Detailed Clarification on various issues relating to applicability of demand and penalty on FAKE INVOICES under the CGST Act, 2017
Recently CBIC has given Circular No.171/03/2022-GST dated 06-July-2022, with regard to applicability of demand and penalty provisions under the CGST Act,2017, in respect of transactions involving FAKE INVOICES.
After introduction of GST Law, GST authorities noticed that some of the registered persons are found to be involved in issuing tax invoice, without actual supply of goods or services or both (fake Invoices), in order to enable the recipients of such invoices to avail and utilize input tax credit (ITC) fraudulently.
Normally, a fake invoice passes through a chain of fake invoice generators before it lands in the lap of a recipient of goods or services who is actually involved in making outward supply. Imagine a fake invoice has passed through 5 fake creators, the department till now was demanding GST Tax and penalty from each of said 5 fake creators. Consistently such fake invoice creators were making appeals and have been questioning the orders on various counts.
In order to clarify these issues and to ensure uniformity in the implementation of the provisions of law across the field formations, the Board, in exercise of its powers conferred by Sec.168(1) of the CGST Act,2017 has given clarification as below:
Issues -I:
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 Sec.7 of CGST Act, 2017 and whether any demand and recovery can be made from “A” in respect of the said transaction under the provisions of Sec.73 or Sec.74 of CGST Act,2017, 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 “B” without the underlying supply of goods or services or both, therefore, such an activity does not satisfy the criteria ”supply”’ as defined under Sec.7 of CGST Act,2017.
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, 2017, 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 Sec.73 or Sec.74 of CGST Act, 2017, in respect of the same. Besides, n penal action under the Provisions of Sec.73 or Sec.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 section122 (1)(ii) of the CGST Act for issuing tax invoices without actual supply of goods or services or both.
Issues -IL:
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 invoices. B further issues invoice along with underlying supply of goods or services or both to his buyers and utilized 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 Sec.73 or Sec.74 or any other provisions of the CGST Act,2017.
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 Sec.74 of the CGST Act, 2017, along with applicable interest under provisions of Sec.50 of the said Act,2017. Further, as per provisions of Sec.75(13) of CGST Act, if penal action for fraudulent availment or utilization of ITC is taken against “B” under Sec.74 of CGST Act, 2017, no penalty for the same act, .e. for the said fraudulent availment or utilization of ITC , can be imposed on “B” under any other provisions of CGST Act, including under Sec.122 of CGST Act,2017.
Issues -III:
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 panel action, under the provisions of Sec.73 or Asec.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 of input tax credit (ITC) 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 sec.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 transactions. Therefore, in these specific cases, no demand and recovery of either input tax credit (ITC) 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 fro penal action both under section 122(1)(ii) and section 122(1)(vii) of the CGST Act,2017, for issuing invoices without any actual supply of gods and / or services as also for taking/utilizing input tax credit without actual receipt of goods and / or services.
2. The fundamental principles that have been delineated in the above scenarios may be adopted to decide the nature of demand and penal action to be taken against a person for such unscrupulous activity. Actual action to be taken against a person will depend upon the specific facts and circumstances of the case which may involve complex mixture of above scenarios or even may not be covered by any of the above scenarios. Any person who has retained the benefit of transactions specified under sub-section (1A) of section 122 of CGST Act and at whose instance such transactions are conducted, shall also be liable for penal action under the provisions of he said sub-section. 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,2017 may also be invokable, subject to conditions specified therein, based on facts and circumstances of each case.
FAQs
1. Is there any liability in the hands of “A” under the GST law?
Ans: In the hands of “A: , GST liability is NIL as there is no actual (physical) supply by “A” to “B” in respect of such FAKE INVOICE. Hence, no demand and recovery proceeding shall be initiated against “A” under Sec.73 or 74 of the CGST Act, 2017.
2. Whether “A” would be subject to any Penal consequences?
Ans: A shall, nevertheless, be liable for penal action under Sec.122 (1) (ii) of the Act for generating and issuing tax invoice without actual supply (physical) supply of goods or services or both. Hence, “A” shall be liable to pay a penalty of Rs.10,000/- or an amount equivalent to the GST evaded, whichever is higher.
