Fake tax invoice under GST

FAKE INVOICE

Fake Invoice refers to a 'Non-compliant GST Invoice'

"Non-compliant GST Invoice' means any invoice which does not comply with the provisions of the CGST Act and Rules, 2017. Usually, 'fake invoice' refers to a non-compliant GST Invoice of the following types:

Invoice without any 'Supply'

Invoice with a 'Non-compliant' Supply  

The 'Invoice' that are usually treated as 'fake' are those wherein the GST invoices are raised by an entity without actual supply of goods or services or payment of GST.

There are three ways in which such fake invoices could be misused in GST regime.

• Issue of invoices without supply of goods or services where payment of tax is made by way of Input Tax Credit which not available to the issuer of invoice. In such cases, there is no receipt of goods or credit by the issuer of Invoice. He merely issues invoices and shows payment of tax by non-existent input tax credit. This results in actual loss in revenue where the buyer of the Invoice avails inadmissible credit which is used for payment of tax. There have also been instances where no GST has been paid even by input tax credit by the issuers of the fake invoice.
• Issue of invoices by persons where the invoices is issued to one person and the goods are diverted to some other person. The person who purchases invoices may utilize the credit for payment of taxes at the time of export of goods and claim refund of the said tax paid, resulting in loss of revenue.
• 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. In such cases, there is no supply of goods or services and thereby availment of credit based on such invoices gets hit by the provisions of Rule 16 of the CGST Act, 2017, which stipulates that the conditions that to avail credit, the buyer should have an invoice on which tax has been paid and he should have received to goods. In such cases, availment of credit without receipt of goods is inadmissible and utilization of such credit for actual regular supplies results in loss of revenue and financial accommodation. In such cases, unscrupulous traders are utilizing the GSTN system to create Invoices, fake e-way bill showing movement of goods etc. to defraud the revenue and the banking system.

USE OF FAKE INVOICES

Issue of Invoice without supply of goods/services

• No receipt of goods
• Payment of tax by non-existent ITC
• No Credit by Issuer of Invoice

Issue of Invoice with goods

• Issue of Invoice
• Supply of goods but diverted to another recipient
• Utilize ITC for payment but claim export refund

Through circular Trading

• Creation of several dummy/shell companies
• Transfer ITC through circular trading in contravention of Section 16 of CGST Act, 2017
• No actual supply of goods and services

MOTIVE BEHIND FAKE INVOICE

Any business or trade, who use 'fake invoice' earn input tax credit which is illegal and hence are liable for punishment under CGST law.

There could be following possible objectives which encourage fraudsters to indulge in issuing and using fake invoices:

Evasion of GST on taxable output supplies by

• Availing under Input tax Credit (ITC)
• Saving GST (cash) by payment of tax liability using undue Input Tax Credit (ITC)
• Clandestine supply without invoices and without payment of taxes

Converting excess Input Tax Credit (ITC) into cash by

• Transferring of Input Tax Credit (ITC) to those who can utilize it.
• Shifting Input Tax Credit (ITC) from exempted supplies to taxable supplies
• Encashment of Input Tax Credit (ITC) by way of IGST refund or unutilized Input     Tax Credit (ITC) refunds

Inflating turnover for the purpose of

• Availing higher credit limit/overdraft from Banks
• Obtaining bank loans
• Improving valuations for issue of capital or sale of stake
• Obtaining contracts including Government contracts

Booking fake purchases for getting Income-tax benefits by

• Showing reduced profit margins and higher expenses
• Avoiding payment of Income-tax by reducing net profit

1. Cash generation/diversion of company funds
2. Laundering of money

IMPACT OF FAKE INVOICES

The issuance of fake invoice results in fake trade which is illegal.

Preparing and trading 'fake invoice' is criminal activity; this crime is punishable under the law with maximum imprisonment of upto five years, in addition to recovery of illegal input tax credit with interest and penalty.

In fact, it is social menace; it is against economy, society and development. Illegal input tax credit earned using 'fake Invoice' is a drain on the economy and affects the GST revenue collections. Evil forces use 'fake Invoice' to generate 'cash' which is most likely to be used for nefarious crimes and to fuel social tension.

