CBIC Issues Clarification On Applicability of GST Demand And Penalty For Transactions Involving Fake Invoices

A number of cases have come to light in which registered people were found to be involved in submitting tax bills without really supplying goods or services, or both, in order for the recipients of such invoices to illegally avail and utilise ITC.

The CBIC has received representations from the trade as well as the field formations seeking clarification on the issues relating to the applicability of demand and penalty provisions in respect of transactions involving fake invoices.

In order to ensure uniformity in the implementation of the provisions of the law across the field formations, the Board, in the exercise of its powers conferred by section 168 (1) of the CGST Act, has issued clarifications.

The issue raised was whether a registered person "A" has issued a tax invoice to another registered person "B" without any underlying supply of goods or services or both, and whether such a transaction will be covered as "supply" under section 7 of the CGST Act. Whether any demand and recovery can be made from "A" in respect of the transaction under the provisions of section 73 or section 74 of the CGST Act.

The Board clarified that only the issuance of a tax invoice by the registered person "A" to registered person "B" without the underlying supply of goods or services or both does not satisfy the criteria of "supply," as defined under section 7 of the CGST Act. As there is no supply by 'A' to 'B' in respect of a tax invoice in terms of the provisions of section 7 of the CGST Act, no tax liability arises against 'A' for the transaction. Accordingly, no demand and recovery is required to be made against 'A' under the provisions of section 73 or section 74 of the CGST Act. Besides, no penal action under the provisions of section 73 or section 74 is required to be taken against "A" in respect of the transaction.

The registered person "A" shall, however, be liable for penal action under section 122 (1) (ii) of the CGST Act for issuing tax invoices without the actual supply of goods or services or both.

Yet another issue raised was: a registered person "A" has issued a tax invoice to another registered person "B" without any underlying supply of goods or services or both. ITC is available on the basis of the tax invoice. B further issues an invoice along with the underlying supply of goods or services or both to his buyers and utilises ITC available on the basis of the invoices issued by "A" for payment of his tax liability in respect of the outward supplies. Whether 'B' will be liable for the demand and recovery of the ITC, along with penal action, under the provisions of section 73 or section 74 or any other provisions of the CGST Act.

The Board clarified that the registered person "B" has availed and utilised fraudulent ITC on the basis of the tax invoice, without receiving the goods or services or both, in contravention of the provisions of section 16(2)(b) of the CGST Acts. "B" shall be liable for the demand and recovery of the ITC, along with penal action, under the provisions of section 74 of the CGST Act, along with applicable interest under the provisions of section 50. As per provisions of section 75(13) of the CGST Act, if penal action for fraudulent availment or utilisation of ITC is taken against "B" under section 74 of the CGST Act, no penalty for fraudulent availment or utilisation of ITC can be imposed on "B".

Furthermore, clarification was sought on the issue that a registered person "A" has issued a tax invoice to another registered person "B" without any underlying supply of goods or services or both. "B" avails ITC on the basis of the tax invoice and further passes on the input tax credit to another registered person "C" by issuing invoices without an underlying supply of goods or services or both. Whether 'B' will be liable for the demand and recovery and penal action under the provisions of section 73 or section 74 or any other provisions of the CGST Act remains to be seen.

The CBIC clarified that as there was no supply of goods or services or both by 'B' to 'C' in respect of the transaction, no tax was required to be paid by 'B'. The ITC availed by 'B' in his electronic credit ledger on the basis of a tax invoice issued by 'A', without actual receipt of goods or services or both, is ineligible in terms of section 16 (2) (b) of the CGST Act. In this case, there was no supply of goods or services or both by 'B' to 'C' in respect of the transaction, and also no tax was required to be paid in respect of the transaction. Therefore, no demand and recovery of either ITC fraudulently availed by 'B' or tax liability in respect of the outward transaction by 'B' to 'C' is required to be made from 'B' under the provisions of section 73 or section 74 of the CGST Act.

The fundamental principles that have been delineated in the above scenarios may be adopted to decide the nature of demand and penal action to be taken against a person for such unscrupulous activity.

Actual action to be taken against a person will depend upon the specific facts and circumstances of the case. Any person who has retained the benefit of transactions specified under sub-section (1A) of section 122 of the CGST Act, and at whose instance such transactions are conducted, shall also be liable for penal action.

Circular No. 171/03/2022-GST

Dated: 06.07.2022

Click Here To Read/Download Circular