You would have heard many GST fake invoice fraud news in recent time, in spite of many checks and balances introduced in GST laws such as GSTR-2A, Rule 36(4), e-invoicing, e-way bill etc. In a release, the CBIC said that it has so far registered about 12,000 cases of ITC fraud and arrested 365 people, yet it is a challenge for the government to curb the fake invoice as usually fake invoices are raised in a more sophisticated and organized manner making it harder to detect. The government in recent months has taken a few more stringent steps to counter Goods and Services Tax (GST) fake invoice frauds. [discussed in the later part]
It necessary for a professional to be completely aware of the fake invoice fraud and its nitigrities, to identify the risk of such activity while conducting the audit or non-audit assignments to take timely and right action to save his clients or himself from the consequences associated with this fraud.
What is a fake invoice?
The “Invoices” are called as ‘fake’ where the GST invoices are raised by an entity without actual supply of goods or services or payment of GST. Fake invoices are raised for the following purposes:
(a) Claiming undue excess ITC
(b) For showing excess turnover
(c) Transferring credit from one registration to another without any actual supply
(d) Other reasons.
Let’s understand fake invoice with help of the below diagram
The Equation of fake invoice: Fake Invoice = Original Invoice + Absence of transaction
There are three ways in which such fake invoices could be misused in the GST Regime:
I. Issue invoice without the supply of goods or services where payment of tax is made by using input tax credit
II. Issue invoice to one party and divert the goods to another party. The person who purchases invoices may utilize the credit for payment of taxes at the time of export of goods and claim a refund of the said tax paid, resulting in loss of revenue.
III. Routing of invoices through a series of shell companies/dummy companies and transfer of input tax credit from one company to another in a circular fashion to increase the turnover.
Now let’s understand that the Working mechanism of fake invoices
Working mechanism of fake invoices
A fake company registered with GST using an unknown person’s identity and proofs then identifies a retailer [such as departmental stores, super markets] who usually supplies goods or services to end consumers where such consumers do not require/ask for an invoice and also, they will not claim the credit [popularly known as B2C supplies].
In the first stage, the retailer gets his commission and the fake company accumulates the input tax credit in its GST registration. Let’s move on to the second stage.
In this stage, the fake company tries to pass on the credit already accumulated and also pass the cash to another company [ XYZ Company] which is genuinely registered under various laws, such XYZ with the intention to evade the taxes by utilizing fake credit for discharging its output liability.
Benefits to various parties
Measures were taken by the Government
Through the insertion of various provisions:
The government with a motive to curb fake invoicing is taking stringent steps by making changes in GST Law, which has created chaos among the traders.
Section 16(2) Conditions:
A registered person can claim ITC of tax paid on supply of goods or services or both only if:
Let us analyze the above conditions from the fake invoice prospective
In the above-discussed mechanism, the XYZ company [Genuine company] will be in the possession of a valid tax invoice. Therefore this condition is satisfied.
The second condition is not satisfied has XYZ has not actually received the goods or services, assessee himself make sure he has received the goods or services before taking the credit. But there is no mechanism with the department to identify the non-compliances in this regard. In the absence of such a mechanism, fraudsters will continue to evade taxes through fake invoicing.
The third condition is that tax has been paid to the government on such supply is also satisfied by the mechanism discussed above.
In the said example retailer paid the taxes to the government after utilizing the available genuine credit and the Fake company and XYZ company utilized the credit and discharge the liability allowed under the law.
The fourth condition is satisfied by all the 3 parties involved by filing GSTR-3B to claim the input tax credit.
As there is no mechanism to make sure compliance of section 16(2) by the department, the taxpayer would comply on a self-assessment basis, therefore fraudsters would still take advantage of this and continue with fake invoicing
Rule 36(4) – restriction of Availment of credit
Rule 36(4) of CGST Rules provides restriction on availment of eligible ITC wherein the recipient could avail eligible ITC in GSTR-3B, not in excess of 20% [from 09th October to 31st December 2019] or 10% [from 01st January 2020] further amended to 5%[from 1st Jan 2021] vide Notification No. 94/2020 CT dated 23rd December 2020 as applicable of eligible ITC appearing in the GSTR-2A of such recipient.
This rule has failed to curb the fake invoice scam as in all the stages of the fake invoice scam the parties GSTR-2A and GSTR-3B credit agree each level and there would be no difference as these involved parties GSTR-2A and GSTR-3B match 100%.
The Government of India has made e-invoicing provisions compulsory for taxpayers having turnover greater than Rs. 500 Cr w.e.f. 1st October, 2020 vide N/No. 61/2020 – CT dated 30th July, 2020. Further, another notification namely, N/No. 88/2020 – CT dated 10th November, 2020, has made E-Invoicing compulsory for taxpayers having turnover greater than Rs. 100 Cr w.e.f. 1st January, 2020.
Will the E-Invoicing eliminate the fake invoicing fraud?
Usually retailers issues a post dated tax invoice to fake company once all the cash sales concluded for the month for the same value he would issue tax invoice to fake company. As E-invoicing should be done on real time basis we may think it would eliminate or reduce the fake invoicing. In fact B2C supplies out of the E-invoicing abmit and need not be raised on real time basis.
In later date say near to month end retailer may issue a B2B invoice to fake company by way of E-invoice and based on the same fake company may avail the credit. However department may look for huge invoices issued at month end or short period to identify the fake invoicing transactions. But definetly it would be tediuse job for department.
