On historic day of 1st July 2017, GST was introduced by pressing the bell by then President and Finance Minister, the person who plays key role even in roots of GST honorable Late Shri Pranab Mukherjee, along with the prime minister of India. The very basis of GST was to remove the cascading effect of taxes which were very present in erstwhile Indirect Taxation (IDT) regime and to provide free flow of credit. From that historic day till now there are always questions by all, that whether the said objective has been achieved through the drafting and/or implementation of GST Laws, and on the top of that this FAKE SUPPLY or FAKE INVOICE is causing the major risk in achieving that objective. As per the statement of CBIC “During the 2020-21 financial year, the CGST zones and the Directorate General of GST Intelligence (DGGI) booked about 8,000 cases involving fake ITC of over Rs 35,000 crore” Further the statement empathized that “Misuse of the beneficial provision of ITC under the GST regime is the most common modus of evasion under the GST law”

Fake Supply, Fake Invoice & Fake ITC


If we look at Section 16(1) and 16(2), the basic section of availment of ITC, of CGST Act 2017 as original and the amended till date (reproduced below), we can conclude that if it is implemented as introduced in word and in spirit then there cannot be any question of FAKE SUPPLY or FAKE INVOICE.

16. Eligibility and conditions for taking input tax credit

(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed[1] and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless, —

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed[2];

[3][(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;]

(b) he has received the goods or services or both.

[4][Explanation.–For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services —

(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person.]

(c) subject to the provisions of [5][section 41 or section 43A], the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and

(d) he has furnished the return under section 39:

Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed[6]:

Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.

[1] Refer to rules 36 to 45 of the CGST Rules, 2017.

[2] Refer to rule 36 of the CGST Rules, 2017.

[3] Inserted vide the Finance Act, 2021, effective from a date to be notified by Central Government.

[4] Substituted vide The Central Goods and Services Tax (Amendment) Act, 2018, effective from 1-2-2019. Prior to its substitution, Explanation read as under:

Explanation.–For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

[5] The words section 41 substituted vide The Central Goods and Services Tax (Amendment) Act, 2018, effective from a date to be notified.

[6] Refer to rule 37 of the CGST Rules, 2017.

The Legislature has carefully drafted Section 16(2)(c) to allow the recipient to claim the ITC only based on the tax lawfully deposited by the supplier along with requirement of filing return as per Section 16(2)(d). Furthermore the condition of actually receiving the goods and/or service along with having the duty paying documents, as specified in Section 16(2)(a) & 16(2)(b) made it clear that there are no chances of having FAKE SUPPLY or FAKE INVOICE in the whole GST Systems.

Section 16(1) has made it clear that to be eligible to credit the ITC to Electronic credit ledger, it must be used or intended to be used in course or furtherance of business and it is always subject to Section 16(2) due to non obstante clause.

And to be able to discharge the condition specified in Section 16(2)(c), there was mechanisms to ensure that ITC availed by the registered person has been lawfully paid by his supplier, as the original return filling system, which is yet to see the day light, has requirement to file GSTR 2 after reconciling the same with GSTR 2A and even if there are some mismatch or missing entries in GSTR 2A then same can be added/modified by the recipient at the time of filling his GSTR 2, which in turn would have been reflected in GSTR 1A of respective supplier who then approves the same and afterwards based on it, a final GSTR 1 and GSTR 2 after modification due to comparison with GSTR 1A and GSTR 2A, System generated GSTR 3 to be filled which will have details of outward and inward supply based on GSTR 1 & GSTR 2. GSTR 3 even allows for provisional filling of GST return by offsetting the ITC as available in electronic credit ledger as prepared based on GSTR 2 and remaining balance can be discharged through Cash ledger.


But as the filing mechanism related to GSTR 2 and in turn GSTR 1A has been kept in abeyance till date, it becomes IMPOSSIBLE for the recipient to comply with requirement of Section 16(2)(c) and that has also provided the culprits to engage in the ill activities of FAKE SUPPLY or FAKE INVOICING causing loss to the government exchequer and sometimes leading to undue and unfair hardship to genuine taxpayers.

