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Federation of All India Vyapar Mandal (FAIVM), one of largest Traders Organization in country, urges the FM Nirmala Sitharaman to proactively address vulnerabilities in the GST system that enable fraudulent benefit, in GST Council Meeting of 12 Sept.2026.
Findings are quoted from the DGGI, CBIC and Central GST Commissionerates, reports. Memorandum signed by ‘‘FAIVM President Jayendra Tanna and Nat.Secretary CA RK Gaur” recommends targeted redesigns of process stages where fraud repeatedly occurs, rather than relying solely on post-facto detection and enforcement.
Evidence from Government Investigations
Recent high-profile cases investigated by DGGI and CGST have exposed several recurring patterns of GST fraud:
- Fake ITC Networks: DGGI uncovered a Rs. 1,196 crore network involving bogus entities, fake invoices, and circular trading, with no actual movement of goods.
- Dummy Firms and Layered ITC: Rs. 645 crore in ITC was passed through 229 dummy firms, using invoices without real supply and layered transactions.
- Refund Fraud: A Rs. 1,825 crore case involved fraudulent ITC generated through paper chains and converted into refund claims, as reported by DGGI Ahmedabad in April 2026.
- Non-Functional Entities: CGST Delhi South found Rs. 60.59 crore in ITC claimed by a non-functional entity using only paper invoices.
- Widespread Syndicates: DGGI’s 2023 report identified Rs. 18,000 crore in fake ITC using data analytics to detect syndicates and fraudulent firms.
“These cases consistently reveal that fraud is enabled by specific process weaknesses, not by isolated incidents or individual actors”.
Analysis of Vulnerable Process Stages
The proposal identifies five key stages where GST fraud typically arises:
- Non-Genuine Registrations: Fraudsters create bogus firms using forged KYC and repeated entity creation. The registration process is the entry point for much of the fraud.
- Invoices Without Actual Supply: Paper invoices are issued without real goods or services, enabling fraudulent ITC claims.
- Layered ITC Passing: Chains of dummy entities pass ITC through multiple layers, obscuring the true beneficiary.
- Conversion to Refunds: Fraudulent ITC is ultimately converted into cash through refund claims, especially on zero-rated supplies.
- Delayed Detection: Enforcement and analytics often detect fraud only after the benefit has been realized, making recovery difficult.
Policy Recommendations
FAIVM recommends a shift from reactive enforcement to preventive process redesign:
- Redesign Registration: Implement risk-sensitive controls so that new registrations cannot easily become platforms for large-scale fraud, while ensuring genuine applicants are not unduly burdened.
- Strengthen Transaction Evidence: Make tax benefits dependent on stronger, transaction-linked evidence, so that paper invoices alone cannot generate financial benefits.
- Control ITC Transfer: Introduce risk-based controls at the stage where ITC becomes transferable or usable, preventing the accumulation of fraudulent benefit through layered transactions.
- Secure Refund Mechanisms: Redesign refund processes to ensure that questionable credits cannot be converted into cash before appropriate risk checks are satisfied.
- Shift to Preventive Controls: Move from a reactive model (detect, investigate, recover) to a preventive one (identify risk, stop vulnerable opportunities, allow genuine transactions).
Eliminating Opportunities of Malpractices for Small Traders
FAIVM proposes that GST compliance obligations be concentrated at higher points in the supply chain, such as manufacturers or major distributors, who have greater record-keeping capacity. Small traders, especially in smaller towns and villages, should be made to purchase tax-paid goods for resale without the scope of ITC compliance, depriving them any claim to ITC.
This would also..
- Reduce compliance burdens on small and scattered traders who lack the infrastructure for detailed invoice-matching and ITC claims.
- Simplify tax administration for the informal and semi-urban retail sector, without increasing the risk of tax leakage, since these traders would only resell tax-paid stock.
Department’s focus will Concentrate on compliance and enforcement at fewer, larger initial points in the supply chain, making oversight more manageable and cost effective also.
“The Central Principle”
“If a particular stage of a tax process creates an avoidable opportunity for wrongful monetary benefit, the better policy solution may be to remove or redesign that stage and achieve the same legitimate objective through a safer, transparent and technology-driven mechanism.”
Conclusion
FAIVM urges the government to objectively identify and review vulnerable process stages in the GST ecosystem, minimizing opportunities for fraud with safer, transparent mechanisms. FAIVM stands ready to provide detailed process-level suggestions to support these reforms, for effective tax administration to restrict malpractice.
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