GST GST Advisory

GST Tax Evasion: Eliminating Menace of Fake GST Invoices

In the past, it has been observed that some fraudulent activities are carried out by individuals in making fake GST invoices to claim wrong input tax credit by GST taxpayers. There have been instances where taxpayers obtained fake invoices to reduce their output GST liability by claiming credit based on fake bills. In this article, we shall look at these fraudulent practices that has intensified and how this menace is sought to be eliminated.

What is meant by Fake GST invoices?

Fake GST invoice or fake bills is when an individual issues invoicing charging GST on it without the GST number mentioned on it, resulting in a fake invoice. Every registered business is required to issue invoice containing a valid GSTIN. In case any crucial information from a typical GST invoice is missing, it is said to be a fake invoice.

Further, another instance of this is seen when individuals that are not registered under GST uses a fake GSTIN number in the invoice and charges GST, and the tax is not deposited with the government. GSTIN is a 15 digit unique code where the first two digits represent the state code, and the next PAN number and the last three numbers denote entity number. Any change in this set will be said to be fake GSTIN number and, therefore a fake invoice.

Who issues Fake GST Invoices?

 It has been observed that the fake invoices are issued by a racket of individuals who are illiterate and not carrying on any business or any other profession.  Generally, fake invoices are frauds done by the non-existent taxpayers and by using a network of firms set up to illegally obtain ITC.

What is the purpose behind issuing Fake GST Invoices?

The main purpose behind this includes:

• To avail undue input tax credit;
• To evade GST and income tax and divert funds from companies;
• To conduct hawala transactions;
• To claim GST refunds for exporters; and
• To show non-existent transactions to show hiked figures and obtain loans from banks.

Measures taken by GST authorities to curb GST fake invoicing

The following measures have been taken:

• Aadhar verification with physical verification procedure have been made compulsory at the time of GST registration allotment; and
• Technological innovations like artificial intelligence and data analytical tools is to be used by the government to understand business supply and purchase patterns and identify abnormal patterns and suspects.

What are the penal provisions for fake invoicing under GST?

 Despite the lawmakers looking to cover every fraudulent transaction resulting in GST tax evasion, it has been observed that various new methods have been adopted to avoid tax payment through fake GST invoices.  

Therefore amendments have been made to the penal provisions of Sections 122 and 132 of the CGST Act. Further, Section 271 AAD has been introduced in Income Tax Act^[1] as applicable from 1^st of April 2020. Below we shall look at these changes.

Amendment in penal provisions of Section 122 of CGST Act

It is provided that any person who retains the benefit of transactions stated below and at whose instance such transaction is made shall also be liable to penalty of a sum that is equal to tax evaded or input tax credit availed of or passed on.  

• Supplies any goods or services without issuing any invoice in violation of GST provisions;
• Issues any invoice or bill without the supply of goods or services in violation of GST provisions;
• Obtains or uses ITC without actual goods and services receipt; and
• Obtains or distributes wrong ITC.

Amendment in provisions of Section 132 of CGST Act

Before the amendment was introduced, only the person who committed the offence was liable for punishment but now whoever commits, causes to commit, and also retains the benefits arising out of the offense is liable to be punished.

Section 132 of CGST Act lays down offences that cover fake GST invoices:

• Whoever supplies any goods and or services without issuing invoice in violation of the provision of the Act or rules made thereunder, with an intention to evade tax payment;
• Whoever issues any invoice or bill without the supply of goods or services or both in violation of the provisions of the Act leading to wrong availment or use of input tax credit or tax refund;
• Whoever avails input tax credit using invoice or bill referred to in clause b or avails input tax credit fraudulently without any invoice;
• Collects any amount as tax but does not pay the same to government beyond three months period from the date on which such payment is due;
• Evades tax or obtains refund fraudulently and where such offence is not covered under clauses a to d.

Shall be punished leading to imprisonment.

Subsequently, an amendment has also been made from 1^st April 2020 under the Income Tax Act by inserting Section 271 AAD. In this penalty would be imposed on the person maintaining books of accounts in case of false entry or omission of an entry that is needed for calculating total income.

Further penalty will be levied on any other person who causes the person required to maintain the books of accounts to make or cause to make any incorrect entry or omit or cause to omit an entry in the books of accounts. It may be noted that penalty can only be levied when identified during any proceedings that is assessment, reassessment, search of survey, etc.

Conclusion

Offences with regard to fake GST invoices is a cognizable offence and non-bailable in nature where the amount of tax evaded or input tax credit availed wrongly or used or refund taken wrongly exceeds 5 crore. Therefore stringent measures have been employed by the government however, the government should ensure that genuine taxpayers are not harassed because of such provisions as the need for these penalties are meant for fraudsters. 

Read our article: Problems of Fake GST Invoice and measures to address them