Penalty for Fake Invoice in GST

Fake Invoice | Applicability of Penalties & Demand | CBIC Clarification

CA Poonam Gandhi

Updated on February 9th, 2024

In the present article, we will understand the Penalty for Fake Invoice in GST and go through the recent departmental clarification relating to demand and as applicable under fake invoice. 

Fake Invoice and Departmental Clarification  

The term ‘fake invoice’ is not defined under the Goods and Services Tax (GST) law. However, any invoice will be treated as a ‘fake invoice’ when a tax invoice is raised under GST without actual supply of goods or services or both.

In order to clear the concept of ‘fake invoice’, it is important to understand the motive behind issuing the same. An illustrative list of the motive behind issuing fake invoices is highlighted hereunder

Product Name

Price

Evasion of GST on taxable output supply

  • Availing undue input tax credit; or
  • Indirectly saving GST [i.e. payment of tax liability via using undue input tax credit]; or
  • Clandestine supply without actual invoice and without payment of tax; etc.

Conversion of excess input tax credit into cash

  • Transferring input tax credit to those registered persons who can utilize the same; or
  • Shifting input tax credit from exempted supply to taxable supply; or
  • Encashment of input tax credit either by claiming GST  refund of IGST or by claiming refund of the unutilized input tax credit; etc.

Inflating turnover

  • Obtaining bank loans or availing higher credit limit/ overdraft; or
  • Obtaining contracts; or
  • Improving valuation for the purpose of IPO/ sale of stake; etc.

Booking fake purchases so as to get higher income-tax benefits

  • Showing less profit margin by increasing the expenses; or
  • To reduce net profit for avoiding payment of income tax.

Money laundering

_

Diversion of company funds

_

Due to the involvement of huge tax evasion in cases relating to fake invoices, the department aggressively demands tax, interest and penalty from both the supplier and the buyer (first buyer). Interestingly, even the demand of tax, interest and penalty is being levied on subsequent buyers also.

Resultantly, even the bona fide buyer gets trapped into the circle of litigation which can never be the intention of the Government. Various representations were done from the trade and the department to provide clarification on the applicability of demand and penalty provisions in case of fake invoices.

Accordingly, major clarification in the matter was provided by the Central Board of Indirect Taxes and Customs, vide circular no. 171/03/2022- GST dated 6th July 2022. The same is broadly discussed hereunder. Notably, to simplify the understanding of the circular, we will discuss the stage-wise applicability of demand and penalty i.e. –

  • Applicability of demand and penalty on the issuer of the fake invoice (i.e. original supplier);
  • Applicability of demand and penalty on the buyer (first buyer) of the fake invoice. Also, the applicability of demand and penalty when the first buyer issues the fake invoice to the subsequent buyer; and
  • Applicability of demand and penalty on the buyer (subsequent buyer) of the fake invoice.

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Penalty for Fake Invoice in GST: Provisions for Suppliers

Penalty for Fake Invoice in GST for suppliers

Before understanding the demand and penalty provisions, let us go through the situation which emerges here –

The supplier issues a tax invoice to the recipient buyer (first buyer), however, there is no supply of either goods or services or both as referred under the issued tax invoice. Thus, from the view point of the supplier, we can say that there is only issuance of tax invoices without actual supply.

 The clarification as provided vide circular no. 171/03/2022- GST dated 6th July 2022, in such a situation, is explained hereunder

Particulars

Details

Transaction (i.e. fake invoice transaction)

  • The supplier has issued a tax invoice;
  • The supplier has not supplied any goods or services or both as mentioned in the tax invoice.

Can transaction be covered under the definition of ‘supply’?

No, the transaction cannot be covered within the definition of supply.

Reason – As there is only issuance of invoice and there is no supply of goods or services or both, such activity doesn’t satisfy the criteria of supply as defined under section 7 of the Central Goods and Services Tax Act, 2017.

Can demand and recovery be initiated against the supplier?

No, the department cannot initiate any demand and recovery action against the supplier.

Reason – As there is no supply, no tax liability arises against the supplier of a fake invoice. Accordingly, no demand and recovery proceedings under section 73 (i.e., non-fraud cases) and under section 74 (i.e., fraud cases) of the Central Goods and Services Tax Act, 2017 can be initiated against the supplier.

Can interest be imposed on the supplier?

No, the department cannot impose interest on such supplier.

Reason – As tax cannot be demanded from the supplier, interest also cannot be imposed on such supplier.

Can a penalty be imposed on the supplier?

Yes, the penalty can be imposed under section 122(1)(ii) of the Central Goods and Services Tax Act, 2017 on the supplier.

Reason – Here, the supplier has issued a tax invoice without actual supply of goods or services or both. Accordingly, for such a fraudulent act of the supplier, he will be penalized under section 122(1)(ii). The maximum amount of penalty that can be imposed on the supplier will be higher of the following –

  • INR 10,000; or
  • An amount equal to the tax evaded (which would be NIL here).

Applicability of Demand & Penalty Provisions on Buyer (first buyer)

demand provisions for buyers

Prior to understanding the applicability of demand and penalty provisions on the first buyer, it is important to go through the situation which emerges here –

The recipient buyer (first buyer) has received the tax invoice without actual receipt of goods or services or both. Thus, from the view point of the first buyer, we can say that there is a receipt of a tax invoice without the actual receipt of goods or services or both.

Read our penalties under GST article explained all major possible errors, types for penalties.

 The clarification as provided vide circular no. 171/03/2022- GST dated 6th July 2022, in such a situation, is explained hereunder

Particulars

Details

Transaction (i.e. fake invoice transaction)

  • The first buyer has received the tax invoice;
  • The first buyer has not received the goods or services or both as mentioned in the tax invoice; and
  • The first buyer avails and utilizes the input tax credit on the basis of such tax invoice.

