Fraudulent ITC & Fake Invoices under GST: Applicability of Sections 73, 74, 122 & 132

Today, we propose to discuss the modus operandi of fraud under the Goods and Services Tax (GST) regime and the applicability of the demand, penalty, and prosecution provisions under the Central Goods and Services Tax Act, 2017 in respect of transactions involving fake invoices. The following are some of the common methods adopted to perpetrate such frauds. These represent typical ways in which the Input Tax Credit (ITC) mechanism is misused:

• Issue of invoices without actual supply of goods or services;
• Availment of ITC on fake or non-existent purchases;
• Passing on fraudulent ITC to other entities;
• Creation of shell or bogus firms for paper transactions;
• Circular trading without physical movement of goods;
• Inflation of turnover for wrongful claim of refunds

In respect of such transactions, the GST law provides for initiation of demand proceedings, recovery of wrongly availed or utilised ITC, levy of penalties, and punishment for offences. In serious cases involving fraud or wilful misstatement, the law also contemplates criminal liability, including prosecution and arrest.

In this regard, it is pertinent to mention that the Central Board of Indirect Taxes and Customs (CBIC) has issued a clarification on various issues relating to the applicability of demand and penalty provisions in cases involving fake invoices, vide Circular No. 171/03/2022-GST dated 6 July 2022.

Accordingly, the relevant provisions of the GST law concerning such fraudulent transactions, along with the corresponding demand, penalty, and prosecution consequences, are discussed hereunder.

Situation-1- only fake invoice issued (no supply at all)

Issue- In case where a registered person “A” has issued tax invoice to another registered person “B” without any underlying supply of goods or services or both, whether such transaction will be covered as “supply” under section 7 of CGST Act and whether any demand and recovery can be made from ‘A’ in respect of the said transaction under the provisions of section 73 or section 74 of CGST Act.  Also, whether any penal action can be taken against registered person ‘A’ in such cases.

Clarification-Since there is only been an issuance of tax invoice by the registered person ‘A’ to registered person ‘B’ without the underlying supply of goods or services or both, therefore, such an activity does not satisfy the criteria of “supply”, as defined under section 7 of the CGST Act. As there is no supply by ‘A’ to ‘B’ in respect of such tax invoice in terms of the provisions of section 7 of CGST Act, no tax liability arises against ‘A’ for the said transaction, and accordingly, no demand and recovery is required to be made against ‘A’ under the provisions of section 73 or section 74 of CGST Act in respect of the same. Besides, no penal action under the provisions of section 73 or section 74 is required to be taken against ‘A’ in respect of the said transaction.  The registered person ‘A’ shall, however, be liable for penal action under section 122 (1)(ii) of the CGST Act for issuing tax invoices without actual supply of goods or services or both.

Now we would like make it more simplify as under-

Example: A (a paper company) issues an invoice to B for ₹10,00,000 plus GST of ₹1,80,000. In this case, no goods or services are actually supplied. Further, B does not avail or utilise the ITC on the said invoice.

In such circumstances, the following questions arise:

• Whether the said transaction qualifies as a “supply” under Section 7 of the CGST Act, 2017?
• Whether any tax demand and recovery can be initiated against ‘A’ under Section 73 or Section 74 of the CGST Act?
• Whether any penal action can be taken against ‘A’ for issuing such invoices?
• Whether any tax demand and recovery can be initiated against ‘B’ under Section 73 or Section 74 of the CGST Act, or whether any penal action can be taken against ‘B’ merely for receiving such invoices?

In the present case, only an invoice exists on paper and no goods or services have been physically supplied. Since there has merely been issuance of a tax invoice by the registered person ‘A’ to registered person ‘B’ without any underlying supply of goods or services, such an activity does not satisfy the criteria of “supply” as defined under Section 7 of the CGST Act. Consequently, no tax liability arises against ‘A’ in respect of the said transaction and, therefore, no demand and recovery proceedings are required to be initiated against ‘A’ under the provisions of Section 73 or Section 74 of the CGST Act.

Legal effect: No “supply” under Section 7 → No GST payable by ‘A’ → No demand under Sections 73/74.

However, it is pertinent to note that ‘A’ has admittedly issued an invoice without any underlying supply of goods or services. Such issuance of a fake invoice is specifically prohibited under the CGST Act.

In this regard, Section 122(1)(ii) of the CGST Act provides that any taxable person who issues any invoice or bill without supply of goods or services or both, in violation of the provisions of the Act or the rules made thereunder, shall be liable to penalty.

