Haryana excise and taxation department has asked its officers to find out whether premises companies from the state have mentioned in goods and services tax network registration are authentic, a move that seems to be aimed at identifying shell companies.

Experts, however, warn that this could create problems for several genuine companies, mainly smaller ones, and may even prompt them to deregister from the GST network.

“Success of GST depends on smaller entities as their non-inclusion in the GST value chain will significantly impair the reform,” said MS Mani, partner at Deloitte India.

“Usage of intrusive methods for verification of their registration would, at this initial stage, impact their acceptance of the reform. It is expected that all tax authorities would go all out to encourage smaller businesses to embrace GST without any concerns of a heavy handed approach from authorities.”

The Haryana excise and taxation department issued a circular on August 10 that mentions eight points tax officers have to follow. At the end, the timeline for each process is mentioned. The whole process has to be completed by November 15, as per the circular. “Physical verification shall be done in every case as in the initial stage maximum registration certificates have been auto-approved,” reads one of the guidelines in the circular.

“He (tax officer) shall verify documents related to solvency, credentials, genuineness of the person and his business,” reads another. Several experts fear that some other states may just follow Haryana’s example and this could lead to problems for small and medium enterprises that are already reeling under GST compliance pressure.

While the Haryana tax department’s step may create problems for many SMEs, insiders said many companies have been trying take advantage of GST by creating shell entities.

ET first reported on July 13 that indirect tax officials are scrutinising sudden spurt of activity in old companies and formation of new companies and fear that these are specifically created to game the GST. Many companies, especially those with a turnover of between Rs 50 crore to Rs 200 crore, are creating shells specifically to take advantage of GST, said insiders.

These shell companies would be used to take credit in interstate transactions. “Many dormant companies have become active and are trading in various product categories they never used to deal with earlier. In many cases these companies seem to be deliberately registered in prominent business area,” a tax official based in Mumbai had told ET.