Following is the effects or outcome of an issuing, using and dealing with fake invoices:

1. It amounts to fraudulent and illegal activities
2. It is counter-productive and works against the national and economic interest of the country
3. It is social evil
4. It results in tax avoidance and tax evasion
5. It attracts penal provisions under section 122 of CGST Act, 2017
6. It is a criminal and cognizable act liable for imprisonment under section 69, 132 and other provisions of the Act
7. Loosing right to carry on business as a result of cancellation of registration.

GST FRAUD THROUGH FAKE INVOICES     

Based on the cases of fraud emanating from issue and use of fake invoices, following assertions can be made:

• The Input tax credit (ITC) involved in the fraud cases usually reaches a large sum in a short timeframe. Some reported frauds are hundreds of crores.
• Fake invoice case involves fabrication of Invoices which is an offence under Indian Penal Code. The Investigating Authority has to take call regarding how to get this part of the case investigated. Issues of legality, jurisdiction are involved.
• In a number of cases, e-Way bill has been generated without the corresponding filing of returns. The lack of real time connectivity between e-Way Bill system and GSTN is being exploited by fraudsters.
• The frauds usually a large number of GSTIN entities spread over states.
• Some of the entities would fall under the jurisdiction of the CGST authorities while the connected entities fall under the jurisdiction of the state authorities.
• Data adequacy and availability has become another challenge. The capacity of Invoice matching is yet to be provided. In multi-jurisdictional investigations, Tax administration do not have access to supplies in other jurisdictions, even though data resides in the GSTN.
• In many cases, dummy firms are created/floated to commit the fraud. The address is often incorrect/incomplete and the details revealed in the registration forms are often false. As entry barriers is very low, and there is a lack of a proper system of scrutiny and verification of registration data, fraudsters are able to commit frauds with impunity.
• There is another class of dummy companies with verifiable facts but no assets or means to do business; they act as surrogate for other large companies to camouflage their activities.
• Connivance with transporters to get bogus bilty/consignment note to show movement of goods on paper and creating fake e-Way bills with fake/wrong vehicle registration details without the supply of any goods. There is no system in place to see if vehicle registration data is correct or not.
• Fly-by-night operators are used to get GSTIN and generate large number of tax invoices and e-way bills in the first few months and disappear. In this way the fly-by-night operators help other large companies to supply and transport their goods without Invoice and paying taxes.
• Encashment of Input Tax Credit (ITC) availed on fake Invoices by obtaining IGST/Input Tax Credit (ITC) refunds especially in case of free shipping bills raise the issue of valuation of export goods. Further Customs GST coordination with regard to such fake invoice cases required to be looked into.
• Supplies made and GST collected but not paid i.e., GSTR-1 is filed but GSTR-3B is not filed. In some cases, both GSTR-1 and GSTR-3B are not filed.

CIRCULAR TRADING       

Circular trading is a fraudulent transaction that creates an artificial trading activity by issuance of sales Invoice amongst a close group without an actual supply of goods. In simple words, circular trading refers to the transactions of selling and buying of goods (without actual movement of goods) through shell companies.

Circular trading refers to issuing of Invoices in transactions among multiple companies without actual supply of goods. This is done to use input tax credit in the GST regime, meaning Circular Trading is a type of cycle that takes place when a company tries to create flow of fake sales transaction with its colluding parties by producing fake invoices.

The objective of circular trading is for inflating turnover of the business. However, through circular trading, companies may also aim to:

• To Increase the valuation of the company/business
• To bring in black money into the system
• To avail fake Input tax credit
• To divert or siption out funds

Section 132(1)(b) of the Central Goods and Service Tax Act, 2017 covers the situation, wherein, the person issues Invoices without actual supply of goods (i.e., circular trading)

Section 132(1) (c) also covers the situation, and wherein the person avails input tax credit based on the invoice so issued without actual supply of the goods.

The provisions of GST for circular trading are very harsh and are covered under serious offense as non-bailable and cognizable offense.