Tax evasion by moving the goods without invoice could be eliminated or reduced by E-invoicing provisions however E-invoicing may not be effective for eliminating or rediucing the fake invoicing as E-invoice could be generated without movement of goods. Therefore fraudster would continue to operate under E-invoice regime also.
Rule 86B restriction on availing ITC to discharge 100% output tax liability [newly introduced w.e.f. 01.01.2021]
Payment of taxes through the utilization of balance from electronic credit ledger has been restricted up to 99% of such tax liability in the case where the value of taxable supply other than exempt supply and zero-rated supply, in a month, exceeds Rs. 50 lakh w.e.f 1st January 2021
Proviso to Rule 86B – Said rule not to Apply in certain cases: –
(a) The said person or the proprietor or karta or the managing director or any of its two partners, whole-time Directors, Members of Managing Committee of Associations or Board of Trustees, as the case may be, have paid more than one lakh rupees as income tax under the Income-tax Act, 1961(43 of 1961) in each of the last two financial years for which the time limit to file return of income under subsection (1) of section 139 of the said Act has expired; or
(b) the registered person has received a refund amount of more than Rs. 1 lakh in the preceding financial year under clause (i) of first proviso of section 54(3) ; or (ii) of first proviso of section 54(3)
(c) The registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is in excess of 1% of the total output tax liability, applied cumulatively, up to the said month in the current financial year; or
(d) The registered person is –
i. Government Department; or
ii. a Public Sector Undertaking; or
iii. a local authority;or
iv. a statutory body:
This category of persons are out of the ambit of rule 86B as these government branches would not engage in fake invoicing.
The government using rule 86B as a tool to curb tax evasion, however in this process definitely it troubles the genuine taxpayers, increases the compliance cost by employing more resources to apply rule 86B.
Biometric-based Aadhaar authentication and taking photographs
The rule of verification has been amended vide notification 94 No. 94/2020 – Central Tax dated 22nd December 2020 to verify the application as follows
(a) Biometric-based Aadhaar authentication and taking photograph, unless exempted under subsection (6D) of section 25, if he has opted for authentication of Aadhaar number;
(b) taking Biometric information, photograph and verification of such other KYC documents, as notified, unless the applicant is exempted under sub-section (6D) of section 25, if he has opted not to get Aadhaar authentication done.
(c) verification of original copy of the documents uploaded would be done with the application in FORM GST REG-01at one of the Facilitation Centres notified by the Commissioner and the application shall be deemed to be complete only after completion of the process laid down under this subrule.
Insertion of this rule is a great initiative to curb fake invoicing as fake companies are floated with fake proofs or profiles. However, now it would not be possible as GST registration requires Bio-metric based Aadhaar verification, or who is not able to undergo the bio matric aadhaar verification then he has to provide the biometric information, photograph and verification of such other KYC documents and also original documents are verified at facilitation centres.
However additional option has been provided for registration other than Aadhaar Authentication is a cumbersome process to visit the facilitation centre for verification of original documents has been an additional burden. This option could be explored by fraudsters to obtain registration however the number may reduce due to the cumbersome process.
Penalties for Fake invoicing
New Sub-section (1A) inserted to Sec 122 of CGST Act [W.E.F 01.04.2020]- 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.”
with respect to clause (i), (ii), (vii) or clause (ix) of sub-section (1) of Sec 122
|SITUATION||Section 122(1A) of GST Act’ 2017.|
|(i) Supplies any goods or services or both without issue of any invoice||The person can be held as beneficiary of a transaction covered under Clause (i) of Section 122(1) and hence liable for penalty equivalent to the amount of tax evaded u/s 122(1A)|
|(ii) Invoice in respect of supply or receipt of goods or services or both issued by the person or any other person without actual supply or receipt of such goods or services or both.||The person can be held as beneficiaryof a transaction covered under Clause (ii) of Section 122(1) and hence liable for penalty equivalent to the amount of tax evaded u/s 122(1A)|
|(iii) 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 there under;||The person can be held as beneficiary of a transaction covered under Clause (vii) of Section 122(1) and hence liable for penalty equivalent to the amount of ITC availed u/s 122(1A).|
|(iv) Forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence||The person can be held as beneficiary of a transaction covered under Clause (i) of Section 122(1) and hence liable for penalty equivalent to the amount of tax evaded u/s 122(1A)|
The intention of the amendment to include the Beneficiary of transactions and at whose instance transactions are conducted for imposing penalty.
Further, Section 132 has been amended to covers many offences
|Offence Involving||Amount Involved (in Rs.)||Punishment (Imprisonment min 6 months in the absence of special and adequate reasons to the contrary to be recorded in the judgment of the Court and extending to –)|
|Tax evaded or input tax credit wrongly availed or utilised or refund wrongly taken||> 5 crores||5 Years and with fine|
|Exceeds 2 crores
but ≤ 5 crores
|3 Years and with fine|
|Exceeds 1 crores
but ≤ 2 crores
|1 Years and with fine1 Years and with fine|
|For second and every subsequent offence under section 132||No limit||5 Years and with fine|
Further offences with regard to fake invoicing is considered as Cognizable Offence and Non-Bailable where amount of tax evaded or input tax credit wrongly availed or utilised or refund wrongly taken exceeding 5 crores.
Special mention to CA Mayank A Jain for vetting this article.
Important Note: – Author in no manner through this article encourage any person to indulge in such activities. This is only meant to create awareness among the professionals about Fake invoices and help the government curb such activities.
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