Remedies Available to GENUINE taxpayers

Generally in cases where FAKE SUPPLY or FAKE INOVICE leading to FAKE ITC, department are first issuing the Summon under Section 70(1) to the recipient. In summon proceeding the recipient will normally be able produce the following documents

a. Self Certified Copy of Tax Invoices (Duty Paying document)

b. Lorry Receipts

c. Way Bridge Receipts

d. E way bill for the respective invoices for purchases made

e. Copy of ledger accounts and bank statements clearly showing that Payment for the above purchases are made through bank.

f. Relevant extract of GSTR 2A showing that the invoices are duly reflected in our GSTR 2A if it is so.

Department is also blocking the ITC under Rule 86A of CGST Rules 2017.

Even after the above documentary evidence department normally issues the Show Cause Notice under Section 74 claiming that

“Dealer has availed Input Tax Credit from certain fictitious dealers wherein only bill is obtained without receipt of actual goods hence contravened the provision of Sec.16 (2) of GGST Act, 2017/CGST Act, 2017 which amounts to wrongful availment of Input Tax Credit.”  Or “You have availed Input Tax Credit without actual supply of goods from So and So person, who has not actually paid applicable taxes on the said supply to government or paid applicable tax by utilizing the ITC which is not genuine availed by such So and So person”

In the SCNs issued department also argues that

“Department also conducts research and system-based verification to verify the genuineness of the dealers. Either these firms are found non-existent at its shown business place, owner not traceable or firms are in the name of the persons of no means and they are not aware of what operations are going on in the firms which are registered in their names and like that. Then, analysis is made about the dealers to whom these firms have shown outward supply so that beneficiary of wrongly passed Input Tax Credit can be identified. You are one of such beneficiaries which have made purchase from certain fictitious firms which department has identified till date.”

Furthermore department also resorts to refer to the Sec.155 of CGST Act, 2017, which read as under

Section 155. Burden of proof 

Where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person.

Following can be the submission in reply to above contention of the department

(a) No Such Concept in the GST Law

There is no reference or definition available for FAKE SUPPLY, FAKE INVOICE OR FAKE ITC under the CGST/SGST Act.

(b) Valid Registration at the time of Transaction related to Inward Supply

Normally the registration of so called fictitious supplier were cancelled by the department at some later date either as ab-initio cancellation or otherwise and in case of genuine buyer, the registration are valid as on the date of entering in to transaction.

(c) Sellers’ liability to Pay to tax to the government

To justify the above position reliance can be placed on the following ruling of Hon’ble Madras High Court in the case of DY Beathel Enterprises v. State Tax Officer (Data Cell), Tirunelveli, in which Hon’ble Madras High Court observed that

 “Section 16(2) mandates that input tax credit would only be available to the buyer when the tax collected has been deposited to the government exchequer by the seller. However, the Hon’ble High Court has observed that in such cases it is imperative to examine the buyer as well as the seller to correctly identify where the misappropriation of tax has happened. Such an equitable judgment laying down the impartial mannerisms of assessment/investigation acts as a beacon of hope against unnecessary harassment to honest taxpayers”

Even in the said judgment Hon’ble Madras High Court further observed that “If the tax had not reached the kitty of the Government, then the liability may have to be eventually borne by one party, either the seller or the buyer.”

 (d) Position under the erstwhile tax regime

It is imperative to note that a similar issue has previously been raised before the Courts under the erstwhile indirect tax regime in a plethora of judicial precedents, wherein the Courts have broadly laid down the following two key principles:

  • ITC i.e. CENVAT credit cannot be disallowed to a bona fide buyer on account of default of payment of tax to exchequer by the supplier.
  • The Tax Authority should proceed against the defaulting seller to recover tax and not the buyer.

