Circular on ITC claims on fake invoices

In the wake of fake invoices, the Central Board of Indirect Taxes and Customs (CBIC) released a circular on ITC claims on fake invoices. There are several incidents of fraud where people fraudulently claim Input Tax Credit and unethical refunds. The government has addressed this issue with the help of Circular No.171/03/2022-GST.

What does a fake invoice mean?

Fake invoices are usually invoices which are raised by an entity without any supply of goods or services or any payment of Goods and Services Tax (GST).

How do frauds make use of fake GST invoices?

Listed below are how fake frauds could misuse invoices in the GST regime:

• By issuing invoices without supplying any goods or rendering any services where tax has been paid by Input Tax Credit (ITC) which isn’t available to the issuer of such invoice. In these cases, the issuer issues invoices and shows tax payments by non-existent ITC. This results in actual loss to the government’s revenue where the buyer of such invoice avails inadmissible ITC, which is then used for tax payment.
• Issuance of the invoice where the recipient of the goods or services is different than the one to whom such invoice was issued. The person to whom such invoice is issued may utilise the ITC for payment of GST at the time of exporting goods and then claim a refund of GST paid.
• Routing an invoice through a series of dummy or shell companies and transferring the ITC from one to another company in a circular fashion to increase the turnover. Here, there’s no supply of goods or rendering of services and thereby availing ITC, such invoices get hit by the provisions contained under Rule 16 of the CGST Act, 2017.

The provision states that the conditions for availing input tax credit, a buyer must have an invoice on which GST has been paid, and such buyer must have received the goods or services.

In these cases, availing of ITC without receiving the goods or services is inadmissible, and utilisation of such ITC for actual regular supplies causes a loss of revenue for the government. In a nutshell, unscrupulous traders use this way to utilise the GST system for creating invoices, fake e-way bills to show the movement of goods etc. and defraud the revenue and the banking system.

Implications of issuing fake invoice, Impact and Consequences

Once the investigation results in the issue of a Show Cause Notice (SCN) or any other penal actions, the below-listed steps can be taken by the authorities to prevent entities to continue with the fraudulent activities:

a) An offence database module creation in the GST Application where the GSTIN of each entity that has been charged with fraud, such as fake invoices, etc., will be flagged. This will enable automatic identification of purchasers of such fake invoices from these flagged entities, and automatic alerts could be given in GST Application for further investigation.

b) The GST registration of such entities shall be cancelled, and the re-registration of such cancelled registrations is to be dealt with separately. Any application for re-registration from such entities would be flagged to alert the authorities, and there shall be no deemed registration in such cases. Further, physical verification for registration purposes would be necessary for such cases.

c) The entities that have availed input tax credit with the help of fake invoices need to be identified, and steps for recovery need to be made from them as per law. The previous transactions of such entities with other entities need to be investigated on a sample basis in view of their detected propensity.

d) Provisions contained in Section 83 of the CGST Act, 2017, relating to the provisional attachment of property, including the bank accounts, should invariably be invoked.

e) If there’s prima-facie evidence showing criminal involvement of directors to evade GST, then Section 89 of the CGST Act 2017 can be invoked

f) Blocking of the input tax credit of persons, including beneficiaries of such defrauding entities, to not allow the entities to get away with any undue input tax credit. 

Circular 171 on demand and penalty provisions towards fake invoices

Quantum of tax or ITC availed or utilised	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.