FAKE INVOICE UNDER GST: Edatabook

Posted On: April 29,2023
Posted By: John Anderson

FAKE INVOICE UNDER GST

Large number of GST fraud cases involving the use of fake invoices for wrong availment of input tax credit (ITC), which is further used to pay GST on outward supply have been detected since the rollout of GST by the Central GST authorities as well as State GST authorities. Whereas the mens rea for the use of such fake invoices appears to be fraudulent availment/encashment of ITC credit, the unscrupulous entities engaged in this also defraud other authorities such as Banks by inflating turnovers, laundering of money etc.

The SOP also issued by the GST-Investigating Wing of the CBIC for utilising the fake invoice issuers dataset by SGST Authorities providing suggested strategy to tackle “fake invoice” fraud in GST and for detecting and tackling fraud in GST which are:

1. Identification of entities who generate “fake invoices” is the first step in curbing this menace. This method also involves identification of generators and users. To identify the generators of fake invoices the various risk parameters can be used like multiple GSTIN on same address, wrong address, common e-mail/contact no., excess us of ITC in the particular industry standards etc.

2. Search/Investigation of all premises, consumption of electricity, lack of space, e-way bills etc.

3. Once it is completely investigated resulting in the issue of SCN or any other penal actions, steps to be taken to prevent the same entities indulging again in the same fraud like blocking of ITC, suspension, provisional attachment of property/bank etc.

The term ‘fake invoice’ is not defined under the GST Act. However, any invoice will be treated as a ‘fake invoice’ when a tax invoice is raised under GST without actual supply of goods or services or both or payment of GST.

Fake Invoice can be done with a motive of:

· Evasion of GST on Outward taxable supply.

· Conversion of excess ITC into cash.

· Inflating turnover/sales for loans/contracts/Valuations/IPO’s - Routing of invoices through a series of shell companies/dummy companies and transfer of input tax credit from one company to another in a circular fashion to increase the turnover.

· Booking fake purchases so as to get higher income-tax benefits.

· Cash generation/ diversion of company funds.

· Money laundering.

Due to the involvement of huge tax evasion in cases relating to fake invoices, the department demands tax, interest and even penalty from both the supplier and the buyer (first buyer). Further, the demand of tax, interest and penalty is being levied on subsequent buyers also.

Even the bona-fide buyer gets trapped into the circle of litigation which can never be the intention of the Government. Various representations were done from the trade and the department to provide clarification on the applicability of demand and penalty provisions in case of fake invoices.

Accordingly, Circular no. 171/03/2022- GST dated 6th July 2022 is being issued for clarification on supra subjects. The same is broadly discussed hereunder.

Let’s assume, We have three parties in this transaction: Mr. Shoman, Mr. Tabby, and Mr. Liger.

Let us take an example-1 in this regard- The supplier (Mr. Shoman) issues a tax invoice to the recipient (First buyer-Mr. Tabby), however, there is no supply of either goods or services or both as referred under the issued tax invoice. Thus, from the view point of the supplier, we can say that there is only issuance of tax invoices without actual supply of goods or services or both. Further, the first buyers avails the ITC against such taxable invoice without actual supply of goods or services or both.

Applicability of Tax, interest, demand and penalty on the issuer of the fake invoice (i.e. original supplier-Mr. Shoman).

This is Fake Invoice transaction?

Yes,

The supplier (Mr. Shoman) has issued a tax invoice;

The supplier (Mr. Shoman) has not supplied any goods or services or both as mentioned in the tax invoice.

This is Supply?

No, the transaction cannot be covered within the definition of supply.

Reason – As there is only issuance of invoice and there is no supply of goods or services or both, such activity doesn’t satisfy the criteria of supply as defined under section 7 of the CGST Act, 2017.

Can demand and recovery be initiated against the supplier?

No, the department cannot initiate any demand and recovery action against the supplier (Mr. Shoman).

Reason – As there is no supply, no tax liability arises against the supplier of a fake invoice. Accordingly, no demand and recovery proceedings under section 73 (i.e., non-fraud cases) and under section 74 (i.e., fraud cases) of the CGST Act, 2017 can be initiated against the supplier.

Can interest be imposed on the supplier?

No, the department cannot impose interest on such supplier (Mr. Shoman).

Reason – As tax cannot be demanded from the supplier, interest also cannot be imposed on such supplier.

Can a penalty be imposed on the supplier?

Yes, the penalty can be imposed under section 122(1)(ii) of the CGST Act, 2017 on the supplier (Mr. Shoman).

Reason – Here, the supplier has issued a tax invoice without actual supply of goods or services or both. Accordingly, for such a fraudulent act of the supplier, he will be penalized under section 122(1)(ii). The maximum amount of penalty that can be imposed on the supplier will be higher of the following –

INR 10,000; or

An amount equal to the tax evaded (which would be NIL here).