Some of the key rulings inter alia are as summarized below

  • CCE v. Kay Kay Industries, [2013] 38 336/42 GST 50 (SC) – The Apex Court held that it would be practically impossible for the recipient to verify whether the duty has been paid by the supplier. As a result, the CENVAT credit cannot be disallowed to the recipient even if the supplier has not paid the duty collected to the exchequer.
  • Shri Ranganathar Valves (P.) Ltd. v. Assttt Commissioner (CT), Coimbatore, [2020] 120 345 (Mad.) – Recently, the Hon’ble Madras High Court has upheld the position that input tax cannot be restricted in the hands of the buyer on failure of seller to pay tax to the government, if the seller has collected the tax and issued invoices to the buyer. Such input tax restriction would be unsustainable and seeks re-consideration.
  • Tarapore & Co. v. State of Jharkhand [2020] 74 GSTR 340 (Jharkhand) – The Hon’ble Jharkhand High Court has observed that non-payment of VAT amount by the seller to the government cannot be attributable to the bona fide buyer. It was because of the laches on part of the seller that the seller has not filed the return and not deposited the tax with the government. Further, the law does not provide a mechanism to the buyer to compel the seller to file the return on time and deposit the tax to the exchequer. As a result, any action taken by the tax authorities against the buyer is unwarranted and cannot be sustained in the eyes of law.
  • Arise India Ltd. v. Commissioner of Trade & Taxes, Delhi MANU/DE/3361/2017, dated 26-10-2017 In a bunch of writ petitions with similar facts where the seller had not deposited the collected tax amount with the government, the Hon’ble Delhi High Court answered the same question of law while interpreting the Delhi Value Added Tax Act, 2004. The court held that in case the seller has failed to deposit the collected tax from the purchaser, the remedy for the department would be to proceed against the defaulting seller to recover such tax and not to deny input tax credit to the buyer. The Revenue filed a special leave petition before the Hon’ble Supreme Court against this judgment, which was dismissed vide Order dated 10-1-2018.
  • Asstt Commissioner (CT) v. Infiniti Wholesale Ltd. [2017] 77 372 (Mad.) – The Hon’ble High Court of Madras held that if the sales are not disclosed by a seller either in the monthly returns or the tax collected from the dealer is not made over to the Department by such seller, the action lies against the defaulting seller and not against the buyer.
  • Sri Vinayaga Agencies v. Asstt. Commissioner, CT Vadapalani, [2013] 29 554 (Mad.) (upheld by the Division Bench of the Hon’ble Madras High Court in MANU/TN/7257/2020) wherein the Hon’ble High Court held that the authority does not have the jurisdiction to reverse the input tax credit already availed by the assessee on the ground that the seller has not paid tax. This ruling was also relied upon in the decision of DY Beathel Enterprises case (supra).

(e) Reasonable Classification under Article 14 of the Constitution:

The need for the law to distinguish between honest and dishonest dealers was acknowledged by the Punjab and Haryana High Court in Gheru Lal Bal Chand v. State of Haryana [(2011) 45 VST 195 (P&H)] where the constitutional validity of a similar section 8 of the Haryana VAT Act, 2003 (“HVAT Act”) was being considered. It was held, “In legal jurisprudence, the liability can be fastened on a person who either acts fraudulently or has been a party to the collusion or connivance with the offender. However, law nowhere envisages to impose any penalty either directly or vicariously where a person is not connected with any such event or an act. Law cannot envisage an almost impossible eventuality. The onus upon the assessee gets discharged on production of form VAT C-4 which is required to be genuine and not thereafter to substantiate its truthfulness by running from pillar to post to collect the material for its authenticity. In the absence of any mala fide intention, connivance or wrongful association of the assessee with the selling dealer or any dealer earlier there- to, no liability can be imposed on the principle of vicarious liability. Law cannot put such onerous responsibility on the assessee otherwise; it would be difficult to hold the law to be valid on the touch stone of articles 14 and 19 of the Constitution of India.

The rule of interpretation requires that such meaning should be assigned to the provision which would make the provision of the Act effective and advance the purpose of the Act. This should be done wherever possible without doing any violence to the language of the provision. A statute has to be read in such a manner so as to do justice to the parties. If it is held that the person who does not deposit or is required to deposit the tax would be put in an advantageous position and whereas the person who has paid the tax would be worse, the interpretation would give result to an absurdity. Such a construction has to be avoided.”

