The GST Act came into effect on 1st July 2017 with the objective to curb tax evasion, seamless flow of credit and eliminating the cascading effect of taxes. But if we look today, we find that the most litigative issue is ITC. 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 claim input tax credit (ITC) fraudulently and unscrupulous refund of ITC.
In this article, we will study all about Fake Invoicing and the penalty that will be levied on the taxpayer who issues such invoice.
Fake Invoice-
The term Fake Invoice is not defined under the GST Act and can be referred to as ‘Non-Compliant GST Invoice’ which can be well understand as any invoice which do not comply with the provisions of the CGST Act and Rules,2017. In layman language, invoices raised by an entity without actual supply of goods or services or payment of GST. Thus, GST Charged on such invoices is neither paid nor intended to be paid.
The basic purpose of the taxpayers behind issuance of fake invoicing may be any of the following:
- Evasion of GST on taxable output supply
- Conversion of excess ITC into cash
- Showing excess Turnover
- Booking fake purchases so as to get higher income tax benefits
- Diversion of company funds
- Money Laundering
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 ensure uniformity in the implementation of law, The Central Board of Indirect Taxes and Customs, vide circular no. 171/03/2022- GST dated 6th July 2022 has address clarifications on fake invoicing and applicability of demand and penalty in respect of 3 cases:
| S.No. | Case | Issue | Clarification |
| 1 | Mr. A issued tax invoice to Mr. B without any underlying supply of goods or services or both. | (a) Whether it is a supply u/s 7?
(b) Whether any demand and recovery can be made from Mr. A u/s 73 or 74? (c) Whether any penal action can be taken against Mr. A? |
(a) Not a supply u/s 7.
(b) As there is no supply by A to B, no tax liability arises against Mr. A, hence No Demand and Recovery u/s 73 or 74 can be made from Mr. A. (c) Penal action under section 122(1)(ii) would be taken against Mr. A for issuance of fake invoice |
| 2. |
|
(a) Whether Mr. B liable for demand and recovery of said ITC u/s 73 or 74?
(b) Whether any penal action can be taken against Mr.B? |
(a) Mr. B has utilized fraudulent ITC without receiving the goods and services, in contravention of sec 16(2)(b), so he shall be liable for demand and recovery of said ITC, along with penal action, under u/s 74 for wrongful availment of ITC and Interest u/s 50.
(b) No separate penalty for the same act u/s 122. |
| 3. |
|
(a) Whether Mr. B liable for demand and recovery of said ITC u/s 73 or 74?
(b) Whether any penal action can be taken against Mr.B? |
a) As no tax liability arises from Mr. A, hence No Demand and Recovery u/s 73 or 74. Penal action u/s 122(1)(ii). (Case 1)
(b) Mr. B has utilized fraudulent ITC without receiving the goods and services, in contravention of sec 16(2)(b). No Recovery u/s 74 as ITC utilized against Supply. (c) There was no supply u/s by Mr. B to Mr. C, Penal action under section 122(1)(ii) and 122(1)(vii) would be taken against Mr. B for issuance of fake invoice and utilizing ITC without actual receipt of Goods and/or services. |
Respective Sections of Default/Penalty:
| Provision | Interpretation | Implications | ||||||||
| Section 73: Any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised for any reason, other than the reason of fraud or any wilful-misstatement or suppression of facts. | An assessee is penalized if he does not pay taxes or short pays or wrongly avails ITC with no intention of fraud or any wilful misstatement or suppression of facts to evade tax. | – Penalty is 10% of tax or 10,000, whichever is higher
– If ITC or tax with interest is paid before issuance of notice or within 30 days of notice, No Penalty
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| Section 74: Any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax. | An assessee is penalized if he does not pay taxes or short pays or wrongly avails ITC with intention of fraud or wilful misstatement or suppression of facts to evade tax. | Penalty leviable is tabulated as follows:
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| Section 122(1)(ii): issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act or the rules made thereunder | When the assessee issues a tax invoice without supply of goods or services or both. | Penalty = Rs.10,000 or tax evaded/ITC availed/tax passed on whichever is higher | ||||||||
| Section 122(1)(vii): where any taxable person takes or utilises input tax credit without actual receipt of goods or services or both either fully or partially, in contravention of the provisions of this Act or the rules made thereunder” | When the assessee receives a tax invoice a tax invoice without supply of goods or services or both and avails such ITC | Penalty = Rs.10,000 or tax evaded/ITC availed/tax passed on whichever is higher. |
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