GST fake Invoices, ITC frauds & its consequences

WHAT IS A FAKE INVOICE?

Though, Fake Invoice is not defined under Goods & Services Tax Act, 2017. But in general, Fake Invoice refers to an Invoice which does not comply with the provisions of the Act and Rules. In simple terms, When a registered person issues a Tax Invoice without actual supply of goods or services or payment of GST then such invoice is presumed to be ‘Fake Invoice’. As a matter of fact, the GST charged on those invoices is neither paid, nor intended to be paid. The fake invoice frauds are largely carried out by using a network of firms set up to usurp Input Tax Credit illegally.

In fake Invoicing, one party is Issuer of invoice and the other party is Beneficiary. Sometimes, Beneficiary might be a genuine one. Even then, Beneficiary can be made answerable to the department. For Instance, ‘Company A’ comes into a genuine trade with ‘Company B’. But most of the transactions of ‘Company B’ are fake invoices. Then Company A would also have to face some consequences for the offence of Company B.

The act has provided certain provisions which need to be satisfied by the Supplier to claim Input Tax Credit. Eligibility to claim ITC U/s 16(2) of CGST Act, 2017.

1. Possession of Tax Invoice / Debit or Credit Note / Supplementary Invoice issued by a supplier.

2. The said goods/services have been received.

3. Returns have been filed.

4. The tax charged has been paid to the government by the supplier.

5. Matching of Invoices and Reversal.

When registered persons claim ITC of the invoices which do not satisfy the eligibility criteria as per the Act, then these are considered as Fake Invoices.

The whole process of Fake Invoicing begins with the making of Bogus/Shell companies which are generally created in the names of peons, drivers or other workers. These companies are eventually closed within limited period of time without payment of actual tax liability.

Let us understand the whole concept with an example:- Mr. A issues an Invoice against Mr. B without any actual supply of goods or services. In this case, Mr. A does not pay tax to the Government or a minor amount of tax liability is paid. He just shows the invoice in GSTR-1. So, Mr. B is able to claim ITC of that invoice being auto-populated in GSTR 2A. Then, Mr. B would again issue invoice to Mr. C, but Now Mr. B pays tax because Mr. B has ITC in its Credit Ledger. Consequently, C would also be able to claim ITC. All of these firms are the parts of same network to take illegal benefit of ITC. Hence, it is very difficult for GST Department to prove Mr. C as fake invoice as he has taken invoice from Mr. B and Mr. B is an absolute tax compliant. Ultimate defaulter is Mr. A, but it is just a shell company.

TYPES OF FAKE INVOICE CASES IN GST

1. Fake & Bogus Invoices

2. Fraudulent Refund on exports, based upon fake invoices.

3. Fraudulent Refund of accumulated ITC without supply of goods & service.

WHY DO COMPANIES GET INVOLVED IN FAKE INVOICING?

1. For bank overdraft facility or to overcome NPA status.

2. To Increase turnover for higher valuation to investors.

3. Furnishing false information or falsification of financial records or fake accounts & documents with intent to evade payment of Income tax.

4. Siphoning of money by owners.

5. To avail export refunds and other ITC benefits.

6. Encashment of accumulated ITC.

HOW DETECTION OF FAKE INVOICES IS DONE BY THE DEPARTMENT?

• Multiple registrations for single PAN and common registration details, or Incorrect/fake address given on GST portal.
• Report of Non-filers of GSTR-1 & GSTR-3B, and persons who purchased from non filers.
• Report of Non-filers of GSTR-3B who only filed GSTR-1.
• Report of mismatch in HSN wise Sale & Purchase, mismatch between the volume of goods transacted in GSTR -1 and E-Way Bill generated.
• High Value Transaction by new registered persons.
• Substantial payment of tax through ITC only.
• Report of Export refund cases who are suspected as bogus.
• HSN Report of Taxpayers claiming ITC of those goods or services which not connected to business.

POWERS OF DEPARTMENT

Rule 86 A: Power to Block ITC

Rule 86A(1)-Relevant conditions

1. Authorized Officer: commissioner or an officer authorized by him in this behalf not below the rank of an assistant commissioner.

2. Primary conditions before blocking ITC-authorized officer should have reasons to believe.

3. “Reasons to Believe” if credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible for reasons specified in Rule 86A

4. Authorised Officer may, for reasons to recording in writing not allowed debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under Section 49 or for claim of any refund of any unutilized amount.

