Goods and Service Tax subsumed all taxes and brought one tax to ensure a seamless flow of Input Tax Credit. All ITC is cross-verified through an electronic medium so that authorities can ensure that the counterparty has actually made such a supply.
However, taxpayers have misused this facility, and Post implementation of GST, issues of fake invoices, i.e., invoices are issues for passing on fake Input Tax Credit (ITC) without any unlying supply of goods or services, have become quite common. Department identifies such cases every other day wherein a huge amount of Fake ITC is passed on papers only without any actual supply of goods and services. Department is taking stringent actions against such people from heavy penalties to imprisonment.
However, Department received various representations from the trade as well as the field formations seeking clarification on the applicability of demand and penalty provisions on transactions involving fake invoices. Understanding the severity of this issue, the Department issued the following clarification that how demand and penalty provisions on such transactions will apply to vide Circular No. 171/03/2022-GST dated 6th July 2017.
1. Penal action against a person issuing fake Invoices without an unlying supply of goods or services
Issue
- Where a registered person “A” has issued a tax invoice to another registered person “B” without any underlying supply of goods or services or both, whether such transaction will be covered as “supply” under section 7 of the CGST Act.
- Further, whether any demand and recovery can be made from ‘A’ in respect of such transaction under any of the following sections of the CGST Act.
- section 73: Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for any reason other than fraud or any wilful misstatement or suppression of facts
- section 74: Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or any wilful-misstatement or suppression of facts.
- Also, whether any penal action can be taken against the registered person ‘A’ in such cases.
Clarification
- Registered person “A” has only issued a tax invoice to registered person ‘B’ without any underlying supply of goods or services.
- As there is no supply involved from “A” to “B”, therefore, such an activity does not satisfy the criteria of “supply” under section 7 of the CGST Act.
- Accordingly, no tax liability arises against ‘A’ for such transaction, and therefore, no demand and recovery can be made against ‘A’ under section 73 or section 74 of the CGST Act.
- Besides, no penal action under the provisions of section 73 or section 74 is required to be taken against ‘A’ in respect of the said transaction.
- However, ‘A’ shall be liable for penal action under section 122 (1)(ii) of the CGST Act for issuing tax invoices without actual supply of goods or services or both.
2. Penal Action against person availing ITC on the basis of Fake invoice without receiving any goods or services
Issue
- On fake invoices issued by a registered person “A”, registered person “B” avails ITC without receiving an actual supply of goods or services.
- “B” issues genuine invoices to his buyers along with an underlying supply of goods or services.
- However, for payment of such output liability arising from genuine transactions, “B” utilizes ITC availed on the fake invoices.
- In such cases, Whether ‘B’ will be liable for the demand and recovery of the said ITC, along with penal action, under section 73 or 74 or any other provisions of the CGST Act.?
Clarification
- Registered person ‘B’ has availed and utilized fraudulent ITC on the basis of the fake invoices without receiving the goods or services.
- Such ITC is availed in contravention of section 16(2)(b) of the CGST Act.
- Therefore, “B” shall be liable for the demand and recovery of such ITC along with penal action under section 74 of the CGST Act.
- Interest shall also apply under section 50 of the said Act.
- Please note that as per section 75(13) of CGST Act, if penal action is taken against “B” under Section 74 for fraudulent availment or utilization of ITC then no penalty for the same act, i.e. wrong availment or utilization of ITC, can be imposed on ‘B’ under any other provisions of CGST Act, including section 122.
3. Penal action against a person who avails ITC on fake invoices and in turn passes on such ITC through fake invoices
- Registered person ‘A’ issued tax invoice to registered person ‘B’ without any underlying supply of goods or services.
- In turn, ‘B’ avails ITC on basis of such fake invoices without receiving an actual supply of goods and services and further passes on such fake ITC to another registered person ‘C’ by issuing fake invoices.
- Whether ‘B’ will be liable for the demand and recovery and penal action under section 73 or 74 or any other provisions of the CGST Act.
Clarification
- In this case, ‘B’ has availed ITC in his electronic credit ledger on the basis of fake invoices without actual receipt of goods or services.
- Further, “B” has utilized such ITC for payment of output liability on fake invoices issued to ‘C’ without any underlying supply of goods or services.
- With respect to supply made by “B” to “C”, there is no supply of goods or services. Accordingly, no tax is payable by “B” on such a transaction.
- Also, ITC availed by “B” on the basis of a fake invoice issued by “A” is ineligible in terms of section 16 (2)(b) of the CGST Act.
- With respect to the transaction of supply from “B” to “C”, no tax is payable as there is no supply.
- Therefore, in these specific cases, no demand and recovery of either ITC wrongly/ fraudulently availed by ‘B’ or output liability on a supply made by ‘B’ to ‘C’ is required to be made from ‘B’ under section 73 or section 74 of CGST Act.
- However, ‘B’ shall be liable for penal action both under section 122(1)((ii) and section 122(1)(vii) of the CGST Act, for issuing invoices without any actual supply of goods or services, and for taking/ utilizing ITC without actual receipt of goods or services.
- Under Section 122(1)(ii), a penalty is imposed for “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”
- Under Section 122(1)(vii), a penalty is imposed for “takes or utilizes 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;”
Conclusion
- GST authority may adopt the above laid fundamental principles to decide demand and penal action against a person for such unscrupulous activity.
- However, actual action will depend upon the specific facts and circumstances of the case. Any case may involve a complex mixture of the above scenarios or even may not be covered by any of the above scenarios.
- Any person who has retained the benefit of transactions specified under Section 122(1A) of the CGST Act, and at whose instance such transactions are conducted, shall also be liable for penal action.
- Also, in case of wrongful/ fraudulent availment or utilization of ITC or issuance of the fake invoice, leading to wrongful availment or utilization of ITC or refund of tax, provisions of section 132 (Punishment for certain offenses.) of the CGST Act may also be invokable based on facts and circumstances of each case.
