The tax authorities are confronting an unprecedented spike in goods and services tax (GST) fraud, driven increasingly by “sleeping modules”, dormant or inactive companies that are being resurrected as shells to issue fake invoices and siphon off input tax credits (ITC).
New government data submitted to Parliament shows that GST evasion through bogus entities has accelerated sharply over the past four years, becoming one of the biggest threats to the tax system since the regime was rolled out in 2017.
The Ministry of Finance, responding to a question in the Rajya Sabha, disclosed that over 55,000 cases of fake invoicing and ITC fraud have been detected between FY23 and the current year, with tax authorities flagging more than Rs 1.61 lakh crore in suspect transactions.
What began as sporadic fraud has, officials say, morphed into a structured industry.
A breakneck rise in GST theft
Data tabled by Minister of State for Finance Pankaj Chaudhary shows a dramatic rise:
- FY 2022–23: 7,231 cases | Rs 24,140 crore detected
- FY 2023–24: 9,190 cases | Rs 36,374 crore detected
- FY 2024–25: 15,283 cases | Rs 58,772 crore detected
- FY 2025–26 (up to October): 24,109 cases | Rs 41,664 crore detected
The year-on-year spike reflects both better digital detection and the scale at which shell networks have proliferated. Officials familiar with investigations say that a number of rackets operate like parallel supply chains, entities that exist only on paper, passing ITC down a chain of buyers who claim credits on taxes never paid upstream.
Pharma firms becoming favoured fronts
While fake invoicing spans industries from steel scrap to electronics, a notable trend has emerged in pharmaceuticals, a sector where regulatory registration is complex, pricing is tightly controlled, and dormant units are easier to repurpose.
The government admitted that “sleeping modules or inactive pharmaceutical firms” have been identified as fronts in multiple GST theft cases:
- FY 2022–23: 3 cases | Rs 31.71 crore
- FY 2023–24: 0 cases
- FY 2024–25: 2 cases | Rs 5 crore
- FY 2025–26 (up to October): 2 cases | Rs 7.25 crore
Though relatively small in number, officials say these cases require deeper scrutiny because pharma units often have large license networks and historically carry stock or production capacity, making fabricated invoice trails harder to detect.
A senior indirect-tax officer, who has led investigations into pharma-linked frauds, said the pattern typically involves reactivating long-defunct drug manufacturers, forging supply records, and routing high-value chemicals or formulations on paper.
“Once registration is secured, the same dormant firm can generate invoices worth hundreds of crores without ever opening its shutters,” the officer said. “The margins for the fraudsters are extraordinary.”
Crackdowns and new digital guardrails
The government says it has spent the past two years tightening compliance systems and reworking GST registration protocols, which officials concede had been exploited heavily by shell operators.
Several new measures have been rolled out:
Stricter invoice matching: Only invoices uploaded in GSTR-1 and reflected in GSTR-2B can now be used to claim ITC, shutting the door on mismatched or manually inserted credits.
Mandatory sequential filing: Businesses must file GSTR-1 before filing GSTR-3B, preventing firms from delaying outward invoice reporting while claiming credits.
PAN-linked verification: Registration now requires OTP-based PAN authentication and Aadhaar-based biometric checks in high-risk cases.
Physical verification and geo-tagging: New GST applicants in certain categories are subject to on-ground inspections, geo-tagged addresses, and bank account validation within 30 days.
E-invoicing expansion: All B2B transactions for companies with a turnover above Rs 5 crore must follow e-invoice norms, creating a real-time audit trail.
Tougher criminal provisions: Fraudulent ITC claims without genuine supply have been made cognizable and non-bailable.
A new tool: Invoice management system (IMS)
One of the biggest reforms came late in 2024 with the rollout of the Invoice Management System, which allows buyers to accept, reject, or mark invoices as pending — a real-time workflow intended to eliminate “ghost invoices” inserted by shell entities.
Officials say the IMS has already reduced the volume of mismatched credits and forced both genuine and bogus suppliers to reconcile invoices more transparently.
Two nationwide enforcement drives, in mid-2023 and again in late-2024, were launched to track fake registrations. These involved joint operations by central and state tax teams, physical site inspections, and mass cancellation of GSTINs found to be non-existent.
One tax official described these as “the largest verification exercises since GST began”, adding that hundreds of thousands of suspicious accounts were flagged.
Fraud networks are growing faster than enforcement
Despite the stepped-up crackdown, authorities acknowledge one challenge: fraud networks are scaling faster than compliance mechanisms. Shell companies or “sleeping modules” can be created using stolen PAN details, obscure addresses, and compromised Aadhaar credentials — often faster than tax systems can detect anomalies.
The surge in cases in FY26, nearly 24,109 cases in just seven months, highlights how syndicates have adapted to new rules, spreading transactions across larger volumes of small entities to avoid detection thresholds.
Tax experts say the solution may lie in deeper data integration between corporate affairs, drug regulators, banks, and GST systems, particularly in sectors like pharma, where inactive units can be easily weaponised.
The bigger picture
The GST Council has repeatedly warned states about aggressive ITC fraud trends, noting that fake invoices dilute the integrity of the system, distort competition, and widen revenue gaps for programs funded by shared taxes.
With revenue pressures mounting ahead of the Union Budget, the government is expected to announce further measures to plug leakages, potentially including AI-based anomaly tracking and even pre-filled returns for certain taxpayer segments.
Until then, the data released in Parliament underscores an unavoidable fact: India’s GST system, despite years of refinement, continues to battle fraud at a scale that threatens its foundational promise of a unified, technology-driven tax regime.
Edited by Jyoti Narayan
Original Article
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