Accordingly, although no tax demand arises under Sections 73 or 74 due to the absence of “supply”, ‘A’ shall nevertheless be liable for penal action under Section 122(1)(ii) for issuing invoices without actual supply.

Net Result:

Situation-2 – Fake invoice issued (no supply at all) and recipient has taken ITC.

Issue- A registered person “A” has issued tax invoice to another registered person “B” without any underlying supply of goods or services or both. ‘B’ avails input tax credit on the basis of the said tax invoice. B further issues invoice along with underlying supply of goods or services or both to his buyers and utilizes ITC availed on the basis of the above mentioned invoices issued by ‘A’, for payment of his tax liability in respect of his said outward supplies. Whether ‘B’ will be liable for the demand and recovery of the said ITC, along with penal action, under the provisions of section 73 or section 74 or any other provisions of the CGST Act.

Clarification: Since the registered person ‘B’ has availed and utilized fraudulent ITC on the basis of the said tax invoice, without receiving the goods or services or both, in contravention of the provisions of section 16(2)(b) of CGST Act, he shall be liable for the demand and recovery of the said ITC, along with penal action, under the provisions of section 74 of the CGST Act, along with applicable interest under provisions of section 50 of the said Act.  Further, as per provisions of section 75(13) of CGST Act, if penal action for fraudulent availment or utilization of ITC is taken against ‘B’ under section 74 of CGST Act, no penalty for the same act, i.e. for the said fraudulent availment or utilization of ITC, can be imposed on ‘B’ under any other provisions of CGST Act, including under section 122.

Example: A (a paper/shell company) issues an invoice to B for ₹10,00,000 plus GST of ₹1,80,000. However, no goods or services are actually supplied by A to B. Despite the absence of any underlying supply, B avails ITC of ₹1,80,000 on the strength of the said invoice. Thereafter, B sells genuine goods to its customers and utilises the said ITC to discharge its output GST liability.

A’s Position- Since no actual supply has taken place, the transaction does not qualify as “supply” under Section 7 of the CGST Act. Consequently:

• No tax liability arises
• No demand under Sections 73 or 74

However, ‘A’ shall be liable for penalty under Section 122(1)(ii) for issuing invoices without actual supply of goods or services.

B’s Position- Since ‘B’ has fraudulently availed and utilised ITC without receipt of goods or services:

• ITC is recoverable
• Interest is payable under Section 50
• Demand and penalty proceedings shall be initiated under Section 74
• No additional penalty under Section 122 due to bar under Section 75(13). [Please note that section 75(13) provides that Where any penalty is imposed under section 73 or section 74 or section 74A, no penalty for the same act or omission shall be imposed on the same person under any other provision of this Act.

What actually happened?  The Government suffered loss of tax because ‘B’ discharged his output liability using fraudulent ITC.

Net Result:

Situation-3 – Fake invoice chain (passing ITC forward)

Issue: A registered person ‘A’ has issued tax invoice to another registered person ‘B’ without any underlying supply of goods or services or both. ‘B’ avails input tax credit on the basis of the said tax invoice and further passes on the said input tax credit to another registered person ‘C’ by issuing invoices without underlying supply of goods or services or both. Whether ‘B’ will be liable for the demand and recovery and penal action, under the provisions of section 73 or section 74 or any other provisions of the CGST Act.

Clarification: In this case, the input tax credit availed by ‘B’ in his electronic credit ledger on the basis of tax invoice issued by ‘A’, without actual receipt of goods or services or both, has been utilized by ‘B’ for passing on of input tax credit by issuing tax invoice to ‘C’ without any underlying supply of goods or services or both. As there was no supply of goods or services or both by ‘B’ to ‘C’ in respect of the said transaction, no tax was required to be paid by ‘B’ in respect of the same.

The input tax credit availed by ‘B’ in his electronic credit ledger on the basis of tax invoice issued by ‘A’, without actual receipt of goods or services or both, is ineligible in terms of section 16 (2)(b) of the CGST Act. In this case, there was no supply of goods or services or both by ‘B’ to ‘C’ in respect of the said transaction and also no tax was required to be paid in respect of the said transaction. Therefore, in these specific cases, no demand and recovery of either input tax credit wrongly/ fraudulently availed by ‘B’ in such case or tax liability in respect of the said outward transaction by ‘B’ to ‘C’ is required to be made from ‘B’ under the provisions of section 73 or section 74 of CGST Act.