(f) Selling Dealer is tax collection agent of the Government:

It can further be noted that the Supreme Court held in Corporation Bank [(20090 19 VST84 (SC)] that the selling dealer collects tax as an agent of the Government. Therefore, the bona fide buyer cannot be put in jeopardy when he has done all the law requires him to do so. The purchasing dealer has no means to ascertain and secure compliance by the selling dealer. Earlier also, in Central Wines, Hyderabad [(1987) 65 STC 48 (SC); (1987)2 SCC 371] the Supreme Court observed that “the seller acts as an agent of the buyer while collecting the tax”. Revenue cannot punish innocent purchasers for fault or fraud committed by its own agents.

 (g) Civilised Jurisprudence- Innocent persons cannot be punished:

It is an established legal principle of any civilised jurisprudence that innocent purchaser cannot be punished. When fraudulent DEPB scrips were issued, and used by the innocent transferee, it was clearly held that innocent transferee cannot be punished. In case of fraudulent DEPB scripts, it was held in East India Commercial Company Limited v. Collector, [1983 (13) E.L.T. 1342 (S.C.)] that, “Nor there is any legal basis for the contention that licence obtained by misrepresentation makes the licence non-est. With the result that the goods should be deemed to have been imported without licence in contravention of the order issued under S. 3 of the Act so as to bring the case within cl. (8) of s. 167 of the Sea Customs Act. Assuming that the principles of law of contract apply to the issue of a licence under the Act, a licence obtained by fraud is only voidable; it is good till avoided in the manner prescribed by law.”

Similar views were taken by Hon’ble Supreme Court in Collector of Customs, Bombay v. Sneha Sales Corporation, [2000 (121) E.L.T. 577 (S.C.)], wherein it was held that where the licence is obtained by misrepresentation or fraud it is not rendered non-est as a result of its cancellation so as to result in the goods that were imported on the basis of the said licences and being treated as goods imported without a licence in contravention of the order passed under Section 3 of the Import and Export Act that fraud or misrepresentation only renders a licence voidable and it becomes inoperative before it is cancelled.

 In the present case the licences were cancelled by order dated December 18,1986 after the goods had been imported and cleared. The Tribunal was, therefore, right in holding that the import of the goods was not in contravention of the provisions of Import and Export Order, 1955 and Import and Export (Control) Act, 1947 and the goods were not liable to be confiscated on that basis under Section 111(d) of the Act.”

(h) Position in Central Excise/Service Tax laws:

Similar issues arose in Central Excise and Service Tax laws also. CBEC clarified vide Circular No. 766/82/2003 – Central Excise dated 15-12-2003 – This Circular issued during the erstwhile Central Excise regime directs the tax authorities to take action against the seller who has received payment from the buyer but has not deposited the same with the government, and not against the buyer to reverse CENVAT credit, if the bona fide nature of the transaction is not in dispute.

(i) Position under Gujarat Vat Act:

Gujarat High Court in case of “Meet Traders Prop. Kishor Babulal Shah Vs. State of Gujarat (SCA No. 14736 of 2012, 63 VST 246 Guj.) where the Gujarat high court held that “if the Purchases made by Purchasing dealer when Registration Number of Selling Dealer is active and afterwards Department cancel the number of Selling dealer then ITC of Purchasing Dealer cannot be disallowed if the whole transaction of Purchase of Goods is genuine”

The above rulings though are passed under the erstwhile indirect tax regime but have certainly laid down a settled principle (i.e., the right of buyer to avail input tax credit cannot be denied on account of default of the supplier) which can be applied and relied even under the GST regime as the intent of the legislation has always been to allow seamless flow of input tax credit in the supply chain. 

It may also be noted that under GST law, a supplier is entitled to “self-assess” GST liability. The purchaser has no right to challenge the assessment done by the supplier; which may or may not be correct in the views of the department. If the self-assessment done by the supplier is faulty, the department should approach the supplier and gets it corrected; this onus cannot be shifted on the purchaser. It may further be noted that “self-assessment” done by the assessee is a valid and legal assessment.

