GST evasion: A growing threat to honest enterprise

INDIA’S Goods and Services Tax (GST) was introduced with the promise of transparency, simplicity and nationwide uniformity. Yet persistent evasion and misuse continue to challenge its credibility. Despite reforms, enforcement drives and technological advances, loopholes in the system are being exploited in increasingly sophisticated ways. Government officials and industry stakeholders acknowledge that while GST has streamlined compliance for many, it has also en-abled manipulation on a scale that threatens both national revenue and business integrity. The result is a troubling imbalance: honest taxpayers often find themselves at a competitive disadvantage, while those who circumvent the rules gain unfair market leverage.

Government data on GST investigations over the past five years indicates a sharp rise in suspected evasion and misuse of input tax credit (ITC). Public datasets on the Open Government Data (OGD) platform show that thousands of ITC fraud cases have been detected between FY 2020–21 and FY 2024–25, with amounts running into tens of thou-sands of crores. When all categories of evasion are considered—including fraudulent ITC claims, bogus invoicing, non-payment of GST, circular trading and incorrect availment of credit—the total figure is estimated to run into several lakh crore rupees during this period. The persistence of such malpractice indicates that the issue is not merely one of enforcement but of systemic vulnerabilities.

Small and medium enterprises face the consequences most directly. Fraudulent operators frequently enter markets briefly, issue under-valued invoices, charge GST only on paper, and vanish before audits begin. Such traders can sell goods at prices genuine businesses cannot match without losses, distorting market equilibrium and discouraging compliance. The resulting perception—that honesty is commercially disadvantageous—is corrosive to long-term economic integrity.

Technology-driven enforcement such as e-invoicing, AI-based risk profiling, facial recognition and Project Anveshan have strengthened detection capacities. These measures enable earlier identification of fraud networks, but detection alone is re-active. Prevention must now become the centrepiece of reform.

A Preventive Approach Proposed By The Author: Unified UPI–GST Payment System

To address this structural gap, I propose a reform that links taxation directly to payments through a unified UPI–GST system. This is not an existing government initiative but a conceptual framework intended to eliminate tax leakage at source.

How the system would work:

1. All invoices continue to be generated on a central GST portal.

2. At payment stage, the buyer makes two simultaneous transfers:

* Product value to seller

* GST amount directly to the government

3.Only after GST receipt does the invoice get authenticated.

4.Input tax credit is credited based on actual tax paid—eliminating fake credit claims.

5.E-way bills are auto-linked, pre-venting circular trading chains.

Benefits and Expected Outcomes

* Zero discretion in GST collection—no trader can collect tax and not de-posit it.

*Level playing field—genuine tax-payers compete fairly without price distortion.

*Increase in voluntary compliance—paying tax becomes automatic, not optional.

*Higher national revenue and reduced enforcement burden—tax paid at source requires fewer raids, notices and audits.

*A cleaner data ecosystem—real invoices, real movement of goods, traceable supply chain.

Restoring Trust in the Tax System 

GST is a landmark reform, but its success depends on reinforcing fairness. A system where taxes flow directly to the government in real time would not only prevent fraud but also re-store faith among compliant businesses and strengthen India’s fiscal foundation.

It is time to shift from catching evaders to designing a system where evasion is no longer possible.