Penalty on issuance of fake invoice and wrong ITC claim

This article describes the Fake GST Invoice and measures to address them.

Also it helps to understand the applicability of GST Penalty on Fake Invoicing or ITC claim. It will also helpful to understand penalty imposition of Penalty u/s 73(5) and 74(5) or Section 122 of GST Act 2017.

Introduction

In recent years, many fraudulent cases of claiming input tax credit (ITC) are brought to the notice of GST authorities. It is seen that registered suppliers under GST follow a tendency to obtain fake invoices to claim ITC dishonestly. This is done to reduce their net GST liability.

A fake GST invoice is usually issued deceitfully by persons who do carry on any business or profession in reality. Such false invoices are prepared without the actual supply of goods or services to the registered GST supplier. As a matter of fact, the GST charged on those invoices is neither paid nor intended to be paid.

Supply Under GST U/s 7

Supply includes sale, transfer, exchange, barter, license, rental, lease and disposal. If a person undertakes either of these transactions during the course or furtherance of business for consideration, it will be covered under the meaning of Supply under GST.

Documents Required to Prove Supply U/s 31 to 34

Section 31 to 34 of CGST Act, 2017 along with Tax Invoice, Credit and Debit Note Rules are the governing law for the purpose of documents of supply of Goods/ Services. As per Section 31(1) a registered person is required to raise invoice before or at the time of removal of goods. As per section 31(2) of CGST Act, 2017, a registered person is required to raise invoice for supply of services before or within 30 days from date of providing of services. Section 31(3) deals with Revised Invoice, Bill of Supply, Receipt Voucher, Refund Voucher, Payment Voucher and Invoice as Recipient. Section 32 says unregistered person will not collect tax. Section 33 says tax amount is required to be shown separately on the invoice. Section 34(1) deals with Credit Note and Section 34(2) deals with Debit Note.

Following are the important documents in relation to supply of goods:-

IMPORTANT DOCUMENTS RELATING TO SALE AND PURCHASE IN GST

Over and above presently one more documents required by department is Toll Receipt to prove movement of goods. If the information in not received from IHMCL particular commercial vehicle. But it is not listed in the Section u/s 31 to 34.

Integration of FASTag with the GST e-way bill system will enable the GST Council and the NHAI to:

• Track the movement of commercial vehicles
• Track the authenticity of all travel data supplied when filing GST
• Verifying e-way bills
• Implement prepaid e-wallet for paying parking charges, toll charges and fuel costs
• Partner with airports and other transportation hubs to offer parking services

Indian Highways Management Corporation Limited (IHMCL) and GST Network (GSTN) has signed an MoU for integrating the E-Way Bill system with FASTag. This will enable to overcome the difficulties in existing track and trace mechanism for GST E-Way Bill (EWB) System.

Penalty u/s 73(5) and 74(5)

In simple words, Section 73 talks of recovery of tax not paid due to bona fide mistake and Section 74 talks of recovery of tax not paid due to mala fide intention. This is the major difference between the two Sections.

As per Section 73(5) The person chargeable with tax may, before service of notice under sub-section (1) or, as the case may be, the statement under sub-section (3), pay the amount of tax along with interest payable thereon under section 50 on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment.

As per Section 74(5) The person chargeable with tax may, before service of notice under sub-section (1), pay the amount of tax along with interest payable under section 50 and a penalty equivalent to fifteen per cent. of such tax on the basis of his own ascertainment of such tax or the tax as ascertained by the proper officer and inform the proper officer in writing of such payment.

Penalty for certain offences under GST Section 122

The section declares the offences that attract penalty as a consequence, apart from the requirement to pay the tax and applicable interest. Some of the offences listed under this section may also attract prosecution under section 132 but that depends on the gravity of the offence defined in that section.

Penalty will impose u/s 122 in case of Issues an invoice (or bill of supply) without supply of goods or services or both in violation of the provisions of the Act/ Rules. (Means Bogus OR Fake bills)

Penalty equivalent to amount of tax evaded or ITC availed or passed on will be levied on a person committing any of the following offences.

This provision will apply if such person is a beneficiary and happening of such a transaction is on his request,

• Goods / services / both are supplied without issue of invoices / issue of incorrect or false invoice.
• Issue of invoice / bill without supply of goods / services / both
• Takes / utilises input tax credit without actual receipt of goods / services
• Takes / distributes Input tax credit in contravention to provisions of Section 20 of CGST Act, 2017

Penalty Under ANY one section

As per section 75 (13) Where any penalty is imposed under section 73 or section 74, no penalty for the same act or omission shall be imposed on the same person under any other provision of this Act.