(j) Burden of proof and onus of proof

In Reply for reference to Sec 155 of GGST Act 2017 attention can be drawn to the following,

In the current return filing scenario, the supplier uploads his invoices through GSTR 1, which eventually reflects in the ITC of claimant dealer’s GSTR 2A, hence the system of allowing ITC is absolutely one sided. It could have been possible, if original plan of GSTR 1-2-3 had been implemented by the Government. In curent circumstances, it is impossible to discharge the burden so cast under Section 155.

Further, even though the terms, ‘Burden of Proof’ and ‘Onus of Proof’ are being used interchangeably, still, those have definite meanings. The Bombay High Court in the case of Phoenix Mill Ltd. Vs. Union of India, 2004 (168) ELT 310 has lucidly explained the difference between the two in the following words,

“There is essential distinction between burden of proof and onus of proof. The burden of proof lies upon the person who has to prove a fact and it never shifts. However, the onus of proof shifts. Onus means a duty of adducing evidence.”

The term burden of proof used in Section 155, in the circumstances narrated above, is required to be interpreted to mean onus of proof. It would shift to the departmental officials once proper documents and bonafide is proved by the person claiming ITC.

(K) Blocking of ITC

In this regards reliance can be placed on recent ruling of Honorable Allahabad High Court in case of M/S North End Food Marketing Pvt. Ltd. Vs. State of UP and others, in PARA 57 of said Judgment court observed that “The powers, as conferred under Rule 86A, could not have been exercised merely on the ground that an inquiry has been initiated as there is a suspicion that the transactions were sham.” Hence merely on the basic of assumption of suspicion ITC which is vested right of the taxpayer cannot be blocked by the officers.

The Way Ahead

Based on above discussion we can conclude that to prevent the loss of government exchequer and to protect the interest of genuine recipient,

A.  Government should have introduced the original return filling systems of GSTR 2 and in turn GSTR 1A, by making improvement in the GSTN network to allow the recipient comply with Section 16(2)(c), at this juncture it is also worthwhile to note that filling of GSTR 2 and in turn GSTR 1A along with GSTR 3 are kept in abeyance and never done away with.

B. It should amend the GST Laws to allow the genuine recipient to avail the ITC on genuine Inward Supplies, by making provisions to distinguish between FAKE and GENUINE ITC.

C. Government has already started making GST Registration provision more stringent by having Aadhar Authentication and Physical verification (though it is creating hurdle in ease of doing business and promoting corruption in field), but It can also have some co-relation by having any of following system driven measures to avoid a hurdle for objective of ease of doing business and corruption

I. In case of new registration, by integrating Income Tax data base with GSTN to have some limits of filling invoices in GSTR 1/Outward Supply value of GSTR 3B i.e. Filling of GSTR  based on Income reported by the promoters of entities in their ITR in say first One or Two years of registration (Let say a Proprietor having Gross Total of income of about 5 Lakhs may be allowed to Report total sales of up to 2 Crore (40 Time to the GTI of Person))

II. To have lien on fixed deposit or having bank guarantees of specified amount based on expected turnover (Say 50,000 deposit for expected turnover of 50 Lacs and so on) which can be created in online in authorized bank and directly linked with applied GSTN of registered person, which at the time of maturity automatically credited back to the bank account of applicant after TWO years or so, to avoid manual intervention.

III. Even government can verify the Net Worth of person by obtaining CA Certificate and limit can be prescribed for filling invoices in GSTR 1/Outward Supply value of GSTR 3B based on Net Worth obtained at the time of GST registration for first TWO years or so.


(The author is highly grateful to CA. Drashti Sejpal & CA. Gaurang Khakhkhar for their valuable contribution at various palaces of this article)

Views express in these articles except the bare act, rules and extract of judgments are personal views of the author. Author or his associates are no where responsible for any loss or adverse legal consequences caused to any person by relaying on the above views. The Author, CA Ravi Tanna, is a partner in charge of GST at KST and Associates, Chartered Accountants, having offices at Rajkot & Pune and can be reached on [email protected]

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Qualification: CA in Practice
Company: KST & Associates
Location: Rajkot, Gujarat, IN
Member Since: 22 Jan 2020 | Total Posts: 3

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