property bill, you will find that in Bihar, Lalu's sons/ daughters properties are being confiscated will make many other cautious. In West Bengal, for Sharda/ Naarda there were arrests of MP's and CM is finding the heat by faul words in public places. more
Jul 24
You have to remember that in India laws are created to catch some one or to release some one from the clutch of law, so that corruption by selective prosecution can go on. more
Jul 24
It will not be easy. The distributor will have to mention the name and details of the wholesaler to whom he is selling (even though the wholesaler is unregistered) and the department will keep a tab on the purchases of these unregistered wholesalers through data analytics. If they suspect something they will be pulled up immediately. And even if they put in fictitious names during audits and counter checks they will be able to track these down. But yes a lacuna is there and can be mis-used. Indians are well known for this and that is the reason why the Govts have to come with complicated structures to plug the loop holes. If we are honest in paying taxes, the complicated structures will automatically give way to simple procedures and less scrutiny. In any genuine efforts by the Govt to improve things, we Indians try to see how the system can be subverted and this leads to complications for everyone. The honest suffer because of the practices of the dis-honest. In advanced countries the premise is that the citizen is honest and accordingly the Govt makes the processes. And this is the reality because very few resort to subverting the system. Hence the compliance costs (for the tax payer) remain low and an elaborate machinery is also not needed by the Govt for monitoring. However in countries like India, since the people are generally dis-honest, the processes have to be made keeping in mind the dishonesty element. This leads to higher compliance costs and higher cost on monitoring machinery. more
Jul 24
Can you please let us know of the Clause in the GST Act or Rules which places restriction of sale amounting to 2.5 lakh in a year to unregistered dealer. more
Jul 24