USE OF INTELLIGENCE AGAINST TAX EVASION     

The use of intelligence is for identification of tax evasion through the help of Artificial Intelligence and data analytics in order to stop the leakages in revenue collection. Its goal is to make a targeted approach to counter the leakages. It wants to ensure the process of red-flagging the tax evaders thereby making calculated steps to avoid harassment or overreach to genuine taxpayers.

CBIC officers are using latest IT tools, digital evidence and also collecting information from other government department to catch the fraudsters. Along with legislative and procedural changes in the law, the nationwide drive has contributed to better compliance and revenue collection. During the drive, case of input tax credit availment against some well-known companies were also booked.

CBIC has also decided to take the following steps in order to curb tax evasion:

• A mechanism and machinery for disseminating inter-departmental data among various agencies like GSTC, CBDT, CBIC, FIU, DOR, DGGI and state tax administrations etc. in order to achieve efficiency in curbing evasion and augment revenue collection.
• Constituting a committee of center and state officers to examine and implement quick measures in a given time frame to curb fraudulent refund claims including the inverted tax structure refund claims and evasion of GST. The committee will come out with detailed SOP with in a week, which may be implemented across the country.
• Considering fraudulent IGST refund claims, to link foreign exchange remittances with IGST refund for risky and new exporter.     
• All major cases of fake Input Tax Credit, export/import fraud and fraudulent refunds shall also be compulsorily investigated by Investigation wing of the Income Tax Department.
• MoU among CBDT, CBIC and GSTN to exchange data through API, from CBDT to GSTN and CBIC and vice-versa. This data should be shared on quarterly basis, instead of being shared on yearly basis.
• Sharing data of cases involving evasion and fraudulent refund detected by CBIC with CBDT and vice versa, so that proper profiling of theses fraudsters could also be done.
• Verification of unmatched Input Tax Credit availed by taxpayers.

STANDARD OPERATING PROCEDURE (SOP) ON FAKE INVOICES

CBIC through its GST investigation wing has formulated standard operating procedure (SOP) on dealing and tacking the issue of frauds arising from fake invoices.

Accordingly, the frauds in question need to be tackled by putting in place a regime that enables to the extent possible the identification of suspect entities at the initial state it self and in other cases the detection of GST frauds at the earliest. The former becomes especially important as the past experience is that many of such operators have a tendency to operate through impersonation in the name of dummy persons who have no real assets making it virtually impossible to recover any amounts from them, if a case is detected at later stage.

The following safeguards are suggested as key elements of risk profiling to check such GST frauds:

1. Scrutiny/verification of registered taxpayers through risk profiling and verification for early identification of fraudsters indulging in fake Invoices.
2. Historically tax evasion prone sectors.
3. Maintenance of offence database of those figuring in frauds to prevent their reentry in the system.
4. Some of the risk indicators of such persons or activities done by them or commodities traded by them or patterns behind their activities are as under:
   • Multiple registration on same PAN
   • Common email, common mobile numbers, common address, common authorized signatory, common promoters etc.
   • A person whose registration application is rejected or a person whose registration is cancelled may apply again for registration.
   • Live registration against the said PAN with the CGST jurisdiction where offence has been booked by SGST authorities.

STEPS INVOLVED

The SOP on procedure to detect and tackle 'fake Invoices' frauds involve the following steps:

Identification

• Identification of entities to generate fake invoices
• Identification of entities who use the fake invoices
• Common e-mails/mobiles/addresses
• Use of fake (PAN) cards

Determination/detection  

• Search of premises
• Physical space availability verification
• Ascertainment of non-existent inputs/outputs
• Lack of documentation
• Mis-match of e-way bills
• Fake or non-existent vehicle numbers
• Mis-match of information amongst regulators such as Income Tax, commercial & other taxes, ROC etc.

Post detection

• Issuance of show cause notice (SCN)
• Issuance of summons
• Blocking of Input Tax Credit (ITC)
• Cancellation of registration
• Attachment of bank account and other assets
• Detention and confiscation of goods and conveyance
• Prosecution and arrest