Authored by Aditya M Agarwal

At a time when the government is already struggling with low revenue collection due to the COVID-19 pandemic virus, cases of GST fake invoicing fraud are making a further dent in the government’s pocket and its ability to spend.

The Finance Minister Nirmala Sitharaman in the Budget Speech 2021-22 proposed the 'Provisional Attachment of Assets' of those who are involved in the GST fake invoice of more than Rs 2 crore.

“A new provision is being inserted in the Customs Act (section 114AC) to prescribe penalty in specific cases where any person claims refund of tax or duty discharge, using fraudulent invoices, on exports of goods,” Sitharaman said.

A new provision section 114AC is inserted in the GST Act in respect of the Penalty for fraudulent utilization of input tax credit for claiming a refund. Section 114AC says, “Where any person has obtained any invoice by fraud, collusion, willful misstatement or suppression of facts to utilize input tax credit on the basis of such invoice for discharging any duty or tax on goods that are entered for exportation under a claim of refund of such duty or tax, such person shall be liable for a penalty not exceeding five times the refund claimed.”

Every registered business under GST must issue an invoice that contains a valid GSTIN, and further show the breakup of IGST, CGST and SGST along with the other mandatory fields as defined in the GST Invoice Rules. Hence, if any of the vital information required in a typical GST invoice is missing, it can be said to be a fake invoice.

For Example,

If a trader issues a GST invoice dated 01/01/2019 with no GSTIN mentioned on it;

If a business has not been registered under GST but uses a fake GSTIN on the invoice and charges GST, it shall not be a valid invoice as the tax paid will not get deposited with the Government;

If the Supply related to which the Invoice has been issued has not taken place. i.e when the goods/services are not supplied and just an invoice has been issued.

While the above Point 1 and 2 can be said to be in the nature of an invalid invoice but the invoices as per Point 3 above is the major concern discussed here wrt the invoices issued with a fraudulent intention.

The main course of the objective behind these fraudulent fake invoicing is observed to be that they are to pass and avail the fake input tax credit to manage the Income Tax and Outward GST Liability.

The manifold objective/purpose of the taxpayers behind the issuance of fake invoicing may involve:

Availment of the undue input tax credit on fake invoices by the recipient.

Evade Goods & Services Tax & Income tax & then Divert funds from companies.

To claim GST refunds for exporters.

GST Council has also adopted few standard operating procedures for “how to detect and tackle the fake invoices”.

A few red alerts which can be said to be leading to the identification of the generator and user of fake invoices could be as follows:

Multiple registrations for a single address and single PAN

Common Registration details like email, mobile no’s, address, authorized signatories, promoters for multiple GSTIN

Incorrect or fake address given on GST portal while taking registration

The mismatch between premises declared and volume of goods delivered to them at the time of physical verification

The mismatch between the volume of goods transacted and the e-way bill generated

After identification of generator and user of fake invoices, investigation of premises is to be established for analyzing the occurrence of the actual supply of goods or services by the supplier and gather information in respect to the fake invoices.

Finally after investigating the genuineness of the supplier who generated the fake invoice and the buyer who used that invoices for the taking unnecessary tax benefit. If the forgery is proved then the following actions can be taken by the government:

Cancellation of GST registration;

GSTIN of Such supplier are flagged for generating fake invoices or for any other frauds and this will indicate those buyers who take credit on behalf of fake invoices and automatic alert for further verification by the officer;

Input tax credit availed on behalf of fake invoices to be recovered/reversed;

Few measures taken by the GST Authorities to Curb GST Fake invoicing frauds:

Aadhar Verification along with Physical verification procedures has been made mandatory at the time of allotting GST Registrations.

Artificial Intelligence and Data Analytical tools are to be used by the government to understand the business supply and purchase patterns and identify any abnormal patterns and suspects.

Penalty Provisions in case of Fake Invoicing:

To curb this, Finance Act,2020 has brought an amendment to penalty provisions of Sec 122 & Sec 132 of CGST Act and has also introduced Sec 271AAD in Income Tax ACT applicable from 01.04.2020.

I. New Sub-section (1A) inserted to Sec 122 of CGST Act- with the Quantum of Penalty: Equal to the amount of tax evaded or ITC availed.

II. Amendment to Sec 132 of CGST ACT:

Before the Amendment, only the person who commits the offense was liable for punishment but now,

whosoever commits,

causes to commit and

also, who retains the benefits arising out of the offenses

are liable for punishment.

Sec 132 Offences that covers fake invoicing ( after amendment) -

supplies any goods or services or both without the issue of any invoice, in violation of the provisions of this Act or the rules made thereunder, with the intention to evade tax

issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act, or the rules made thereunder leading to wrongful availment or utilization of input tax credit or refund of tax;

avails input tax credit using the invoice or bill referred to in clause (b) or fraudulently avails input tax credit without any invoice or bill

collects any amount as tax but fails to pay the same to the Government beyond a period of three months from the date on which such payment becomes due;

evades tax, or fraudulently obtains refund and where such offense is not covered under clauses (a) to (d);

Quantum of Punishment- Cognizable and Non-bailable leading to Imprisonment

III. Sec 271AAD of Income Tax Act-

Penalty under this Section in Income Tax can be imposed to in addition to any other penalty on an assessee.

Penalty can be levied only when identified during any proceedings in Income Tax Act i.e. assessment, reassessment, search or survey or any other proceedings.

When can the Penalty be Imposed?

When the AO finds that in the books of accounts maintained by a person there is-

a false entry; or an omission of any entry which is relevant for computation of total income of such person, to evade tax liability,

What is the quantum of penalty?

Sum equal to the aggregate amount of such false or omitted entry. The assessing officer has been given discretionary power to impose penalty.

Who is covered?

Not only the person but “Any other person” who causes the first person to make false entry or omit or causes to omit any entry shall be liable to pay similar penalty.

False Entry includes use or intention to use

forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence; or

invoice in respect of supply or receipt of goods or services or both issued by the person or any other person without actual supply or receipt of such goods or services or both; or

invoice in respect of supply or receipt of goods or services or both to or from a person who does not exist

Further, there exists Sec 270A provides a penalty of 200 percent of the tax evaded in the case of misreporting of income.

So, if a company accepts a fake invoice of Rs 50 lakh without actual supply of goods or services and shows the same as his purchases or expenses and claims income tax benefit on the same, the amount of penalty shall be U/S 271 AAD of Rs 50 lakh plus 200 percent of tax evaded U/S 270A of Rs 30 lakh (assuming tax of 30 percent) i.e. Rs 80 lakh (more than the value of the fake invoice)

Aditya M Agarwal is Partner at Mahesh K Agarwal & Co. and Secretary at Professional Times