However, in such cases, ‘B’ shall be liable for penal action both under section 122(1)((ii) and section 122(1)(vii) of the CGST Act, for issuing invoices without any actual supply of goods and/or services as also for taking/ utilizing input tax credit without actual receipt of goods and/or services.

Example: A (a paper/shell company) issues an invoice to B for ₹10,00,000 plus GST of ₹1,80,000. However, no goods or services are actually supplied by A to B. On the basis of this invoice, B avails ITC of ₹1,80,000. Thereafter, without any actual supply, B issues another invoice to C for ₹12,00,000 plus GST ₹2,16,000 and passes on ITC to C merely on paper.

Thus, the entire chain consists only of invoices without any physical movement of goods or provision of services, and ITC is merely circulated among parties.

A’s Position- Since no actual supply has taken place, the transaction does not qualify as “supply” under Section 7 of the CGST Act. Consequently:

• No tax liability arises
• No demand under Sections 73 or 74

However, ‘A’ shall be liable for penalty under Section 122(1)(ii) for issuing invoices without actual supply of goods or services.

B’s Position-  In the present case, ‘B’ has availed ITC without actual receipt of goods or services, which is in contravention of Section 16(2)(b) of the CGST Act. Hence, such ITC is ineligible. Further, the invoices issued by ‘B’ to ‘C’ are also without any underlying supply. Since no actual supply has taken place:

• The transaction does not qualify as “supply” under Section 7
• No output tax liability arises on such outward invoices
• No tax has been short-paid or unpaid

Accordingly, no demand and recovery under Sections 73 or 74 is required to be initiated against ‘B’ in respect of either the wrongly availed ITC or the outward invoices in such specific circumstances.

But ‘B’ has committed statutory violations by:

• Availing ITC without receipt of goods/services, and
• Issuing invoices without actual supply for passing on ITC

Therefore, penal action is attracted under Section 122, namely:

• Section 122(1)(ii) – issuing invoice without supply
• Section 122(1)(vii) – availing/utilising ITC without actual receipt of goods/services

C’s Position- Since ‘C’ has fraudulently availed and utilised ITC without receipt of goods or services:

• ITC is recoverable.
• Interest is payable under Section 50.
• Demand and penalty proceedings shall be initiated under Section 74.
• No additional penalty under Section 122 due to bar under Section 75(13). [Please note that section 75(13) provides that Where any penalty is imposed under section 73 or section 74 or section 74A, no penalty for the same act or omission shall be imposed on the same person under any other provision of this Act.

Net Result:

Punishment for certain offences.

It may also be noted that in such cases of wrongful/ fraudulent availment or utilization of input tax credit, or in cases of issuance of invoices without supply of goods or services or both, leading to wrongful availment or utilization of input tax credit or refund of tax, provisions of section 132 of the CGST Act may also be invokable, subject to conditions specified therein, based on facts and circumstances of each case.

Further, Section 69 of the CGST Act empowers the Commissioner to authorize the arrest of a person where he has “reason to believe”, based on credible material and evidence, that such person has committed offences specified under clauses (a), (b), (c), or (d) of Section 132(1) of the Act.

The offences specified under Section 132(1) include the following:

(a) supply of goods or services or both without issuing an invoice, with intent to evade tax;

(b) issuance of invoice or bill without actual supply of goods or services or both, leading to wrongful availment or utilisation of input tax credit or refund;

(c) fraudulent availment or utilisation of input tax credit, with or without an invoice;

(d) collection of tax but failure to deposit the same with the Government beyond three months from the due date.

The punishment prescribed under Section 132 provides that:

(i) where the amount of tax evaded or input tax credit wrongly availed or utilised or refund wrongly taken exceeds ₹5 crore, the punishment may extend to imprisonment up to five years along with fine;

(ii) where such amount exceeds ₹2 crore but does not exceed ₹5 crore, the punishment may extend to imprisonment up to three years along with fine.

Further, under Section 132(2), a person convicted for a subsequent offence shall be punishable with imprisonment which may extend to five years along with fine.

For more details regarding arrest under GST law, including the scope of arrest powers under Section 69, the conditions that must be satisfied before arrest can be authorised, and the constitutional and procedural safeguards required to protect personal liberty, please refer to the article “Arrest under GST – Law, Limitations and Constitutional Safeguards” available at the following link: https://taxguru.in/goods-and-service-tax/arrest-gst-law-limitations-constitutional-safeguards.html

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the author whatsoever and the content is to be used strictly for informational and educational purposes. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. the author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.