Fake Invoices under GST

[Sunil Vengaldas]

Introduction

Under the Indirect tax regime, the taxpayer is under obligation to collect and pay taxes to the government in the manner as prescribed.

Under GST, section 59 deals about self-assessment which can be broken down as below:

• Every person registered under the CGST Act, 2017 (hereinafter referred to as the “Act”) is required to discharge the tax liability
• On self-assessment basis
• By filing the periodical returns as prescribed U/s 39 of the Act

Elements of Self-assessment:

1. Outward invoices
2. Inward invoices

Self-assessment means that taxpayer himself shall determine the output tax payable and discharge the tax after offsetting the ITC available, if any. Since the Self-assessment is in the hands of the taxpayer, he may misuse such opportunity. One such misuse is the excess claim of Input Tax Credit (hereinafter referred to as the “ITC”) and reducing the payment of tax in cash. If such excess claim is out of fake invoices, then it is an offence committed under Section 122 of the Act and shall be liable for punishment under Section 132 of the Act.  

Statistics and volume of Fake invoice under GST:

According to the press release by the Press Bureau of India (PIB) dated 13-07-2021, the CGST zones and the Directorate General of GST Intelligence (DGGI) have booked about 8000 cases involving massive fake ITC which can be tabulated as follows

Financial year	No. of cases booked	No. of people arrested	Fake ITC involved
2021-22 (till July)	500	426	Yet to be known
2020-21	8000	24	35,000 crores

Apart from the above, the various Commissionerate from time to time are bursting the fake invoice racket to protect the interest of revenue. According to one survey, the proportion of Fake ITC to the total collection can be anywhere between 1% to 5%.

From the above, it is clear that the Fake Invoice is a serious issue and needs to be curbed at the earliest.

Concept & Definition of the fake invoice.

One of the popular ways of generating fake invoices is setting up fake Companies and issuing the fake invoices with GST without actual supply of the goods or services to the Companies within the group or known persons for sales. By issuing an invoice, it allows the recipient to claim ITC.

To put check against the creation of fake firms and passing on the benefit of bogus ITC, the CBIC has come up with stringent rules with respect to registration and makes it mandatory for Aadhar authentication or physical verification vide Notification No 62/2020 (CT) dated 20-08-2020.

Fake invoice would generally involve issue of tax invoices for transactions which are not in existence merely to provide an opportunity to the recipient to avail ITC. Issuer of invoice may pay their tax liability either though fake ITC claimed without receipt of goods or services or would not file their returns. Thereby there is no flow of tax to the department. This can be understood clearly with the help of press release by the CGST Agra Commissionerate dated 19-08-2021

Synopsis:

• The Amount involved
  • Taxable Value - ₹ 184.56 Crores
  • Fake ITC - ₹ 32.56 Crores
• The Anti-Evasion Branch of CGST Agra initiated an investigation against a registered person which was non-existent and involved in passing on ITC fraudulently without having any inward supplies and process of passing on fraudulent ITC is as follows:
  • creation of fake firms on identity proof of factious or unrelated person
  • opened bank a/c with the name of bogus firms with same firm name but different proprietors
  • issue of fake invoices without actual supply to pass on huge Fraudulent ITC to recipient firms 
  • and availment of Fraudulent passed on by suppliers which were also bogus/non-existent

• The registered persons involved herein are committed an offence under section 132 and hence arrested under section 69.

Difference between proper Invoice, Improper invoice and fake Invoice

• Invoice / Bill: Document, as described under Section 31 of the Act, read with Rule 46 of CGST Rules, 2017
• Improper invoice: An Invoice that is not in accordance with Section 31 of the Act or Rule 46 of Rules
• Fake bill: An Invoice raised in accordance with Section 31 of the Act and Rule 46 of Rules but on a transaction that had never occurred with the intention to evade tax or to claim excess ITC.

Characteristics of Fake Invoice:

• It is more likely to be object-oriented and objective specific
• It is more likely to be intentional
• Can be in both physical form and electronic form
• Can be at the transaction level or at recording level or at time of filing of returns
• Fake bill can be intended to mislead intended users

Purpose of Fake invoice:

A fake invoice is solely raised for the purpose of

1. Undue excess claim of ITC or
2. for showing excess turnover or
3. for fraudulent refunds or for any other reasons.

Scenarios:

• Bill has been raised but no movement of Goods.
• Fictitious entries made at the time of preparation of Books of Accounts.
• Excess disclosure of turnover based on fake invoices.

Implications of accounting fake invoices in Books of Accounts:

The implications of fake invoices accounted in the BOA as follows:

• Under GST: Excess of ITC there by evading tax or fictious turnover to pass on bogus ITC.
• Under Income tax: Excess claim of expenditure thereby reduction in turnover resulting in under payment of income tax.
• Under Companies Act:
  • In case of inward invoices – excess expenditure resulting in lower profits undervaluation of assets & liabilities
  • In case of outward invoices – Excess turnover there by inflating cash and other assets.

In both the cases, it misleads intended users.

Fake Invoice - an offense

Provisions of the Section 122 and 132 deals with the offences and punishments for the offences committed under the Act respectively.

For a limited purpose, as per the Section 122 of the Act, where any Taxable person or any other person is involved in any activity of

1. Issuance of bogus / Fake Invoice without actual supply of goods and services or
2. Availment and/or utilization of ITC based on false or bogus invoice
3. collects any amount as tax but fails to pay the same to the Government beyond a period of three months

shall become an offence under this Act. Such person shall be liable to the penalty as determined under the section 122 of the Act.

