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

The taxation system in India focused on GST was designed to simplify the process of imposing taxes and increase the utilisation of Input Tax Credit (ITC) transfers. However, the issue of bogus invoices remains one of the biggest challenges to the GST system -these are documents generated to sell goods or services that are never rendered. In answer to these issues, the Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 171/03/2022-GST on July 6, 2022, which explains the complexities relating to demand and penalties to transactions involving fake invoices.

Understanding Fake Invoices Under GST

A bogus invoice is defined as a tax-defendant invoice that is issued without any goods or services offered for trade. Such invoices are predominantly utilised to covertly shift benefits tax ITC to a selected few and, in the process, deny the government the revenues it rightfully deserves. This leads to an imbalanced market.

Key Clarifications from Circular No. 171/03/2022-GST

The circular addresses various scenarios to elucidate the applicability of demand and penalty provisions:

Scenario	Clarification	Relevant Sections
Issuance of Fake Invoices Without Actual Supply	Nature of Transaction: Not a 'supply' under Section 7 of the CGST Act, as no actual supply is involved.	Section 7
	Tax Liability: No tax liability arises for 'A'. No demand or recovery actions under Sections 73 or 74.	Sections 73, 74
	Penalty: Liable for penalty under Section 122(1)(ii) for issuing invoices without actual supply.	Section 122(1)(ii)
Availing ITC Based on Fake Invoices Without Receiving Goods or Services	Contravention: 'B' has violated Section 16(2)(b) by availing ITC without receiving goods/services.	Section 16(2)(b)
	Demand and Recovery: Ineligible ITC availed by 'B' is recoverable under Section 74, along with interest under Section 50.	Sections 74, 50
	Penalty: Penal provisions of Section 74 apply. As per Section 75(13), no further penalty under Section 122.	Sections 74, 75(13)
Passing on ITC Through Fake Invoices Without Actual Supply	Nature of Transaction: Not a 'supply' under Section 7 as no actual supply occurs.	Section 7
	Tax Liability: No tax liability arises for 'B'.	-
	Penalty: 'B' is liable for penalties under Section 122(1)(ii) for issuing invoices without supply and Section 122(1)(vii) for taking/uutilisingITC without actual receipt of goods/services.	Sections 122(1)(ii), 122(1)(vii)

Additional Considerations

People Who Contribute from Fake Invoices: The people who profit from falsifying invoices and conduct transactions based on these invoices will face charges based on the Framework of the CGST Act, Section 122(1A).

Conditions Of Offenses: Section 132 of the CGST Act may be applied to some parts of Clause 132 in the case of claimed tax credits through borrowing, fraudulent invoice creation without genuine transaction, or alleged supplied goods selling without genuine supply.

Preventive Measures and Best Practices

To reduce the impact of the fake invoices, businesses can utilise these practices:

‍Vendor Verification: Do thorough background checks to confirm that the vendors are real and comply with GST policies.

‍Invoice Scrutiny: Make sure that basic but very important information is provided on all invoices, including GSTIN, goods/service description, and everything else that must have GST.

‍Regular Reconciliation: Occasionally check the purchase registers against records GSTR-2A/2B to spot issues and claim ITC on real transactions.

‍Training and Awareness: Make accountants and other finance staff understand what fake invoices can lead to and the need to comply with GST rules.

‍Use of Technology: Invest in reliable accounting systems that can indicate noncompliance and help in enforcing business regulations.

‍Circular on ITC Claims on Fake Invoices

After a case involving false invoices, the CBEC has issued a circular regarding ITC claims with regards to false invoices. Different fraudulent activities happen in which people deceptively claim Input Tax Credit (ITC) for tax refunds, which are unethical. This issue has been tackled by the government with the assistance of the circular numbered 171/03/2022-GST.

How Do Frauds Make Use of Fake GST Invoices?

Below are some of the common methods fraudsters exploit to misuse invoices under the GST regime:

Issuing Invoices Without Supplying Goods or Services: Here, tax is paid using fraudulent ITC, which in turn leads to a loss of revenue for the government where buyers are claiming inadmissible ITC.

Mismatched Recipient Information: The invoice holder is different from the recipient of goods/services. This allows the invoice holder to claim ITC and receive a refund during exports.

Circular Trading using Dummy Corporations: Fraudsters make fictitious invoices and pass ITC through several shell companies without supplying goods/services. This is, in effect, a contravention of Rule 16 of the CGST Act, 2017, where ITC is soluble only when there is a genuine supply of goods/services and payment of GST has been made.

Implications of Issuing Fake Invoices: Impact and Consequences

After spotting the fraudulent activities that involve fake invoicing, here's what the authorities can do:

Development of an Offence Database: Irrespective of the particular identifiers, the fake invoice's GSTINs will be flagged to disable any further fraudulent undertakings.

Cancellation of the GST Registration: Any fraudulent entities that are diagnosed will have their registrations cancelled. Furthermore, any applications for re-registration will be subjected to rigorous editing, even down to the physical examination of the entity.

Recovery of ITC from Beneficiaries: The businesses that used the fake invoices for ITC will be tracked, as well as the legal proceedings that will follow suit.

Provisional Attachment of Property: Using section 83 of the CGST Act, the property and bank accounts of the fraudulent entities can be provisionally attached by the officials.

Legal Action Against the Directors: The same principles apply to any directors associated, assuming there was tax evasion. To seek their accountability, section 89 of the CGST Act will be applied.

Circular 171 on Demand and Penalty Provisions Towards Fake Invoices

Quantum of Tax or ITC Availed/Utilised	Punishment
Exceeds ₹5 Crore	Imprisonment up to 5 years and a fine.
Exceeds ₹2 Crore but ≤ ₹5 Crore	Imprisonment up to 3 years and a fine.
Exceeds ₹1 Crore but ≤ ₹2 Crore	Imprisonment up to 3 years and a fine.
Committing or Facilitating Any of the Above Offences	Imprisonment up to 6 months or a fine or both.

The government has taken stringent measures to curb GST fraud, ensuring that businesses stay compliant and avoid legal consequences.

Conclusion

Using fake invoices critically hinders the application of GST and results in a heavy loss of revenue for the government. Circular No. 171/03/2022-GST explains the application of the demand and penalty provisions in this case. The circular highlights the importance of observing the law and demands for GST compliance. All business entities must exercise control, compliance, and best practices to avoid manipulation with fake invoice problems.

FAQs

What is a fake invoice under GST?

To defraud an individual or business, a fake invoice is issued without actually providing any goods or services. It enables a party to claim or sell Input Tax Credit (ITC), which they are never entitled to.

What penalty applies for issuing fake invoices without actual supply?

A penalty equal to the tax amount listed on the invoice could be imposed on the invoice provider according to Section 122(1)(ii) of the CGST Act.

Can ITC be claimed on a fake invoice?

Claiming an Input Tax Credit (ITC) without a good/service being rendered is not possible. The act of claiming ITC without the required service being offered constitutes a violation of Section 16(2)(b) of the CGST Act. Such actions will result in scrutiny under Section 74, which will lead to a demand and recovery case.

What are the consequences of passing on ITC from a fake invoice?

Anyone who takes advantage of the ITC and shares it without really receiving goods or services is subject to penalties under CGST Act Section 122(1)(ii) and Section 122(1)(vii).

Can prosecution be initiated for fake invoice fraud?

Absolutely, as per Section 132 of the CGST Act, if a person tries to fraudulently claim ITC or avail it through a fake invoice, it can lead to conviction along with imprisonment, depending upon the severity of the crime.