Department has clarified vide Circular No. 171/03/2022-GST the following points under which condition, which section will apply for penalty on Supplier and Recipient. Now we understand which penalty will applicable on which condition and to whom :

Issues

In case where a registered person "A" has issued 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 CGST Act and whether any demand and recovery can be made from 'A' in respect of the said transaction under the provisions of section 73 or section 74 of CGST Act.

Clarification

Since there is only been an issuance of tax invoice by the registered person 'A' to registered person 'B' without the underlying supply of goods or services or both, therefore, such an activity does not satisfy the criteria of "supply", as defined under section 7 of the CGST Act. As there is no supply by 'A' to 'B' in respect of such tax invoice in terms of the provisions of section 7 of CGST Act, no tax liability arises against 'A' for the said transaction, and accordingly, no demand and recovery is required to be made against 'A' under the provisions of section 73 or section 74 of CGST Act in respect of the same. 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.

Issues

Whether any penal action can be taken against registered person 'A' in such cases

Clarification

The registered person 'A' shall, however, 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.

Issues

A registered person "A" has issued tax invoice to another registered person "B" without any underlying supply of goods or services or both. 'B' avails input tax credit on the basis of the said tax invoice. B further issues invoice along with underlying supply of goods or services or both to his buyers and utilizes ITC availed on the basis of the above mentioned invoices issued by 'A', for payment of his tax liability in respect of his said outward supplies. Whether 'B' will be liable for the demand and recovery of the said ITC, along with penal action, under the provisions of section 73 or section 74 or any other provisions of the CGST Act.

Clarification

Since the registered person 'B' has availed and utilized fraudulent ITC on the basis of the said tax invoice, without receiving the goods or services or both, in contravention of the provisions of section 16(2)(b) of CGST Act, he shall be liable for the demand and recovery of the said ITC, along with penal action, under the provisions of section 74 of the CGST Act, along with applicable interest under provisions of section 50 of the said Act.

Further, as per provisions of section 75(13) of CGST Act, if penal action for fraudulent availment or utilization of ITC is taken against 'B' under section 74 of CGST Act, no penalty for the same act, i.e. for the said fraudulent availment or utilization of ITC, can be imposed on 'B' under any other provisions of CGST Act, including under section 122.

Issues

A registered person 'A' has issued tax invoice to another registered person 'B' without any underlying supply of goods or services or both. 'B' avails input tax credit on the basis of the said tax invoice and further passes on the said input tax credit to another registered person 'C' by issuing invoices without underlying supply of goods or services or both. Whether 'B' will be liable for the demand and recovery and penal action, under the provisions of section 73 or section 74 or any other provisions of the CGST Act.

Clarification

In this case, the input tax credit availed by 'B' in his electronic credit ledger on the basis of tax invoice issued by 'A', without actual receipt of goods or services or both, has been utilized by 'B' for passing on of input tax credit by issuing tax invoice to 'C' without any underlying supply of goods or services or both. As there was no supply of goods or services or both by 'B' to 'C' in respect of the said transaction, no tax was required to be paid by 'B' in respect of the same. The input tax credit availed by 'B' in his electronic credit ledger on the basis of tax invoice issued by 'A', without actual receipt of goods or services or both, is ineligible in terms of section 16(2)(b) of the CGST Act. In this case, there was no supply of goods or services or both by 'B' to 'C' in respect of the said transaction and also no tax was required to be paid in respect of the said transaction. Therefore, in these specific cases, no demand and recovery of either input tax credit wrongly/ fraudulently availed by 'B' in such case or tax liability in respect of the said outward transaction by 'B' to 'C' is required to be made from 'B' under the provisions of section 73 or section 74 of CGST Act.

However, in such cases, '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 and/or services as also for taking/ utilizing input tax credit without actual receipt of goods and/or services.

Conclusion

Since there is only been an issuance of tax invoice by the registered person to other registered person without the underlying supply of goods or services or both, therefore, such an activity does not satisfy the criteria of "supply", as defined under section 7 of the CGST Act. As there is no supply by One registered Person' to Other Registered person in respect of such tax invoice in terms of the provisions of section 7 of CGST Act, no tax liability arises against Issuer of Fake invoice for the said transaction, and accordingly, no demand and recovery is required to be made against issuer of fake tax invoice under the provisions of section 73 or section 74 of CGST Act in respect of the same. Besides, no penal action under the provisions of section 73 or section 74 is required to be taken against registered person in respect of the said transaction.

In other hand Section 122 will apply for penalty regarding issue of invoice without supply of goods or services.

Disclaimer: These are author's personal views and cannot be construed to be the views of the ICAI. It shall not be used for any legal advice/opinion and shall not be used to render any professional opinion/advice. The information contained in the article is for the purpose of spreading information / knowledge/ awareness and shall not be treated as solicitation in any manner or for any other purpose.