Tax department recently mentioned that after the implementation of GST, there can be a huge game of corruption which is underlying in the shell companies being registered for many years. From a recent example quoted by the department, a Mumbai-based non-descript textile company registered with an annual turnover of Rs 1 crore or less has been suddenly active as well as the company has started doing business in other states in form of selling goods and could earn more than Rs 50 crore by the year end.
As per the tax experts and consultants, some of the businesses making shell companies in Mumbai to avoid GST regime and indirect tax experts suspect such kind of companies. The tax officials have started to take vigilant actions towards all those dormant companies who have started a sudden activity after the GST which may create a complex web to deceive the government.
As per the Mumbai, based tax official said, “Many dormant companies have become active and are trading in various product categories they never used to deal with earlier. In many cases, these companies seem to be deliberately registered in prominent business areas.”
To take the benefit of GST, several companies register them with an annual turnover in between Rs 50 crore to Rs 200 crore and it can be known with the shell companies in Mumbai. Shell companies would be doing this kind of activities to avail input tax credit by doing business in other states and would collect input credit, and then brisk away before any tax department raid.
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An official said that “The company would first sell outside the state through a shell company and claim 18% GST with the government. The promoters plan that they would stop paying GST after a couple of transactions.” Other companies are also thinking to furnish this system by hiding the original products or goods.
As per the tax experts, “If a Mumbai company sends goods that are at high GST rate of say 28% to a New Delhi company but the invoice shows they are transporting food grains, which are at 5%. The buyer in New Delhi would never show sales of the goods and never pay GST.”
“These shell companies, after the GST credit transfer, can go back to being dormant and may not get caught if the avoidance per company is around Rs 5 crore.” an official told this.
MS Mani, the partner of Deloitte Haskins & Sells, said “The government can eventually catch hold all those who are using shell companies to accumulate credit and make money. The only way this could be effectively done is by monitoring this real time and through various channels.”
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In the views of experts, official tax experts would be able to know the fraud or such types of cases, but it would take more time at least one year. Until that time, the companies would not be found at the registered address as well as shut down their business.