Circular trading allegations are among the most complex and high-stakes enforcement actions under GST. The department may allege that a chain of transactions involving multiple entities has no commercial substance and is designed solely to pass on fraudulent input tax credit. However, legitimate business transactions can also be swept up in such allegations.
This article explains how circular trading allegations arise and how to respond effectively.
What Is Circular Trading?
Circular trading typically involves a chain of transactions where goods are invoiced through multiple entities but may not physically move in the traditional sense. The department alleges that the sole purpose of the chain is to generate and pass on ITC without actual supply. The Allahabad High Court has held that allegations of circular trading must be backed by concrete evidence, not mere suspicion.
The Patanjali Case
The Allahabad High Court dismissed a challenge to a ₹273 crore GST penalty on charges of circular trading of paper tax invoices without actual supply of goods. The court found sufficient prima facie evidence of circular trading and upheld the penalty.
The Constructive Delivery Defence
A key defence in circular trading cases is the concept of constructive delivery — the change in title to goods without physical movement. If the transaction is conducted in accordance with valid business practices and the title to goods passes from one party to another, the transaction is valid for GST purposes, even if the goods do not physically move.
Evidentiary Standards
The Allahabad High Court has held that the GST law does not require toll plaza receipts to prove the physical movement of goods. Allegations of circular trading cannot be sustained solely on the absence of such receipts. The department must prove:
- That the transactions lacked commercial substance.
- That there was collusion between the parties.
- That the sole purpose was tax evasion.
How Businesses Get Implicated
Businesses can get implicated in circular trading allegations through:
- Transactions with suppliers who are later found to be non-compliant.
- Participation in supply chains that the department characterizes as circular.
- Related-party transactions that lack arm's length pricing.
- High-volume transactions with low margins.
Practical Steps If You Receive a Notice
- Gather all documentary evidence of the transactions.
- Prove the business purpose and commercial substance of each transaction.
- Establish the flow of funds through banking channels.
- Demonstrate the change in title through contracts and invoices.
- Challenge the department's failure to prove collusion.
- Consider the constructive delivery defence if applicable.
Conclusion
Circular trading allegations are serious but defensible. Businesses with legitimate commercial transactions can build a strong defence by proving business purpose, fund flow, and change in title. The key is to act promptly and with professional representation.
At Anuj Desai & Associates, we provide expert representation services for circular trading allegations. Our team can help you build a strong defence and protect your business.
For a confidential consultation, contact us at office@anujdesaiassociates.com or call 9619456656. Visit our website at https://anujdesaiassociates.com or connect with our founder on LinkedIn at linkedin.com/in/ca-anuj-desai-122547230.