Applicability of Tax, interest, demand and penalty on the buyer (First buyer-Mr. Tabby).

This is Fake Invoice transaction?

Yes,

The First buyer (Mr. Tabby) has received a tax invoice;

The First buyer (Mr. Tabby) has not received any goods or services or both as mentioned in the tax invoice.

The First buyer (Mr. Tabby) avails and utilizes the input tax credit on the basis of such tax invoice.

Can demand and recovery be initiated against the First Buyer?

Yes, the department can initiate demand and recovery proceedings against such first buyer (Mr. Tabby).

Reason – Prior to availing of the ITC, the buyer needs to satisfy the conditions as laid down under section 16(2) of the CGST Act, 2017. One such condition, as prescribed under section 16(2)(b), is that the buyer is entitled to avail input tax credit only if he has received the goods or services or both. However, in the present case, the buyer has only received the tax invoice and has not received the specified goods or services or both.

Hence, the buyer has contravened the provisions of section 16(2)(b) due to which demand and recovery proceedings can be initiated against such buyer under the provisions of section 74 (i.e. fraud cases).

Can interest be imposed on the supplier?

Yes, the first buyer (Mr. Tabby) is liable to pay adequate interest.

Reason – Here, the buyer is liable to pay the tax amount as demanded under section 74. Accordingly, the buyer will also be liable to pay the appropriate interest amount as per provision of section 50 of the CGST Act, 2017.

Can a penalty be imposed on the supplier?

Yes, the penalty can be imposed on the first buyer (Mr. Tabby).

Reason – Once the tax is demanded under section 74, the penalty will also get imposed under the same section. Notably, once the department imposes a penalty on the buyer under section 74, a penalty for the same act cannot be imposed on the buyer under any other provisions of the CGST Act, 2017.

Let us take an example-2 in this regard- the first buyer (Mr. Tabby) issues a tax invoice (without actual supply of goods or services or both) to the subsequent buyer (Mr. Liger). Here, the first buyer will become the supplier, however, for ease of understanding, we will keep the same as the first buyer only.

Applicability of Tax, interest, demand and penalty when the first buyer (Mr. Tabby) issues the fake invoice to the subsequent buyer (Mr. Liger).

This is Fake Invoice transaction?

Yes,

The First buyer (Mr. Tabby) has issued a tax invoice;

The First buyer (Mr. Tabby) has not supplied any goods or services or both as mentioned in the tax invoice.

The First buyer (Mr. Tabby) avails and utilizes the input tax credit on the basis of such tax invoice.

This is Supply?

No, the transaction cannot be covered within the definition of supply.

Can demand and recovery be initiated against the First Buyer?

No, the department cannot initiate any demand and recovery action against the first buyer (Mr. Tabby).

Reason – As there is no supply, no tax liability arises against the supplier of a fake invoice. Accordingly, no demand and recovery proceedings under section 73 (i.e., non-fraud cases) and under section 74 (i.e., fraud cases) of the Central Goods and Services Tax Act, 2017 can be initiated against the supplier.

Can interest be imposed on the supplier?

No, the department cannot impose interest on such supplier.

Reason – As tax cannot be demanded from the supplier, interest also cannot be imposed on such supplier.

Can a penalty be imposed on the supplier?

Yes, the penalty can be imposed on the first buyer (Mr. Tabby).

Reason – The first buyer here has done two fraudulent activities i.e., issuance of invoice without actual supply of goods or services or both and availing/ utilizing input tax credit without actual receipt of goods or services or both. Accordingly, he will be penalized under the following two sections -

Section 122(1)(ii) for issuing tax invoice without actual supply of goods or services or both to the subsequent buyer; and

Section 122(1)(vii) for avails/ utilizes input tax credit without actual receipt of goods or services or both from the original supplier.

Applicability of demand and penalty on the subsequent buyer (Mr. Liger).

Demand proceedings can be initiated, due to contravention of the provision of section 16(2)(b) and under section 74 of the CGST Act;

Interest can be imposed under section 50 of the CGST Act;

The penalty for fake invoice in GST can be levied under section 74 of the CGST Act or under any other section, as the case may be.

Here is the summary chart of transactions for easy reference purpose:

Who?	Action	Tax Demand	Interest	Penalty
Supplier- Mr. Shoman	Issue Tax Invoice	NO	NO	S. 122(1)(ii)
First Buyer-Mr. Tabby	Avail ITC	YES	YES	S. 74 or S. 122
First Buyer-Mr. Tabby	Issue Tax Invoice	NO	NO	S. 122(1)(ii) and S. 122(1)(vii)
Subs. Buyer- Mr. Liger	Avail ITC	YES	YES	S. 74 or S. 122
Others	Beneficiary	NO	NO	122(1A)

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