Fake invoice and departmental clarification thereof

A ‘fake invoice’ is specifically not defined under the Goods and Services Tax (GST) law. However, as and when the registered person issues a tax invoice, under GST, without actual supply of goods or services or both. Then such issued tax invoice is called a ‘fake invoice’.

Notably, the basic purpose behind the issuance of a fake invoice can be any one of the following –

Claiming of undue excess Input Tax Credit;
Showing excess turnover;
Transferring input tax credit, without actual supply, from one registered person to another;
Claiming fraudulent refunds; or
Any other fraudulent reasons.

There were various confusions prevalent between the department and the trade, with regard to the applicability of demand as well as a penalty, in respect of such transactions which involves the issuance of fake invoice. Recently, CBIC came up with a clarification on the same.

The present article covers the said clarification of CBIC with respect to the applicability of demand and penalty provisions relating to the fake invoice under GST.

Demand and penalty provisions as applicable to the person issuing the fake invoice –

Vide circular no. 171/03/2022-GST dated 6^th July 2022, demand and penalty provisions applicable to the person issuing fake invoice (i.e., issuing tax invoice without actual supply of goods or services or both) are clarified and summarized hereunder –

Transaction is ‘supply’ (as defined under section 7 of the Central Goods and Services Tax Act, 2017) or not –

In such a transaction, there is only issuance of tax invoice without actual supply of goods or services. Since there is no supply of goods or services, such a transaction is not covered within the purview of section 7 of the Central Goods and Services Tax Act, 2017.

Demand provisions applicable to the person issuing a fake invoice –

As the transaction is not covered within the ambit of section 7, no demand of tax can be raised on the person issuing the fake invoice. Accordingly, demand provisions covered under section 73 (non-fraud cases) and section 74 (fraud cases) will not be applicable to the person issuing the fake invoice.

Penalty provisions applicable to the person issuing a fake invoice –

Since provisions of section 73 and section 74 of the Central Goods and Services Tax Act, 2017 do not apply to the person issuing a fake invoice, levying a penalty under the said provisions is also not possible.

Notably, the person issuing the fake invoice will be liable for penal action only under section 122(1)(ii) of the Central Goods and Services Tax Act, 2017. Here, the maximum penalty would be higher of INR 10,000 or the amount of input tax credit passed on fraudulently.

Demand and penalty provisions on the recipient of the fake invoice –

Here, the recipient of the fake invoice, avails and utilizes the fraudulent input tax credit. Accordingly, as clarified vide circular no. 171/03/2022-GST dated 6^th July 2022, demand and penalty provisions as applicable for fraudulent availment and utilization of input tax credit is summarized hereunder –

Demand provisions applicable to the recipient (i.e., the person who has fraudulently availed and utilized the input tax credit) –

The recipient, here, has fraudulently availed and utilized the input tax credit, without actual receipt of goods or services. Accordingly, such recipient has contravened input tax credit condition as prescribed under section 16(2)(b) of the Central Goods and Services Tax Act, 2017.

It is important to note here that as per the condition prescribed under section 16(2)(b), the input tax credit is available to the recipient only if the goods or services or both are received.

On contravening provisions of section 16(2)(b), demand provisions as covered under section 74 (fraud cases) will get applicable to the recipient. Accordingly, demand and recovery, along with penalty, will be initiated against such recipient on account of fraudulent availment and utilization of input tax credit without receipt of goods or services.

Penalty provisions applicable to the recipient (i.e., the person who has fraudulently availed and utilized the input tax credit) –

The recipient, here, will be liable for penal action under section 74 of the Central Goods and Services Tax Act, 2017.

Importantly, as per provisions of section 75(13) of the Central Goods and Services Tax Act, 2017, once the penal action is taken under section 74, no penalty action under any other provisions can be taken on such recipient.

Demand and penalty provisions on the recipient for passing on such fraudulently availed input tax credit –

Circular no. 171/03/2022-GST dated 6^th July 2022 also clarifies the applicability of demand and penalty provisions when the recipient has passed on the input tax credit to another recipient. The same is explained hereunder –

Demand provisions applicable to the recipient on passing on fraudulently availed input tax credit to another recipient without actual supply of goods or services –

In this transaction, since there is no supply of goods or services, no demand/ recovery under section 73 (i.e., non-fraud cases) or under section 74 (i.e., fraud cases) can be initiated against the recipient.

Penalty provisions applicable to the recipient on passing on fraudulently availed input tax credit to another recipient without actual supply of goods or services –

Here, the recipient will be liable for penal action under the following two sections –

Section 122(1)(ii) of the Central Goods and Services Tax Act, 2017 for issuing invoice without actual supply of goods or services or both; and
Section 122(1)(vii) of the Central Goods and Services Tax Act, 2017 for availing and utilizing input tax credit without actual receipt of goods or services or both.

Other important clarification –

Penal provisions under section 122(1A) of the Central Goods and Services Tax Act, 2017 will be applicable to the following persons –
- The person who has retained the benefit involved in such fake invoice transactions;
- A person at whose instance such fake invoice transaction was undertaken.
Depending upon the facts and circumstance of the fake invoice transaction, penalty provisions as covered under section 132 of the Central Goods and Services Tax Act, 2017 can also be invoked.

Tags: GST GST Act GST Input Tax Credit