Fake Invoices and Fraudulent Input Tax Credit under GST

Introduction

In the modern world, there are many incidents of fraud cases dealing with fake GST invoicing where people fraudulently claim Input Tax Credit (ITC) and unethical refund claimants. This is a very serious issue which might not have an impact on the financial economy of the country for a short period of time but can damage the economy in the long run. This assignment basically deals with this issue where the majority of the fake GST invoices are made by a network of companies and firms that are established to usurp the ITC illegally and non-existent tax payers. This issue must be addressed soon as the Covid-19 pandemic has already created a dent in the economy of all countries.

Indirect Tax

In order to address this issue, it is important to understand the meaning and importance of indirect tax in the economy of countries, especially in India. The term ‘indirect tax’ is defined mostly by contrasting it with direct taxes and it generally means a tax that is passed on to another person or entity (Haibara, 2017). It is actually imposed on manufacturers or suppliers which is passed to the consumers finally and the body that gathers the tax will eventually remit it to the Government. This is however different in case of direct tax where an individual pays tax directly to the Government like income taxes, corporation taxes or wealth taxes. In India, some examples of indirect tax are excise duty on cigarettes, liquor and fuel, Value-Added Tax which is also commonly known as consumption taxes, customs duty and many more (Sinha and Srivastava, 2020). In India, the Government has levied numerous indirect taxes on sale, purchase of services and goods, import and also on manufacture.

The indirect taxes charged by the Government of India are not well defined and they rather serve the purpose of circulars, notifications or orders executed by the concerned government bodies. The procedures and mechanism of the tax system in India is very complex and burdensome and it is essential to understand its features to go forward with the assignment. In the words of Jha, (2018), the tax liability in case of indirect tax is shifted to the consumer from the seller or service provider who indirectly pays tax to the government. The initial nature of indirect tax in India was regressive which later on changed to pretty progressive after the execution of Goods and Services Tax. The purpose of this tax is savings and investment as it has a growth-oriented nature which encourages customers to invest and save. Moreover, it is safe to say that in India it is very difficult to evade indirect taxes as they are charged through services and products.

The sole purpose of indirect taxes is to generate revenue for the economy of the country and are considered as fees levied equally upon all the citizens irrespective of their income and social standards. Indirect taxes are often given the term ‘regressive tax’ due to the fact that these taxes pose a heavy burden on all the people who are suffering from poverty and have to pay the same tax as rich people have to. An example of this situation is that a person who earns $20,000 a year has to pay the same import duty on a refrigerator from Japan as compared to someone who earns $150,000 annually. There are many people who believe that indirect taxes can be used to develop a particular policy of the government by levying taxes on some industries and leaving others. Thus, as per the opinion of some economists, indirect taxes result in unequal prices of products and services in the market places which can lead to an inefficient marketplace.

In Spite of the regressive nature, the policy of indirect tax is beneficial to India for a lot of reasons mentioned below:

• Convenience during Collection: The fact that this tax is directly collected at the factories or stores by the state authorities saves a lot of their effort and time. In India the collection of indirect taxes is much easier than direct taxes as it is levied during purchase of any goods and services and the authorities do not need to worry (Capéau et al., 2018).
• Equitable contributions: As indirect taxes are related to costs of services and products; it is observed that basic necessary items have a low rate of tax as compared to luxury items which attract high tax making the contributions equitable.

Thus, it can be said that with time, indirect taxes have become more progressive in nature. However, it still needs to be more industry-friendly as the rise in prices of products increases the costs of production which cuts off the profit of industries in the cut-throat market competition.

Introduction of GST removing VAT

The concept of Value Added Tax (VAT) was first introduced in 1954 in France and this policy was proposed by Dr. Wilhelm Von Siemens with a view to make it as an Improved turnover tax. This concept was recommended by many economists and was later on adopted by countries like Japan, China, Italy, UK, Thailand, Bangladesh, Pakistan and many more. The Indian Government introduced VAT in 1962 in a way for the manufacture of Proforma Credit Scheme which was later on modified and implemented in 1986. In order to unify all Entry Tax, Purchase Tax and Sales Tax, Works Contract Tax and Turnover Tax, all was covered under the State VAT. Finally on 17th January, 2005, there was an initiation of a White Paper on State Level VAT by the Empowered Committee of State Finance Ministers.

