The intersection of tax compliance and commercial lending: A forensic analysis of GST-enabled bank fraud and regulatory blind spots

Abstract

The transformation of India's tax system into a digital one under the Goods and Services Tax (GST) and the growth of MSME credit schemes have created new pathways for advanced financial crime. This article uncovers some areas for potential systemwide regulatory failures where state tax compliance and commercial loan underwriting intersect. The study points out serious administrative lapses, including the use of aggregate mismatch seeking algorithms and the inability to get granular taxpayer data records, in the Comptroller and Auditor General (CAG) Compliance Audit Report (Jharkhand, Report No.2 of 2024). These vulnerabilities are illustrated with the real time scenario of Vikash Techsec Private Limited, which can be used to artificially inflate turnover without any red flag for tax compliance and how criminal syndicates do it with means of perfectly symmetrical circular trading. This artificial turnaround is then used to attract huge working capital loans by the MPBF model, often shifting the risk of default to the public exchequer through such schemes as the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).The study recommends the use of real-time inter-agency data triangulation, AI driven network analysis and modernisation of due diligence conducted by banks to reduce Non-Performing Assets (NPAs).