Analysis of Applicability of Demand and penalty on Fake Invoices

There were various issues relating to applicability of demand and penalty provisions in respect of transactions involving fake invoices, on which CBIC has issued Circular no. 171/03/2022-GST on 6th July 2022, to clarify the issues regarding fake invoices and to ensure uniformity in the implementation of the provisions of law across the country.

Let us understand with an example:

A registered person ‘X’ has issued tax invoice to another registered person ‘Y’ without any underlying supply of goods or services or both. ‘Y’ 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 ‘Z’ by issuing invoices without underlying supply of goods or services or both.

Liability of X

Issuer “X” will 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.

Liability of Y

• In contravention of the provisions of section 16(2)(b) of CGST Act, Recipient “Y” shall be liable for the demand and recovery of the 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 Act.
• As issuer, “Y” will 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.

Liability of Z

• In contravention of the provisions of section 16(2)(b) of CGST Act, Recipient ”Z” 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 Act.

Remarks

• As per provisions of section 75(13) of CGST Act, if penal action for fraudulent availment or utilization of ITC is taken against recipient “Y” 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 “Y” under any other provisions of CGST Act, including under section 122.
• It should 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.

Please find the below link for accessing the relevant Circular no. 171/03/2022-GST on 6th July 2022:

GST Demand & penalty in respect of transactions involving fake invoices