This multistage tax commonly known as VAT is defined as the proportion of the value added which is equal to wages along with interest, profits and other costs. This tax is levied on every stage of the distribution and production process and it entirely falls on the shoulders of the customers. This multi-point tax always avoids the snowballing or cascading effect of taxes and is mostly equal in all over the country. It is also known as a consumption-based tax as it is collected at the final stage by the Government and as per rules, it is not applicable on a dealer who executed less than 5 lakh turnovers in sales. The concept of VAT is simple and brings uniformity in the rate all over the country and with the help of this policy there has been reduction in tax evasion incidents.

Introduction of GST

The Goods and Services Tax which is commonly known as GST was first implemented on 1st July, 2017 in India which incorporated all the indirect taxes in India. Earlier there were numerous indirect taxes which we had to pay compulsorily and those are now removed after the introduction of this new tax regime (Lourdunathan and Xavier, 2017). Under the State level, the taxes which are subsumed under GST are state excise duty, service tax, additional excise duty, special customs duty and countervailing duty. On the other hand, at the central level, GST includes purchase tax, luxury tax, entry and octroi tax, central sales tax, entertainment tax and many more. GST can be easily defined as a single VAT on the supply of services and goods that is calculated from manufacturer to customers. This policy has no cascading effect as the value added at every stage is taxable under GST and it is comprehensive in nature. Thus, this is an indirect tax which is imposed in each and every stage of production with the objective to refund the tax in all the stages apart from the last consumer.

The concept of GST was first implemented by France in 1954 and within a short period of time more than 160 countries have adopted it due to its natural and transparent nature of revenue collection (Nayyar and Sinha, 2018). The evolution of this concept is discussed below

• Kelkar Task Force 2004: A Task Force was set up under the leadership of Mr. Vijay Kelkar as per the direction of the Finance Ministry of India to implement Budget Management and Fiscal Responsibility. In order to bring a radical transformation in the tax system of India and a revenue-led approach, the Goods and Service Tax was recommended by this body (Banik and Das, 2018). Later on, in August, 2009, the draft of GST was presented in the Parliament.
• NDA Government’s Initiative: The bill of GST was supposed to be introduced in 2010 as per Union Finance Minister, Shri P. Chidambaram, which later on missed several deadlines and was covered by uncertainty. However, this bill was ultimately passed on May 6th, 2015 in Lok Sabha and on August 3rd, 2016 in Rajya Sabha. Following this event, on March 27, 2017, some important Central GST legislation bills were passed by the Lok Sabha namely Union Territory Goods and Services Tax Bill, 2017, Central Goods and Services Tax Bill, 2017 and Goods and Services Tax (Compensation to States) Bill, 2017 (Kankipati, 2017). Finally with the assent of the President, the bill was enacted on 12th April, 2017.
  • State GST laws: After the Central Acts were enacted, several states like Bihar, Telangana, Punjab, Goa, Chhattisgarh, Rajasthan quickly adopted the state GST laws in order to reform the previously implemented indirect taxes.

Input Tax Credit under GST

The term ‘input tax credit’ (ITC) means that one can lower its input tax which was already paid, at the time of paying output tax. Thus, in simple terms, the credit that a producer or manufacturer has earned for the service of paying input taxes that were used while manufacturing services and goods is known as input tax credit (Mujalde and Vani, 2017). In similar ways, a dealer is also entitled to receive input tax credit for the purchase of products that he will sell again. However, it must be noted that all inputs cannot guarantee input tax credit and in each and every state, different conditions and norms are applicable.

