How to check if your supplier is a fake GST firm (before you lose your ITC)

In FY24-25 alone, authorities detected ₹1.01 lakh crore of fake Input Tax Credit routed through 42,000+ bogus firms — and when a fake firm is caught, it's the honest buyers holding its invoices who lose their credit.

The scam is simple: register a firm, issue invoices, collect GST from buyers, never pay it to the government, vanish. The enforcement is simpler: deny every rupee of ITC claimed on that firm's invoices — including yours.

Why the buyer pays for the seller's fraud

Section 16 conditions your credit on the tax actually being paid to the government (Section 16(2)(c)). A fake firm never pays. So when the firm's registration is cancelled — often retrospectively — every buyer downstream gets a notice: reverse the ITC, with interest, argue later. Courts sometimes side with genuinely diligent buyers, but that's years of appeals to recover money a five-minute check would have saved.

The 5-minute check for any new supplier

1. Validate the GSTIN itself (30 seconds)

15 characters: 2-digit state code + 10-character PAN + entity code + Z + checksum. Typos and invented numbers fail the checksum — our free GSTIN verify tool checks it instantly.

2. Check status and identity on the portal (2 minutes)

GST portal → Search Taxpayer. Confirm:

• Status: Active (not Cancelled or Suspended)
• Legal/trade name matches the person you're dealing with
• State code matches where they claim to operate (a "local" supplier with another state's code deserves a question)
• Registration date — a firm registered last month offering you ₹40 lakh of goods on credit is a pattern from every DGGI case study

3. Check filing habits (2 minutes)

The portal shows return-filing status. Regular GSTR-1 and 3B filing = the invoice will reach your 2B and the tax is probably being paid. Gaps and nils while billing you heavily = your credit is at risk even if they're not fraudulent.

4. Apply the price smell-test

If the deal only makes sense because the price is 10-15% under everyone else — roughly the GST — you may be looking at tax that was never going to be deposited. That discount is your ITC, pre-spent.

Ongoing hygiene for existing suppliers

• Watch your GSTR-2B monthly: a supplier whose invoices stop appearing has stopped filing — the first visible symptom of trouble. (Our missing-ITC diagnostic covers this.)
• Reject unknown invoices in IMS: invoices in your queue from firms you never bought from can mean someone is cycling fake credit through your GSTIN — reject them (IMS guide).
• Keep delivery evidence — e-way bills, transport docs, weighbridge slips, payment by bank. If a supplier ever turns out bad, your defence is proving the goods were real.

If the worst happens

Supplier cancelled, notice received: don't panic-pay. Compile invoices, bank payment proofs, delivery evidence, and your verification records; reply through your CA distinguishing your genuine purchases from the firm's fraud. Buyers with documentation and clean conduct have real defences; buyers with cash payments and no delivery records don't.

How GST Sathe watches your suppliers

GST Sathe verifies every supplier's GSTIN, monitors status changes (an Active→Suspended flip triggers an alert before your next order, not after), scores suppliers by filing regularity, and flags unknown invoices in your IMS queue for rejection. Your credit, guarded while you run the shop. Start free →

Sources

• FY24-25 fake ITC detection: ₹1.01 lakh crore across 42,000+ bogus firms (DGGI/CBIC enforcement data)
• Section 16(2)(c) CGST Act; Rule 21 (cancellation); GSTN Search Taxpayer facility