Circular No. 171/03/2022-GST: Made Easy Guide to Fake Invoicing and Its Implications

In response to the rising issue of fake invoices, the Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 171/03/2022-GST to regulate Input Tax Credit (ITC) claims. Numerous cases of fraudulent ITC claims and unethical refunds have been reported, prompting the government to take decisive action through this circular.

What is invoice fraud?

Invoice fraud is a type of phishing where aggressors impersonate legitimate suppliers or vendors to trick administrations into paying fake invoices. These fake invoices often appear authentic, using stolen or fake information such as business logos, invoice formats, or email addresses.

Key invoice fraud statistics

Normally, organizations receive invoice scams every month.

Approximately 71% of organizations reported actuality as victims of payment fraud, with invoice fraud as a significant contributor.

Around 44.8% of all fraudulent expenses are due to invoice and mandate scams.

Nearly 30% of companies testified to an uptick in payment fraud in recent years, with digital payment systems and phishing attacks gradually used to facilitate fraudulent invoices.

How do fake invoice scams work?

Invoice scams usually come in the method of service provider impersonations.

Attackers often make believe they are a service provider because a lot of people use them.

The malicious actor might hide their domain overdue spoofing, and if everything looks as it should, typing out your Office365 credentials might not seem too injurious.

Invoice phishing cannot be avoided by merely not making payments to dubious bank account numbers when told to.

Legitimate seeming messages often lead near legitimate services, such as PayPal and QuickBooks...

However, the sum is not focused on the actual provider.

Real invoice fraud cases

Toyota Boshoku Corporation (2019)

Toyota Boshoku Corporation, a secondary of Toyota Group, fell victim to an invoice fraud attack when charlatans impersonated a business partner and tricked the company into forwarding a large payment to a fraudulent bank account. Losses totaled approximately $37 million.

Scoular Company (2022)

Scoular Company, a leading farming marketing company, experienced an attack in which charlatans used spear-phishing emails to compromise an employee's email account.

They then sent fake invoices to the financial records payable department, requesting payment to fraudulent bank accounts.

The company lost around $17 million before the scam was detected. This incident demonstrates the necessity of multi-factor confirmation and rigorous email sanctuary measures.

Pathe Netherlands (2021)

Pathé Netherlands, a secondary of the French cinema chain, was successfully scammed by fraudsters imitating senior executives from the parent company. Using email spoofing, the fraudsters sent fake invoices besides urgent payment requests to the money department. The scheme resulted in a harm of €19 million (around $22 million).

Common types of invoice fraud to look out for

Business email compromise (BEC)

This is when email accounts of genuine suppliers are hacked or spoofed.

These accounts can then be used to send fraudulent invoices or payment requirements to the accounts payable department.

The email addresses used are usually very similar to legitimate ones, making them difficult to detect.

Modification of real invoices

In this type of fraud, cybercriminals stop legitimate invoices, usually via email.

They'll then modify the payment details, such as bank account numbers, before promoting the altered invoices to the target company.

Overpayment scams

Attackers might send an invoice that appears to cheat for goods or services.

When the target business pays the inflated invoice, the fraudster contacts the business, requesting that there was a mistake and requesting reimbursement for the overpaid amount.

The refund is then directed to a deceitful account while the original payment has now been processed.

Service renewal scams

These scams involve sending fake demands for service renewals, such as subscriptions, care contracts, or software licenses.

The charlatans rely on the fact that businesses often have multiple subscriptions and might not study every renewal invoice closely.

They hope that the company will pay the invoice without verifying its authenticity.

Refund and rebate scams

Some fake invoices come through a refund or rebate offer, enticing the target to provide bank minutiae for the supposed refund.

Once the charlatans have the bank details, they can use them for unauthorized extractions or further scams.

Circular 171 on demand and penalty provisions towards fake invoices

‍

Quantum of tax or ITC availed or utilized	Punishment
In case the ITC availed or utilised by the taxpayer with the help of fake invoices exceeds Rs.5 Crore	For such fraudulent activity the taxpayer can face imprisonment up to 5 years and with a fine.
In case the ITC availed or utilised by the taxpayer with the help of fake invoices exceeds Rs.2 Cr but doesn’t exceed Rs.5 Cr.	For such fraudulent activity, the taxpayer can face imprisonment for up to 3 years and a fine.
In case the ITC availed or utilised by the taxpayer with the help of fake invoices exceeds Rs.1 Cr but doesn’t exceed Rs.5 Cr.	For such fraudulent activity, the taxpayer can face imprisonment for up to 3 years and a fine.
Commits or raises the commission of any of the offences mentioned above.	For such fraudulent activity, the taxpayer can face imprisonment for up to 6 months or a fine or both.

Conclusion

As the GST system evolves in India, businesses need to be watchful in identifying fake invoices to avoid being caught up in fraudulent actions. An invoice that has been made with the intent to entitle input tax credit (ITC) or to use other GST benefits starved of actually paying for the products or services can be considered in place of a fake invoice under GST.

Suggested Read: Fake Invoices under GST: Demand and Penalty Provisions – Circular 171

FAQs

What is Fake Invoicing?

Fake invoicing refers to the practice of generating fraudulent invoices without an actual supply of goods or services to claim Input Tax Credit (ITC) illegally.