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Fake Invoicing under GST– A clarity search

AUGUST 08, 2022

By Debasish Bandyopadhyay

THE world of ITC under the GST regime has undergone many revolutionizing changes causing humungous scale of upheaval in the trade in the last five years. Recently, in the 47th GST council meeting held on 28th and 29th day of June 2022, several changes and clarifications have been made in respect of reporting of ITC in Form GSTR-3B vide Notification 14/2022-Central Tax dated 05-07-2022 and Circular No. 170/02/2022-GST dated 06-07-2022. While the said changes have been made towards better reporting of reversals of Input Tax Credit in Form GSTR-3B but the burden on the poor taxpayers are mounting obnoxiously in order to keep pace with the flurry of changes in the name of improvement of tax compliance under GST. However, this article is not to discuss about the said changes in reporting requirement. This piece is on the issue of proceedings against fake invoicing and restrictions on ITC availability.

All about Fake Invoice

Firstly, it is important to understand, what fake invoice is all about? Apparently, it can be said that invoice that is issued in violation of the provisions of the CGST Act, 2017 and rules made thereunder, is referred to as Fake Invoice. The fake invoicing is seen to be done in the following manner:

- Issue of invoice without supply of goods or services, file GSTR-1, and disappear without payment of tax, eventually recipient gets ITC, which may be used for payment of tax liability.

- Issue of invoices by persons where invoice is issued to one person and goods are diverted to other person resulting in loss of revenue.

- Transfer of ITC from one company to another in a circular way by routing of invoice in order to increase turnover. In this process, dishonest traders by abusing GSTN system issue fake invoice and fake e-way bill in order to evade GST liability on outward supply.

The issuance of fake invoice results into a fake transaction which is illegal under the law. Illegal ITC earned through such illicit method of fake invoicing has been an economic menace affecting the economic health of the country. The activity of fake invoicing is a crime punishable under the GST law.

In respect of fake invoice issue, there were certain confusions with regard to applicability of demand and penalty provisions under the CGST Act, 2017. Therefore, in order to attain uniformity in the implementation of the provisions of law across the field formations, CBIC issued Circular No. 171/03/2022-GST dt. 06.07.2022.

Clarification on Demand & Penalty

In order to throw light on the maze of confusion involving applicability of demand and penalty provisions in respect of transactions involving fake invoices, CBIC vide the said Circular No. 171/03/2022-GST clarified on some raging issues. The summary of such issue based clarifications is given below:

Issue

Clarification

Registered person issued tax invoice without supplies of Goods/ services.

The activity does not satisfy criteria of "Supply" u/s. 7 of CGST Act so no demand and recovery is to be made against issuer of invoice but penalty shall be imposed u/s.122 (1)(ii)of CGST Act.

 

Registered person availed and utilized fraudulent ITC based on the tax invoice issued without underlying supply.

 

Person availing the ITC shall be liable for demand or recovery u/s. 73 or 74 of CGST Act on account of availing and utilizing fraudulent ITC and in terms of section 75(13), no penalty including u/s 122 to be levied if penal action is taken under section 74 of CGST Act.

Registered person avails ITC based on the said tax invoice and further passes on the said ITC to another registered person by issuing invoices without underlying supply of goods or services or both.

Person availing the ITC shall be liable for demand or recovery u/s. 73 or 74 of CGST Act, as the case may be and liable for penal action u/s. 122(1)(ii) and 122(1)(vii) of CGST Act.

Apart from the above, it is also clarified that based on the fact and circumstances of the case, in the matter of wrongful or fraudulent availment and utilization of ITC on fake invoices may lead to invocation of provisions of section 132 of the CGST Act.

Challenge and restriction on ITC

There are plethora of litigations in the GST regime on the issue of fake invoicing and wrongful availment of ITC. In many cases, Court has made strong observation in the matter of offences relating to fake invoice. In the matter of AJANTA INDUSTRIES Vs. COMMISSIONER OF CGST - 2021-TIOL-1548-HC-DEL-GST, Hon'ble Delhi High Court has rejected refund citing that serious findings of fake Input Tax Credit had not been challenged and writ petition was dismissed with liberty to avail appellate remedy.

