Sunday, September 24

Tax Officials Raid Companies Involved in Circular Trading


  1. The Indirect Tax Department targets raid over several promoters of companies involved in circular trading.
  2. Companies also prepared counterfeit invoices of INR 25,000 crore which was issued by the small and medium companies.
  3. The Indirect Tax Department has raided several states like West Bengal, Punjab, Rajasthan, Punjab, Haryana, Maharashtra, and New Delhi.

Circular trading is a type of securities fraud that can take place in stock markets, causing price manipulation and often related to pump and dump schemes.

Tax officials begin to go after companies that tried to fend off Goods and Services Tax (GST) and are involved in circular trading. Officials claim to have arrested various promoters of such companies.

Many suspects that circular trading may be used to increase turnover or perhaps an approach to bringing black money in the system. Tax experts believe due to this approach genuine companies are facing trouble.

Experts, however, argue that circular trading has been an old trick for several businesses, and in itself doesn’t necessarily result in tax evasion.

In February 2019, The Indirect Tax Department authorities issued notices and raided a number of companies which were involved in inflating their company’s turnover by selling goods from one company to another. They also prepared counterfeit invoices of INR 25,000 crore which were issued by the small and medium companies across India to take advantage of GST credit.

Experts say that approach towards circular trading has been a conventional trick for several companies and that does not necessarily result in tax evasion.

Tax Lawyers plan on to file habeas corpus against the tax department’s arrests. Tax lawyers claim that in the majority of cases no duplicate invoices were issued and tax department did not occur any loss due to tax lawyers.

“While many companies may indulge in circular trading, it doesn’t necessarily mean a case of fake invoices with related evasion of taxes,” said by Abhishek A Rastogi, a partner at Khaitan & Co, who is arguing bail application in some such cases. “The judicial custody has been ordered in few cases and this is a clear case to file a writ of habeas corpus in these situations.”

A person, known to be quite familiar with the development of circular trading illustrated an example of a Mumbai-based company. This Mumbai based company is into trading of plastic supplies. The company sold goods to a Pune based company which sold the exact goods to another company from Bengaluru. While all this was happening, goods were stored safely at a warehouse in Mumbai and GST credits were availed on every lap of the transaction. So, the goods were sold to a number of traders before landing with the original seller, just to pump up the turnover and receive larger valuations and loans.

The input tax credit is a mechanism whereby a company can set off the GST paid by them on purchases against future tax liabilities. Industry trackers said that in many cases the promoters of such companies have landed in jail.

The Indirect Tax Department issued notices to a number of suspected companies seeking the proof of all the sale and purchase transactions and also submit the invoices.

The Indirect Tax Department suspects that such companies purchase the fake bills which help them claim the input tax credit and in actuality, there is no buying and selling of goods is taking occurrence.

The Indirect Tax Department has raided several states like West Bengal, Punjab, Rajasthan, Punjab, Haryana, Maharashtra, and New Delhi. More than 500 people have been booked under the raids.

“Logically it would not make sense to buy own goods at a higher value unless there are reasons beyond the realm of normal transactions,” said by Suresh Nair, the partner at EY India. “There could be scrupulous elements who seek to benefit therefrom for reasons beyond GST. Similar instances could prevail in cross-border transactions as well, and could be fodder for investigative agencies as clearly there could be more to this than meets the eye.”

Circular trading frequently comes into play for getting black money in the system. Importers import goods and then export those same goods. On several occasions, in the past,  The Indirect Tax Department has also arrested suspected individuals involved in circular trading.

Important Link:

  1. Promoters arrested as tax officials raid companies suspected of circular trade

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