Can demand and recovery be initiated against such a buyer?

Yes, the department can initiate demand and recovery proceedings against such buyer.

Reason – As we know, prior to availing of the input tax credit, the buyer needs to satisfy the conditions as laid down under section 16(2) of the Central Goods and Services Tax Act, 2017. One such condition, as prescribed under section 16(2)(b), is that the buyer is entitled to avail input tax credit only if he has received the goods or services or both. However, in the present case, the buyer has only received the tax invoice and has not received the specified goods or services or both.

Hence, the buyer has contravened the provisions of section 16(2)(b) due to which demand and recovery proceedings can be initiated against such buyer under the provisions of section 74 (i.e. fraud cases).

Can interest be imposed on such a buyer?

Yes, the buyer is liable to pay adequate interest.

Reason – Here, the buyer is liable to pay the tax amount as demanded under section 74. Accordingly, the buyer will also be liable to pay the appropriate interest amount as per provision of section 50 of the Central Goods and Services Tax Act, 2017.

Can a penalty be imposed on such a buyer?

Yes, the penalty can be imposed on the buyer.

Reason – Once the tax is demanded under section 74, the penalty will also get imposed under the same section. Notably, once the department imposes a penalty on the buyer under section 74, a penalty for the same act cannot be imposed on the buyer under any other provisions of the Central Goods and Services Tax Act, 2017.

Now, taking a step further in the transaction, the first buyer issues a tax invoice (without actual supply of goods or services or both) to the subsequent buyer. Here, the first buyer will become the supplier, however, for ease of understanding, we will keep the same as the first buyer only.

The demand and penalty provisions as applicable to the first buyer are explained hereunder

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Particulars

Details

Transaction (i.e. fake invoice transaction)

  • The first buyer has issued a tax invoice to the subsequent buyer;
  • The first buyer has not supplied any goods or services or both as mentioned in the tax invoice.

Can transaction be covered under the definition of ‘supply’?

No, the transaction cannot be covered within the definition of supply.

Reason – As there is only issuance of invoice and there is no supply of goods or services or both, such activity doesn’t satisfy the defined criteria of supply as defined under section 7 of the Central Goods and Services Tax Act, 2017.

Can demand and recovery be initiated against the first buyer?

No, the department cannot initiate any demand and recovery action against the first buyer.

Reason – As there is no supply, no tax liability arises against the supplier of a fake invoice. Accordingly, no demand and recovery proceedings under section 73 (i.e., non-fraud cases) and under section 74 (i.e., fraud cases) of the Central Goods and Services Tax Act, 2017 can be initiated against the supplier.

Can interest be imposed on the first buyer?

No, the department cannot impose interest on such supplier.

Reason – As tax cannot be demanded from the supplier, interest also cannot be imposed on such supplier.

Can a penalty be imposed on the first buyer?

Yes, the penalty can be imposed on the first buyer.

Reason – The first buyer here has done two fraudulent activities i.e., issuance of invoice without actual supply of goods or services or both and availing/ utilizing input tax credit without actual receipt of goods or services or both. Accordingly, he will be penalized under the following two sections - 

  1. Section 122(1)(ii) for issuing tax invoice without actual supply of goods or services or both to the subsequent buyer; and
  2. Section 122(1)(vii) for avails/ utilizes input tax credit without actual receipt of goods or services or both from the original supplier.

Penalty Provisions on the Subsequent Buyer

demand provisions for subsequent buyer

Here, the subsequent buyer has received the tax invoice; availed the input tax credit on the basis of said tax invoice; without actual receipt of goods or services or both.

Henceforth, all the demand, interest and penalty for fake Invoice in GST provisions as applicable to the first buyer while obtaining the tax invoice from the original supplier will get applicable to the subsequent buyer. That is - 
  • Demand proceedings can be initiated, due to contravention of the provision of section 16(2)(b), under section 74;
  • Interest can be imposed under section 50;
  • The penalty for fake invoice in GST can be levied under section 74 or under any other section, as the case may be.

Penalty for Fake Invoice in GST : Actions & Provisions

As clarified vide circular no. 171/03/2022- GST dated 6th July 2022, the following actions can also be taken

  1. Imposition of penalty for fake Invoice in GST under section 122(1A) on any person who has retained the benefit of the transaction and at whose instance the transaction was concluded.
  2. Action under section 132 can be initiated for -
    • Fraudulent availment/ utilization of input tax credit; or
    • Issuance of tax invoice without actual supply of goods or services or both which resulted into fraudulent availment/ utilization of input tax credit.

Applicability under Fake Invoice Transaction

Person

Possible demand, interest and penalty

Original supplier

  • No tax demand;
  • No interest; and
  • Penalty imposable under section 122(1)(ii).

First buyer

  • Demand of tax under section 74;
  • Interest payable under section 50; and
  • Penalty imposable either under section 74 or any other section (penalty can be imposed only once).

First buyer (when issues tax invoice to the subsequent buyer)

  • No tax demand;
  • No interest; and
  • Penalty imposable under two sections i.e. section 122(1)(ii) and section 122(1)(vii).

Subsequent buyer

  • Demand of tax under section 74;
  • Interest payable under section 50; and
  • Penalty imposable either under section 74 or any other section (penalty can be imposed only once).

Any other involved person

  • Penalty imposable under section 122(1A).
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CA Poonam Gandhi

About the author

Poonam Gandhi is a Chartered Accountant and a Lawyer, with practical experience of 9+ years in the field of Indirect Taxation.

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