Section 122:- Penalty for such Section 122 of CGST Act 2017:

Penalty for Certain Offences (CHAPTER XIX – OFFENCES AND PENALTIES)

(1) Where a taxable person who–

(i) supplies any goods or services or both without issue of any invoice or issues an incorrect or false  invoice with regard to any such supply;

(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;

…….      ……..         …….           ……      ……….

(vii) 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;

(ix) takes or distributes input tax credit in contravention of section 20, or the rules made thereunder;

(1A) Any person who retains the benefit of a transaction covered under clauses (i), (ii), (vii) or clause (ix) of sub-section (1) and at whose instance such transaction is conducted, shall be liable to a penalty of an amount equivalent to the tax evaded or input tax credit availed of or passed on.

Section 132 Punishment for Certain Offences (CHAPTER XIX – OFFENCES AND PENALTIES)

Whoever commits, or causes to commit and retain the benefits arising out of, any of the following offences, namely:-

(a) ………………                     ……………….               …………..

(b) 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 leading to wrongful availment or utilisation of input tax credit or refund of tax;

(c) avails input tax credit using the invoice or bill referred to in clause (b) or fraudulently avails input tax credit without any invoice or bill;

shall be punishable–

(i) in cases where the amount of tax evaded or the amount of input tax credit wrongly availed or utilised or the amount of refund wrongly taken exceeds five hundred lakh rupees, with imprisonment for a term which may extend to five years and with fine;

(5) The offences specified in clause (a) or clause (b) or clause (c) or clause (d) of sub-section (1) and punishable under clause (i) of that sub-section shall be cognizable and non-bailable

Section 69 of CGST Act 2017: Power to Arrest (CHAPTER XIV INSPECTION, SEARCH, SEIZURE AND ARREST)

(1) Where the Commissioner has reasons to believe that a person has committed any offence specified in clause (a) or clause (b) or clause (c) or clause (d) of sub-section (1) of section 132 which is punishable under clause (i) or (ii) of sub-section (1), or sub-section (2) of the said section, he may, by order, authorise any officer of central tax to arrest such person.

Section 271AAD in the Income Tax Act –

• Penalty for false entry or ommission, including fake purchase/sale invoice in books of account equal to value of that transaction which is capable of altering (or evading) his tax liability.
• The penalty amount shall be equivalent to the aggregate amount of all such false entries or omitted entries. Furthermore, it is provided that any other person who causes the defrauding person to make such incorrect entries or omission will also be punishable with the same amount of penalty.
• Thus, penalty on the entity issuing and receiving fake invoice as well as other person like accountant, CA, broker, etc. who found to be assisting the said entity would also be liable for penalty of value of said transaction

Section 114AC of the Customs Act, 1962

“Where any person has obtained any invoice by fraud, collusion, willful misstatement or suppression of facts to utilize input tax credit on the basis of such invoice for discharging any duty or tax on goods that are entered for exportation under a claim of refund of such duty or tax, such person shall be liable for a penalty not exceeding five times the refund claimed.”

SAFEGUARD MEASURES BY ASSESSEE

• Books of Accounts u/s 35(1) r.w. rules 56,57,58 should be properly maintained.
• If all the recipients are summoned, and original supplier has admitted that the supply of goods has not taken place, ITC should be reversed accordingly.
• Non co-operation or apprehension of tampering with evidence could lead to arrest.
• Copies of documents seized – Assessee has the right to get copy & restrictions (67(5)).
• Return of un-relied upon documents within 30 days of issue of Notice (67(3)).
• Presence of Advocate During Investigation:- The advocate of the person summoned is allowed to be present within visible distance, but beyond hearing range. (Vijay Sanjani v UOI, reported as 2017 (345) E.L.T. 323 (S.C.). & Sangit Agarwal v The Director General, Directorate of Revenue Intelligence, reported as 2017 (356) ELT 518 (Delhi.) (HC)

CONCLUSION:- Hence, it can be concluded that both Supplier & Receiver of Fake invoices are liable to 100% penalty of ITC availed u/s Sec.122(1). Furthermore, Not only issuer or receiver of fake invoice but even brokers as well as practitioners who facilitated in such transactions are also liable for penalty of 100% of GST amount [Sec. 122(1A)] and prosecution as well as arrest as per Sec. 132 & Sec. 69.