Further, in the case of PUNNIMTI USHA RANI vs. UNION OF INDIA [Writ Petition Nos. 9213 of 2019 and 21402/2020], dated on 16-6-2021, wherein bank account and lockers of some companies was frozen during investigation on apprehension that such companies were operating as shell companies and allegedly assisting accused in creating fictitious firms for purpose of issuing fake tax invoices for fraudulent passing on ITC. Hon'ble High Court of Andhra Pradesh has disposed off the writ petition by giving liberty to petitioners to approach Court of Special Economic Offences and file application seeking appropriate relief.

Further, in the matter of AJAJ AHAMAD, the High Court of Orissa has held that Economic offences such as Fraudulent availment of input tax credit using fake invoices/bills without receipt of goods being grave are to be considered seriously. Thus, considering the apprehension of petitioner in tampering with evidence, in larger interest of society, Court is not inclined to release petitioner on bail.

It is clear from the above pronouncements that the cloud of apprehension has always been looming over the sky of ITC involving fake invoice in the trade. The judiciary takes strong position in dealing with fake invoicing cases. However, sometimes, department denies genuine ITC simply stating that the taxpayer has claimed ITC using fake invoice resulting into undue hardship for the bona fide assesses. It is also pertinent to emphasize that too many restrictions and compliance requirements for availing ITC has been a major challenge for the taxpayers under the GST regime.

Meanwhile, recently, the Calcutta High Court has delivered an important judgment that if it is found that the transactions in question are genuine and supported by valid documents, input tax credit in question cannot be denied. In the said matter of SANCHITA KUNDU & ANR. VS. THE ASSISTANT COMMISSIONER OF STATE TAX, BUREAU OF INVESTIGATION, SOUTH BENGAL & ORS. - 2022-TIOL-724-HC-KOL-GST, it was observed as under:

"Considering the facts as recorded,  without any further verification it cannot be said that that there was any failure on the part of the petitioners in compliance of any obligation required under the statute before entering into the transactions  in question and that there was no verification of the genuineness of the suppliers in question by the petitioner during the relevant period. ……………………………………………………………………………………………..

If it is found upon verification and considering the relevant documents that all the purchases and transactions in question are genuine and supported by valid documents and transactions in question were made before the cancellation of registration of those suppliers and after taking into consideration as to whether facts of the petitioners are similar to the judgements of the Supreme Court and various High Courts and of this Court upon which petitioners intend to rely and if it is found similar to the present case in that event the petitioners shall be given the benefit of input tax credit in question."

On one hand, the main objective of the department is to find the legitimacy of the transactions based on which ITC is taken whereas on the other hand, the above judgment noted supra leads to invoking a pertinent question, can any ITC which is genuine in nature be denied due to the lack of any procedural or compliance requirements?

In terms of the instant circular, the restrictions on ITC availed based on fake invoice and consequence may be summarized as under:

- ITC taken based on the fake invoice is an offence punishable with applicable penalty.

- ITC availed based on the fake invoice and subsequently used for payment of outward genuine tax liability, ITC is recoverable.

- ITC availed based on the fake invoice and subsequently passed on by issuing fake invoices, only penalty is to be levied.

The department has always been vigilant and apprehensive in allowing the ITC. However, the CBIC must ensure that no legitimate ITC should be denied based on apprehension and presumption of fake invoice issue and genuine taxpayers should not bear the brunt of misdeeds committed by certain unscrupulous entities. However, a larger question that still goes unanswered in the face of Sanchita Kundu judgement (supra) is that, can genuine ITC be denied on the ground of laxity of the assessee in reporting requirement, cancellation of supplier's registration, non-payment of tax or any other failure of the supplier etc.?

Conclusion

In the end, it can be said that the Government has been intensely pushing major reforms in tax administration despite the threat of many disruptive constituents looming over the economic sky of the country. However, any form of reforms must not upset the basic concept and structure of any taxing system such as GST, which may lead to defeat of the spirit and purpose of taxation mechanism. The ITC is extremely essential for the scheme of GST; however, the effective exercise of law is also of paramount importance for the economy.

(The views expressed are strictly personal)

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