In the views of Singhvi and Narwane, (2020), Capital goods which are produced by manufacturers and traders enjoy input tax credit where the overall tax credit can be extended to a maximum 36 EMIs which can be reduced by states if they feel so. The fact that GST is a destination-based tax, makes Input tax credit a core concept of GST where it reduces the cascading effect and makes sure that in every state tax is collected where both services and goods are consumed. The definition of input tax credit is prescribed in section 2(56) of the Central Goods and Services Tax Act, 2017. According to this section, the relation of input tax with a registered person means the State Tax (SGST), Central Tax (CGST), territory tax (UTGST) or Integrated tax (IGST) that are charged on the supply of services and goods or both and involves:

• Importing goods are charged the integrated goods and services tax.
• The tax that must be paid under section 9, sub-section (3) and (4), which contains reverse charge of CGST.
• The tax that must be paid under section 5, subsection (3) and (4) of the Integrated Goods and Service containing reverse charge of IGST.
• Payment of tax under section 9, sub-section (3) and (4) of the concerned States Goods and Services Tax Act dealing with reverse charge of SGST.
• Payment of tax under section 7, sub-section (3) and (4) of the Union Territory Goods and Services Tax Act, dealing with reverse charge of UTGST.

Every individual who is a registered taxable person must be entitled to collect input tax credit that are charged on the supply of both services and goods which he intends to use for continuing his business and later on the specified amount is will be credited as per section 16 (1) of CGST Act, 2017, to the electronic credit ledger. However, there are certain restrictions and conditions that are mentioned in section 49 of CGST Act that every individual must follow. To understand it more clearly, it must be mentioned that there are four taxes under GST based on which ITC can be claimed namely the IGST, SGST, CGST and the GST Composition Cess.

• There are certain conditions that must be fulfilled in order to claim the input tax credit which are listed below:
• An individual must have a debit note or tax invoice of the purchase that must be issued by a registered dealer.
• An individual must have received the concerned services and goods.
• The supplier must compulsorily file the GST returns.
• The charged tax must be paid to the Government after the purchase in cash by the supplier or can be used to claim input credit.

Here, all the suppliers must be GST compliant in order to receive the input credit and in case of receiving products in instalments or lots, the credit can only be claimed against the invoice of the tax after getting the receipt of the last instalment or lot. Moreover, the input tax credit can only be claimed once the supplier deposits the tax that is collected from an individual and hence all the ITC are validated and matched. In case of CGST, UTGST, SGST and IGST, the tax that is paid when the goods are lying in warehouses, purchased, imported or services received, can be counted as input tax credit when the time comes to pay the output tax liability. There are some products like tobacco products, pan masala, coal, motor vehicles and many more where the ITC can be claimed on GST compensation cess that is paid on inward supplies (Gupta et al., 2017).

The tenure till which ITC can be claimed is till September of the upcoming financial year and the annual return can be filed for the concerned financial year. A registered individual can opt for ITC only for one year which is calculated from the date of tax invoice and extends till 5 years in regard to capital goods. This must be noted that input tax is not approved for services and goods that are used personally, travel benefits, works contract, restaurants and many more.

As per the views of Mukherjee, (2020), in the recent past, the cases associated with creation of fake invoices and catering fraudulent aspects of input tax credit have enhanced and amplified vastly. Fake invoices are understood as the invoices that do not obey the various provisions as well as the rules of the Goods and Services Tax Act, 2017. However, the term fake invoice is not directly recognised and defined under the said Act. In a simpler way, a fake invoice is generated whenever an individual who is a registered taxpayer issues tax invoices in lieu of buying the goods and services in reality. In addition to this, minor and major modifications that do not comply with the list of goods actually undertaken amount to fraudulent invoice creation. This can be pointed out by Bhat et al., (2021), that the very fraudulent nature of such fake invoices is such that the GST or tax payable was never paid or even intended to be paid herein. These fake invoices thereafter are cumulatively used to exploit the very concept of input tax credit system. Under Input Tax Credit system, a person who has paid input tax on certain goods may opt for a reimbursement of the said amount when a new good or same good is sold and output tax is paid on that transaction. Thus, creating a fake invoice with extended tax payment which was never actually paid would allow a person to incur more money to be reimbursed.

Types of Fake Invoices

• Fraudulent reimbursement on expert materials depending on fake invoices.
• Fraudulent reimbursement on cumulated input tax credit without the actual supply of services and goods.
• Bogus and baseless invoices
• Reasons for business to generate fake invoices
• To get out of a bank’s overdraft office or to avoid becoming a non-performing asset (NPA).
• To increase turnover in order to provide financial backers a greater valuation.
• Using fictitious data, falsifying financial records, or fabricating documents and reports in order to avoid paying the income tax.
• Cash management by the proprietors.
• To take advantage of trade discounts and other ITC advantages.
• Redeeming the ITCs that have been collected.

