LEGAL TERMINOLOGY IN GST LAW (PART 13)

[Dr. Sanjiv Agarwal]

LEGAL TERMINOLOGY IN GST LAW (PART 13)

(Fake Invoices)

Meaning of Fake Invoice?

The term ‘fake invoice’ is not defined in CGST law. However, fake invoice refers to a ‘Non-compliant GST invoice’.

“Non-compliant GST invoice’ means any invoice which does not comply with the provisions of the CGST Act and Rules, 2017. Usually, ‘fake invoice’ refers to a non-compliant GST invoice of the following types:

1. Invoice without any ‘supply’
2. Invoice with a ‘Non-compliant’ supply.

The ‘Invoices’ that are usually treated as ‘fake’ are those wherein the GST invoices are raised by an entity without actual supply of goods or services or payment of GST. There are three ways in which such fake invoices could be misused in the GST regime.

1. Issue of invoices without supply of goods or services where payment of tax is made by way of Input Tax Credit which is not available to the issuer of invoice. In such cases, there is no receipt of goods or credit by the issuer of invoice. He merely issues invoices and shows payment of tax by non-existent input tax credit. This results in actual loss of revenue where the buyer of the invoice avails inadmissible credit which is used for payment of tax. There have also been instances where no GST has been paid even by input tax credit by the issuers of the fake invoice.
2. Issue of invoices by persons where the invoice is issued to one person and the goods are diverted to some other person. The person who purchases invoices may utilize the credit for payment of taxes at the time of export of goods and claim refund of the said tax paid, resulting in loss of revenue.
3. Routing of invoices through a series of shell companies/dummy companies and transfer of input tax credit from one company to another in a circular fashion to increase the turnover. In such cases, there is no supply of goods or services and thereby availment of credit based on such invoices gets hit by the provisions of Section 16 of the CGST Act, 2017, which stipulates that the conditions that to avail credit, the buyer should have an invoice on which tax has been paid and he should have received the goods. In such cases, availment of credit without receipt of goods is inadmissible and utilization of such credit for actual regular supplies results in loss of revenue and financial accommodation. In such cases, unscrupulous traders are utilizing the GSTN System to create invoices, fake e-way bills showing movement of goods etc., to defraud the revenue and the banking system.

In normal course, any fake invoice passes through a chain of fake invoice generators before it reaches the hands of recipient of goods or services who is actually involved in making an output supply.

Motive behind Fake Invoices

Any business or trade, who use ‘fake invoice’ earn input tax credit which is illegal and hence are liable for punishment under CGST law.

There could be following possible objectives which encourage fraudsters to indulge in issuing and using fake invoices:

1. Evasion of GST on taxable output supplies by:

(a)   Availing undue Input Tax Credit (ITC)

(b)   Saving GST (cash) by payment of tax liability using undue Input Tax Credit (ITC)

(c)   Clandestine supply without invoices and without payment of taxes

2. Converting excess Input Tax Credit (ITC) into cash by:

(a) Transferring of Input Tax Credit (ITC) to those who can utilize it

(b) Shifting Input Tax Credit (ITC) from exempted supplies to taxable supplies\

(c) Encashment of Input Tax Credit (ITC) by way of IGST refund or unutilized Input Tax Credit (ITC) refunds

3. Inflating turnover for the purpose of:

(a) Availing higher Credit Limit/Overdraft from Banks

(b) Obtaining bank loans

(c) Improving valuations for issue of capital or sale of stake

(d) Obtaining contracts including Government contracts

4. Booking fake purchases for getting Income-tax benefits by:

(a) Showing reduced profit margins and higher expenses

(b) Avoiding payment of Income-tax by reducing net profit

5. Cash generation/diversion of company funds
6. Laundering of money

Impact of Fake Invoices

The issuance of fake invoice results in fake trade which is illegal.

Preparing and trading ‘fake invoice’ is criminal activity; this crime is punishable under the law with maximum imprisonment of upto five years, in addition to recovery of illegal input tax credit with interest and penalty.

Infact, it is social menace; it is against economy, society and development. Illegal input tax credit earned using ‘fake invoice’ is a drain on the economy and affects the GST revenue collections. Evil forces use ‘fake invoice’ to generate ‘cash’ which is most likely to be used for nefarious crimes and to fuel social tension.

Following are the effects or outcome of an issuing, using and dealing with fake invoices:

1. It amounts to fraudulent and illegal activities.
2. It is counter-productive and works against the national and economic interest of the country.
3. It is a social evil
4. It results in tax avoidance and tax evasion
5. It attracts penal provisions under section 122 of CGST Act, 2017
6. It is a criminal and cognizable act liable for imprisonment under sections 69, 132 and other provisions of the Act
7. Loosing right to carry on business as a result of cancellation of registration.

GST Frauds through Fake Invoices

Based on the cases of fraud emanating from issue and use of fake invoices, following assertions can be made:

1. The Input Tax Credit (ITC) involved in the fraud cases usually reaches a large sum in a short time frame. Some reported frauds are in hundreds of crores.
2. Fake invoice cases involve fabrication of invoices which is an offence under Indian Penal Code. The Investigating Authority has to take call regarding how to get this part of the case investigated. Issues of legality, jurisdiction are involved.
3. In a number of cases, E-way bills have been generated without the corresponding filling of returns. The lack of real time connectivity between E Way Bill system and GSTN is being exploited by fraudsters.
4. The frauds usually involve a large number of GSTIN entities spread over States.
5. Some of the entities would fall under the jurisdiction of the CGST authorities while the connected entities fall under the jurisdiction of the State authorities.
6. Data adequacy and availability has become another challenge. The capability of invoice matching is yet to be provided. In multi-jurisdictional investigations, Tax administration do not have access to supplies in other jurisdictions, even though data resides in the GSTN.
7. In many cases, dummy firms are created/floated to commit the fraud. The addresses are often incorrect/incomplete and the details revealed in the registration forms are often false. As entry barrier is very low, and there is a lack of a proper system of scrutiny and verification of registration data, fraudsters are able to commit frauds with impunity.
8. There is another class of dummy companies with verifiable facts but no assets or means to do business; they act as surrogate for other large companies to camouflage their activities.
1. Connivance with transporters to get bogus bilty/consignment note to show movement of goods on paper and creating fake e-Way bills with fake/wrong vehicle registration details without the supply of any goods. There is no system in place to see if vehicle registration data is correct or not.
10. Fly-by-night operators are used to get GSTIN and generate large number of tax invoices and e-Way bills in the first few months and disappear. In this way thefly-by-night operators help other large companies to supply and transport their goods without invoice and paying taxes.
11. Encashment of Input Tax Credit (ITC) availed on fake invoices by obtaining IGST/Input Tax Credit (ITC) refunds especially in case of free shipping bills raises the issue of valuation of export goods. Further Customs GST coordination with regard to such fake invoice cases requires to be looked into.
50. Supplies made and GST collected but not paid i.e. GSTR-1 is filed but GSTR-3B is not filed. In some cases both GSTR-1 and GSTR-3B are not filed.

Discussions to this article

[DR.MARIAPPAN GOVINDARAJAN]

Very good analysis.  Thank you sir 

[Dr. Sanjiv Agarwal]

Thanks, Dr. Govindarajan.