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Can your input tax be clawed back despite meeting all the conditions of claiming input tax?

For Singapore GST purposes, GST-registered businesses are eligible to claim the GST incurred on their business expenses if they fulfill all the qualifying conditions of claiming input tax. Among others, the expenses incurred are for business purposes and the businesses should maintain a valid supplier’s tax invoice or simplified tax invoice to support its input tax claim.

Despite meeting all the qualifying conditions above, the Comptroller of GST may order the input tax claimed to be clawed back. How is that so?

Recent GST Board of Review cases

Drawing attention to the recent GST Board of Review cases, namely “GHY vs Comptroller of GST [2023]” and “GIG vs Comptroller of GST [2023]”, one crucial conclusion drawn is that despite maintaining valid documentation to support the input tax claim, where the Comptroller of GST is not satisfied that the purchases are genuine business expenses, the input tax claim will be disallowed. In both cases, the focus is under section 52(3) of the GST Act, “The onus of proving that the decision of the Comptroller on the application for review and revision under section 49 is incorrect shall be on the appellant.

This implies that if the Comptroller of GST questions the legitimacy of business expenses, it falls on the appellant to provide evidence to the contrary. A common thread between both cases is that both GHY and GIG failed to prove that the business purchases were genuine transactions, i.e. there is insufficient evidence to prove that there were actual supplies as stated in the invoices. The goods may either be non-existent or no known upstream suppliers were supplying the goods.

Key Takeaway

While there is a higher likelihood of forfeiting input GST claims in cases of fraudulent transactions, it’s evident that the tax authority has expanded its scope beyond prosecuting transactions solely for illegal evasion to include ‘sham’ transactions.

Businesses must comprehend their obligations to safeguard their business transactions and mitigate the risk of the tax authority challenging their legitimacy. One effective approach is to implement robust control practices, including conducting the necessary due diligence to avoid being involved in Missing Trader Fraud as per IRAS’ guidelines and adopting a risk management framework or GST toolkit to support their daily operations.

Missing Trader Fraud

The Missing Trader Fraud is a complex financial scam involving the exploitation of value-added tax (VAT) or Goods and Services Tax (GST) systems in various countries. This fraudulent scheme typically involves a chain of transactions where goods are bought and sold across borders, with VAT/GST being fraudulently reclaimed at each stage of the process. The term “missing traders” refers to the fraudulent traders who disappear without remitting the VAT/GST they have reclaimed to the authorities.

In recent years, the Inland Revenue Authority of Singapore (“IRAS”) has been actively combating Missing Trader Fraud and sham/fraudulent transactions due to its significant impact on tax revenues and financial systems through various IRAS queries/audits on the submitted GST returns.

The Knowledge Principle

From 1 January 2021, GST-registered businesses will not be entitled to any input tax on any purchases which the businesses knew or should have known to be part of the Missing Trader Fraud arrangement (known as “The Knowledge Principle”). The input tax claim will be denied even though the businesses have fulfilled the conditions for claiming input tax and have maintained valid supporting documents such as suppliers’ tax invoices.

In view of the above, IRAS recommends that businesses perform certain level of due diligence checks to avoid being involved with the Missing Trader Fraud arrangement.

How can SW Singapore assist you?

SW Singapore provides specialized services aimed at helping our clients establish robust GST controls. These services encompass designing and reviewing customized GST Toolkits, GST manuals, GST tax code table and GST risk management framework. By doing so, we aim to help our clients avoid involvement in fraudulent or sham transactions, thereby safeguarding their input tax claims and protecting their business reputation.

Talk to us if you are unsure or are interested to find out more. We welcome any opportunities to discuss and provide our assistance in this aspect to ensure compliance.

 

Ng Ee Theng  

    Head of GST

eetheng.ng@swgroup.sg

 ngeetheng

 

Ng Shi Ting

    Senior ManagerGST

shiting.ng@swgroup.sg

ngshiting1005

 

This content is for general information purposes only and cannot be used as a substitute for professional advice from appropriate professional consultants.