Incorrect/counterfeit location stated on GST entry, or different enrolments for same PAN and typical enlistment peculiarities. Non-filers of GSTR-1 and GSTR-3B, as well as persons who bought from non-filers, are reported. Non-filers of GSTR-3B who only recorded GSTR-1 have filed a report. The confusion between the volume of products processed in GSTR – 1 and E-Way Bill prompted a report of confusion in HSN insightful Sale and Purchase. Recently enlisted people’s high-value transactions. As it were, a significant payment of expenditure through ITC. Cases of alleged counterfeit export discounts have been reported. HSN Taxpayers’ report promising ITC for labour and items that are unrelated to the business.

In the said regard, as per a recent news the GST department has encountered nearly 8000 cases that deciphers the use of fake invoices leading to fraudulent ITC. The said amount was calculated to be around 35000 crores within just one fiscal year of FY21. Furthermore, in the case of VENNAPUSA VENKATA SUBBA REDDY vs. THE UNION OF INDIA (2021), the petitioner was accused to have generated fake invoices (GST) for a total turnover of 397,28,11,944 INR wherein the entire fraudulent ITC of 61,30,33,274 INR (LLP, 2022).

Statutory Provisions to Stop the Offenses

The GST Department has caught numerous fraudulent cases related to input tax credit in recent times. In the majority of the cases, fake invoices are produced where there is actually no supply of services or goods and this fraud is committed just to reduce GST output liability and to claim ITC (Bindal and Gupta, 2018). In order to restrain this situation, the Finance Act, 2020, has executed several amendments in the penalty provisions of section 132, 122 of CGST Act, 2017 and has also introduced a new section 271 AAD in the Income Tax Act, 1961, which was applicable from 1st April, 2020. In case of blocking an ITC, the powers of the department are mentioned under Rule 86 A of the CGST Act, 2017. Here, it is stated that a commissioner or an officer who has been given authority by the commissioner on his behalf can block an ITC, but he cannot be below the rank of an assistant commissioner (Waseem, 2019). The concerned officer must have a reason to believe that the credit applied on the input tax has been fraudulently collected or is rendered ineligible due to reasons that are mentioned in Rule 86 A. The officers can also not allow debit of a fixed amount in electronic credit ledger for the purpose of discharging any liability that is

mentioned under section 49 or regarding a claim of a refund of any unused amount. However, the officer must write the reasons for such an act.
Section 122 of CGST Act, 2017 states the penalty of some offenses that are listed below:

• An individual who does not produce an invoice on supply of goods and services or issues a false invoice.
• An individual who produces a bill or invoice without the supply of the products which is in violation of this Act.
• When an individual distributes or takes an ITC in violation of section 20 of this Act.
• When there is utilization of ITC without receipt of the service or goods or both either partially or totally in violation of this Act.
• The amended section states that an individual that clings to the benefit of a transaction that is mentioned in clauses (i), (ii), (vii), (ix) of sub-section 1. The person who conducts such transactions is liable for punishment for an amount that is equal to the amount of tax evaded ITC passed on.

Section 132 of the CGST Act, 2017 states the punishments of the mentioned offenses. Those who are liable for evading tax or availing a wrong amount of ITC that exceeds five hundred lakh rupees will be punished for a term which can extend till 5 years or fine or both (de Roux et al., 2018). The offenses that are mentioned in clause (a), (b), (c) and (d) of sub-section (1) are committing a non- bailable and cognizable offense. The power to arrest such an offender is given in section 69 of CGST Act, 2017. In section 271 AAD of the Income Tax Act, 1961, the penalty for false omission or entry or fake sale or purchase will be the amount that is equal to the total amount of such omitted entries. Moreover, any individual who commits such offense shall also be punishable with the same penalty. Furthermore, under section 114 AC of the Customs Act, 1962, fraudulent cases are punished with a penalty that do not exceed five times of the refund claimed.

Conclusion

In the light of the given discussion, it is clearly evident that the concept of GST and ITC is extremely essential for the economy of our country and there must be strict execution of laws that will prevent any incident of fake invoices and fraudulent ITC.