GST Evasion Hits ₹7.08 Lakh Crore in 5 Years: Impact of India's MSMEs

India’s Goods and Services Tax (GST) regime, a landmark reform meant to simplify indirect taxation, has been facing serious compliance challenges. According to data presented by the Ministry of Finance in the Lok Sabha, the Centre has detected GST evasion of ₹7.08 lakh crore between FY21 and FY25. This staggering figure includes input tax credit (ITC) frauds worth ₹1.79 lakh crore.

While the government has managed to recover a portion of the evaded amount—with taxpayers voluntarily paying around ₹1.29 lakh crore—it still highlights a pressing concern: GST compliance remains a complex and often misused space, particularly affecting India’s 6.3 crore+ MSMEs.

GST Evasion: A Rising Tide

The annual figures show a sharp and concerning upward trend. In FY21, total evasion was pegged at ₹49,384 crore. By FY24, that number jumped to ₹2.3 lakh crore, and in FY25, it stood at ₹2.23 lakh crore. Within these totals, ITC frauds rose from ₹31,233 crore in FY21 to ₹58,772 crore in FY25—an alarming signal that misuse of credits remains rampant.

For MSMEs—many of which are GST-registered and rely on ITC for cash flow management—this wave of evasion and fraud introduces serious credibility and trust issues. The system designed to formalise the economy is increasingly being manipulated by a small but damaging group, while compliant small businesses bear the brunt of scrutiny.

The MSME Dilemma: Between Compliance and Complexity

Most MSMEs today function in a highly competitive, resource-strapped environment. For them, the GST framework—while meant to unify and simplify taxation—often remains a maze of evolving rules, portal glitches, and ambiguous interpretations.

The misuse of input tax credit by fraudulent entities puts legitimate small businesses under increased suspicion during audits. Many MSMEs report facing delays in ITC claims, notices based on mismatched filings, and the burden of additional paperwork, all while trying to stay operational.

What makes it worse is that some MSMEs become inadvertent victims of ITC fraud when they unknowingly do business with fake or non-compliant vendors. In such cases, even though they have paid taxes and filed returns correctly, they are denied credit due to the supplier’s misconduct.

Government Measures: Analytics, Audits, and E-Invoicing

In response to rising evasion, the Finance Ministry has rolled out a series of data-driven interventions. Minister of State for Finance, Pankaj Chaudhary, highlighted the use of GST analytics tools, automated risk profiling, e-invoicing, and advanced audit mechanisms.

These steps are designed to flag non-compliant behaviours, detect fraudulent registrations, and identify mismatches in returns. The idea is to use technology to make GST compliance smarter and less manual, but small businesses still need to invest in accounting tools, hire experts, or outsource filings to stay updated.

The transition to e-invoicing and digital tax trail tracking, while necessary, continues to be a challenge for smaller firms lacking digital literacy or system integration.

Revenue Collection: Slippage but Still Robust

While GST evasion figures are high, the government’s net CGST collection remained strong in FY25 at over ₹10.26 lakh crore—about 96.7% of the revised estimate (₹10.62 lakh crore). This shows the resilience of the indirect tax framework, even amid leakages.

For context, FY24 had a net CGST collection of ₹9.57 lakh crore, slightly exceeding the revised estimate. These figures indicate that despite evasion, the formal sector—and by extension, tax-compliant MSMEs—are contributing steadily to India’s tax base.

A Call for GST Simplification with MSME Sensitivity

The road ahead must be paved not only with enforcement but also empathy and simplification. India’s MSMEs are not habitual defaulters. In most cases, non-compliance stems from lack of knowledge, lack of access to professional guidance, or systemic issues.

Here’s what could help bridge the compliance gap:

• Dedicated GST grievance cells for MSMEs in each district

• Simplified ITC mechanisms that penalise only the actual fraudsters, not their innocent trading partners

• Tax filing support centres for nano and micro enterprises

• Awareness campaigns in local languages, focusing on practical GST use rather than jargon

The GST system is meant to be a pillar of economic reform. But unless it is inclusive and supportive of small businesses, the real promise of a unified, growth-driven tax structure will remain unfulfilled.

Final Thought: A Wake-Up Call for Policy and Practice

The revelation of ₹7.08 lakh crore in GST evasion over five years is not just a policy statistic—it’s a signal. A signal that the system needs deeper reform, smarter compliance tools, and better protection for honest businesses.

For MSMEs, the challenge is to stay updated, stay cautious, and invest in the right support systems. For policymakers, the task is clear: make GST not just a tax, but a tool for growth, especially for India’s smallest enterprises.