Problems of Fake GST Invoice and measures to address them

Ruchi Gandhi

14 Feb, 2020

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

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.

One of the most prevalent malpractices followed by taxpayers is to set up dummy entities for issuing fake invoices and creating illegal input tax credit. These practices of using a fake GST invoice cause a massive loss to the tax base of the Government.

Malpractices of fake GST invoice

Under the CGST Act, a tax invoice is to be issued before/at the time of the supply of goods or services. However, some taxpayers do not issue invoices for the supply of goods and services so as to avoid payment of taxes. This results in an illegal supply as the same is made without charging and paying GST. In addition, the GST Council has been noticing instances where the taxpayers skillfully exploit definitions and their interpretations to attract lower tax rates in their favor. For example, disclosing branded products as non-branded products to pay a lower tax is one such practice.

Another standard method adopted by taxpayers to reduce the tax outgo is to register bogus firms, produce fake GST invoices without any actual movement of goods and then using these invoices to claim input tax credit fraudulently. However, GST provisions contain a condition for the recipient to claim ITC, that the products or services should be actually received. Thus, claiming of ITC without actual receipt or supply of goods is not legal.

Furthermore, unregistered suppliers are also found to issue tax invoices against an invalid GSTIN and collect GST from their customers. It results in a contravention of the CGST Act since unregistered persons are not authorized to collect GST from their customers.

Penalties for issuing a fake GST invoice and other measures

Some stringent provisions are invoked in the income tax and GST laws to deal with all fraudulent arrangements. These are as under:

• Section 122 and 132 of the CGST/SGST Act lists some offences which warrant penalties, prosecution and initiation of criminal proceedings. These include, among others, the following:

  • “Making a supply without issuing an invoice or upon issuance of a false/incorrect invoice;

  • Issuing an invoice without making supply;

  • Availing or utilizing credit of input tax without actual receipt of goods and/or services;

  • Obtaining any fraudulent refund;

  • Evasion of tax by fraudulently availing ITC or obtaining refund by an offence not covered under above clauses;

  • Furnishing false information or falsification of financial records or furnishing of fake accounts/documents with an intent to evade payment of tax”

• The scheme of punishment of imprisonment under Section 132 is as follows:

  • For tax evasion exceeding Rs. 5 crore or for repeat offender with 250 lacs – 5 years imprisonment and fine

  • For tax evasion between Rs. 2 crore and Rs.5 crore – 3 years imprisonment and fine

  • For tax evasion between Rs.1 crore and Rs.2 crore – 1-year imprisonment and fine

  • For false records, obstructing officer and tampered records – 6 months imprisonment

• The penalty under Section 122 is equivalent to the amount of tax evaded, or refund or ITC fraudulently obtained, or a sum of Rs. 10,000, whichever is higher. Moreover, all offenses involving evasion of tax of less than Rs.5 crore are non-cognizable and bailable; while all violations where the avoidance of tax exceeds Rs.5 crore are cognizable and not bailable.

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• A new section (Section 271AAD) is proposed to be inserted in the Income Tax Act, 1961^[1] via the Finance Bill, 2020. This section penalizes a person if it is found that there is a false entry or omission of an entry in his books of accounts, which is capable of altering (or evading) his tax liability. The penalty amount shall be equivalent to the aggregate amount of all such false entries or omitted entries. Furthermore, it is provided that any other person who causes the defrauding person to make such incorrect entries or omission will also be punishable with the same amount of penalty. For instance, Mr. X issues a false sales invoice to MLP & Co. (a registered GST dealer). Here, both MLP & Co. and Mr. X will be liable to pay the penalty equivalent to the aggregate amount of such fake GST invoice generated and disclosed. Section 271AAD will become effective from 1st April 2020. Some examples of false entries are:

  • A fictitious invoice or a fake piece of documentary evidence

  • An invoice for supply or receipt of goods or services issued by a person without an actual supply or receipt of products or services

  • An invoice for supply or receipt of goods or services to or from a non-existent person

• The Government comes with a lot of preparedness to strengthen the invoice matching system wherein a recipient may claim ITC only on the corresponding supplies as evidenced by suppliers. With the new GST return system and e-invoicing to be effective from 1st April 2020, it would become more comfortable for the GST authorities to ensure compliance, track false ITC claims and locate causes of revenue leakages in the upcoming fiscal period. Although the enforcement authorities will have to look for more ways for B2C transactions, B2B transactions will be verified in entirety as e-invoicing will become mandatory from 1st April 2020.

Conclusion

Read our article: What are the Provisions of Audit Under GST