GST Compliance Gaps in Bihar Self-Employment Schemes

The Context: Self-Employment Schemes in Bihar

Understanding the Fraud Vector

1. Bogus Invoicing: Traders or service providers issue fake invoices for non-existent supplies to the self-employment beneficiaries. These invoices are used to claim credits against GST liabilities.

2. Round-Tripping of Credits: Beneficiaries report inflated outward supplies and use corresponding fake inward supplies to show zero net tax liability, then claim refunds.

3. Shell Entities: Creation of dormant firms or shell companies with no real business operations, used purely as GST credit conduits.

4. Misclassification of Goods/Services: Reporting transactions under incorrect HSN/SAC codes to attract higher credits or refunds.

Detection Mechanisms: How Fraud Came to Light

1. Data Analytics Platforms

• Clusters of matching invoice series between unrelated parties.
• Abnormal credit accumulation without corresponding outward supply evidence.
• Sudden spikes in refund claims from a cohort of new taxpayers.

2. Third-Party Verification and Field Inspections

• Physically inspecting business premises.
• Matching declared stock with physical inventory.
• Interviewing purported suppliers and customers.

3. Inter-Agency Intelligence Sharing

Compliance Failures and System Gaps

1. Inadequate Know-Your-Business Verification: Many self-employment beneficiaries were onboarded into the GST system with minimal physical verification. Lack of robust pre-registration checks — such as proof of business activity, premises verification, or economic viability assessments — made it easier for fake entities to enter the formal tax ecosystem.

2. Overreliance on Self-Reporting: GST compliance fundamentally relies on self-reporting of transactions. Without regular third-party confirmation of supplies and purchases, fraudulent reporting becomes easier. The absence of real-time reconciliation of e-invoicing across buyers and sellers further complicated matters.

3. Limited Capacity at the Local Office Level: Tax officials at district or block offices often lack resources, training, or technological support to detect sophisticated fraud patterns. Their focus, traditionally, has been on processing returns rather than proactive fraud detection.

4. Insufficient Awareness Among Genuine Beneficiaries: Not all fraud was perpetrated by intentional defaulters. A share of irregular filings occurred because genuine self-employment beneficiaries misunderstood GST provisions, leading to misclassification, double claims, or inaccurate credits — which then triggered compliance action.

Lessons Learned and Policy Implications

1. Robust Onboarding and Verification

Before granting GST registration to self-employment scheme beneficiaries, authorities should implement rigorous verification processes. These might include:

• Mandatory physical verification of business premises.
• Submission of business plans or vendor contracts.
• Cross-checking bank accounts and PAN history.

2. Strengthened E-Invoicing and Data Reconciliation

3. Capacity Building and Training

4. Clear Communication and Support for Genuine Businesses

5. Periodic Reviews of Scheme Design

Conclusion