Section 132 of the Act specifies the punishments for various offences under the Act. Punishments for the offences under this Act are mutually exclusive i.e., for each and every subsequent offence under the Act shall be punishable with such punishment and further such additional punishment for subsequent offence as applicable. The section categories the offences as cognizable, non-cognizable, bailable and non bailable offence.

All above-mentioned offences under section 122, are cognizable and non bailable offences under the section 132.

Punishments for the offences under the section 132 are as follows:

Monetary limit	Imprisonment	Fine or Penalty
₹ 5 crore or more	up to 5 years	Fine
More than ₹ 2 crores but less than ₹ 5 crores	up to 3 years	Fine
More than ₹ 1 crore but less than ₹ 2 crores	Imprisonment up to 1 year	Fine
false records or obstructing officer or tampers records (No Monetary criteria)	6 months	Fine

It may be noted that the punishment under the section is in addition to the penalties or fines as applicable under the respective sections.

How department can detect the fake invoices:

The important tool that the department has to detect the fake invoices is that the returns furnished by the taxpayers itself. On certain parameter it is likely possible to detect the presence of fake invoices which can be explained as follows:

1. Input output ratio: In this method, the department shall compare and analyze the input rate of tax and output rate of tax.

For example, Mr. A is involved in a business where the rate of tax is as follows

• Input tax rate - 12%
• Output tax rate – 18%.

Ideally the taxpayer has to pay the tax of 6% in cash as it is the difference between input and output rate of tax. If Mr. A is paying 100% of tax through ITC, then the department may enquiry the same. It may be noted that not every 100% utilization of ITC against the tax discharge is to be doubted, however, in certain cases it is an indication.

2. Statistical Method / Analytical Tools:

The department has various tools and facilities to generate various reports on various parameters. For example, the department may study the trend of utilization of ITC over a particular period of time. In case, where the department has found there is a significant variance in the trend, it may proceed to enquiry further. Likewise, it may also analyze the HSN summary of the supplier and the recipient and in case of discrepancies it may proceed to enquire

3. Failure to furnish the return

One the indicating factor of fake invoices is not filing the returns properly or not at all filing. It is well known fact, that the companies issuing the fake invoices will issue the Invoices for the purpose of claiming ITC and does not file the returns. There might be another scenario, whether the companies issuing the fake invoices files the GSTR 1 but not GSTR 3B giving additional benefit to the recipient to claim ITC.

4. Collecting data from various sources

Recently the CBIC and CBDT has entered into a memorandum of understanding to share the data between themselves. Further, a significant change has been bought to the Income tax portal, where the facility of turnover declared in the GST portal can be seen in Income tax portal. Apart from this, there are many other ways like Banks, Financial statements disclosed by the companies, etc.,

Burden of proof

As per section 155, the burden of proof to claim the ITC shall be on such person. However, in case of fake invoices, the department should have fair enough ground to dispute the same.

How to put check to fake Invoices

Fake invoices are a serious threat to the revenue. By passing on the benefit of ITC, the recipient utilizes the same to discharge the ITC thereby causing the revenue loss to the government. Hence, the government has taken few steps to curb the same which are as follows:

1. Rigid Registration Process:

As stated earlier, in case of fake invoices, majority of the supplier does not file the returns and does not pay the same to the government. Hence, the government has bought the amendment to registration vide Notification No 62/2020 (CT) dated 20-08-2020. As per the amended rules, the supplier needs to opt either for Aadhar Verification or Physical verification of place of business.

2. Restriction on availment of ITC:

There might be a scenario, where the issuer of the fake invoice shall file GSTR 1 but does not the file his GSTR 3B. Hence, the government came with Rule 36(4) that places a restriction on availment of ITC that is not reflected in GSTR 2A. A taxpayer can avail only 105% of the ITC reflected in GSTR 2A or ITC available in BOA, whichever is low.

3. Restriction on use ITC available:

While the Rule 36(4) places the restriction on availment of ITC, Rule 86A and 86B places the restriction on utilization of ITC available which is follows

• Rule 86A: As per the said rule, where the proper officer has a reason to believe that the ITC availed is by fraudulent means shall freeze the ITC thereby the said ITC availed shall not be available to set off against the payment of tax or refund.
• Rule 86B: where a taxpayer has exceeded the limit of ₹ 50 Lakhs in a month turnover in a month excluding the turnover of Exempted, exported, zero rated supply without payment of tax and RCM shall mandatorily discharge the tax @ 1% on the tax payable.

4. E-Invoicing

The GST Council approved the standard of e-invoice in its 37th meeting. ‘E-invoicing’ is a system authenticating electronically the B2B invoices by GSTN for further use on the common GST portal. Unlike the grammatical meaning, E-Invoice does not means generating of invoice electronically but an identification number will be issued against every invoice which is generated by the taxpayer through various accounting software by the Invoice Registration Portal (IRP) to be managed by the GST Network (GSTN). All invoice information will be transferred from this portal to both the GST portal and E- way bill portal in real-time.

Conclusion:

Fake invoices are major cause of loss of revenue to the government and it also results in the misuse of money of the genuine taxpayers. If the same is not curbed at the earliest, it might result in a heavy hardship to the taxpayers and the business. Few steps taken by the government may help to restrict the same, but the existence of fake invoices cannot be removed completely.