3. Whether “B” is eligible to avail Input Tax Credit (ITC) in this case?
Ans: As per the GST Law, one of the conditions for availment of Input Tax Credit (ITC) i.e., actual receipt of goods or services is not fulfilled in case of FAKE INVOING and hence “B” would not be eligible to avail Input Tax Credit (ITC) . Since, “B” has wrongly availed and utilized FAKE Input Tax Credit (ITC) for payment of his output tax liability, he would be required to pay back Input Tax Credit (ITC) with interest @18% p.a.
4. Whether “B” would be subject to any penal consequences?
Ans: “B” would be liable to demand and recovery action under Sec.74 of the CGST Act,2017, as below
|
Before issue of show cause notice through DRC-01. |
15% of tax amount and No Show Cause Notice will be issued. |
| Within 30 days from issue of DRC-01. | 25% of tax amount . All proceedings deemed to be concluded. |
| Within 30 days from issue of an Order. | 50% of tax amount. |
| After 30 days from issue of an Order. | 100% of tax amount. |
5. Whether “B” will also be subject to any other penalty in addition to penalty mentioned as above.
Ans: CBIC in the circular has reiterated the overriding powers of Section 75 (13) of the Act. As per Section 75(13), if penal action for fraudulent availment or utilization of Input Tax Credit (ITC) is taken against “B” under Sec.74 of the CGST Act,2017, no penalty for the same act/conduct is elviable .
6. “A” is a registered person and has issued a tax invoice to another registered person ”B” without any underlying supply of goods or services or both. “B” avails Input Tax Credit (ITC) on the basis of the said tax invoice and further passes on the said Input Tax Credit (ITC) to another registered person ”C” by issuing invoices without an underlying supply of goods or services or both, In this situation both “A” and “B” are acting as FAKE INVOICE generators.
7. Whether “A” and “B” shall be subject to demand and recovery provisions laid down in Sec.74 of the CGST Act,2017?
Ans: In the absence of actual supply and receipt of goods, Sec.74 can’t be invoked. Therefore, the benefit of a reduction in penalty if paid at an earlier stage of proceedings shall not be available to “A” and “B”.
8. Whether “A’ would be subject to any penal consequences?
Ans: Yes, section 122 (1) (ii) of the CGST Act,2017 will be applicable.
9. Whether “B” would be subject to any Penal consequences?
Ans: Since “B” is acting in a dual capacity, ie., fake invoice recipient as well as a fake invoice generator, section122 (1) (ii) (issuance of fake invoice without actual supply) and Sec.122 (1) (vii) (availing or utilizing ITC without actual supply) of the Act shall apply. Consequently, he shall be liable to pay a penalty of Rs.10,000/- or an amount equivalent to the tax evaded, whichever is higher.
10. Whether the prosecution depending upon on the quantum of tax evaded or Input Tax Credit availed or utilized?
Ans: The prosecution and penal actions depend upon the quantum of tax evaded or Input Tax Credit availed or utilized as below:
|
Quantum of tax evaded or input Tax Credit (ITC) availed or Utilized |
Punishable with …. |
| Exceeds beyond Rs.5 Cr. | Imprisonment for a team which may extend to 5 years and with fine. |
| Exceeds Rs.2 Cr but does not exceed Rs.5 Cr. | Imprisonment for a term which may extend to 3 years and with fine. |
| Exceeds Rs.1 Cr but does not Rs.5 Cr. | Imprisonment for a term which may extended to 3 years and with fine. |
| Commit or raise the commission of any of the offenses mentioned above. | Imprisonment up to 6 months or with fine or with both. |
Disclaimer: The contents of this article have been prepared on the basis of Press Release by the GST Council issued on the 28th & 29th, June’ 2022 and Notification No. 171/03/2022-GST dated 06.07.2022 issued by the CBIC. Although care has been taken to ensure the accuracy, completeness and reliability of the information available, the author assumes no liability. Therefore, users of this information are expected to refer the relevant law, the information as given in no case shall be constructed as a professional advice or opinion.
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