GST Update No 235 on circular issued for fake invoices

The GST law was introduced to make compliances digitized so that the cases of fake invoices could be eliminated. The implementation of the concept of e-way bill and e-invoices is an initiative in this regard. However, the disputes related to instances of “invoice without supply” or “supply without valid GST invoice” are commonly observed. It is observed that in fake invoice cases, often the revenue department slaps show cause notices to every supplier in the credit chain but whether recovery of demand of tax is to be made from each of the supplier is the moot question which remains unanswered. Recently, CBIC has issued a CIRCULAR NO. 171/03/2022-GST DATED 06.07.2022 clarifying applicability of demand and penalty provisions on the transactions involving fake invoices. The present update seeks to discuss the aforesaid circular.

The recent circular discusses applicability of penalty and demand provisions on following issues in respect of fake invoices issued by one registered person to another, thereby highlighting the consequences of “invoice without supply”: -

1.      Registered person “A” issues tax invoice to registered person “B” without supply goods. Whether the transaction be treated as “supply” under Section 7 of CGST Act, 2017 and whether any demand, recovery and penal actions can be initiated against “A”- It is clarified by CBIC that since only tax invoice is issued by “A” to “B” without any actual supply of goods, the above   transaction does not fall under the definition of supply under Section 7 of CGST Act, 2017. Since there is no supply, no tax liability arises against “A” and accordingly, no demand and recovery can be initiated against “A” in accordance with provisions of Section73 and 74 of CGST Act, 2017. However, he shall be liable for penal action under Section 122 of CGST Act,2017.

2.      Registered person “A” issues tax invoice to registered person “B” without supply goods. “B” availed input tax credit on the basis of tax invoice and utilised the same against discharging output tax liability. Whether “B” will be liable for demand and recovery of ITC along with penal action under Section 73 and 74 of CGST Act, 2017 – It is clarified that “B” has availed and utilised ITC fraudulently without actual receipt of goods and thereby contravened the provisions of Section 16(2)(b) of CGST Act, 2017. Therefore, he shall be liable to pay back wrongly availed ITC under Section 74 of CGST Act, 2017 along with applicable interest under Section 50 of CGST Act, 2017. Furthermore, as per Section 73(13) of CGST Act, 2017, if penal action is initiated against Section 74 of CGST Act, 2017, no penalty can be imposed under Section 122 of CGST Act, 2017.

3.      Registered person “A” issues tax invoice to registered person “B” without supply goods. “B” availed input tax credit on the basis of tax invoice and passed on ITC to “C” by issuing invoice without supply of goods. Whether demand and penalty can be initiated against “B” under Section 73 or 74 of CGST Act, 2017- The CBIC seeks to clarify that no tax liability is attracted on “B” since there is no supply of goods to “C”. However, ‘B’ shall be liable for penal action both under section 122(1)((ii) and section 122(1)(vii) of the CGST Act, for issuing invoices without any actual supply of goods and/or services as also for taking/ utilizing input tax credit without actual receipt of goods and/or services.

The above circular seeks to clarify various instances of fake invoices and consequences to be faced by the parties dealing in fake invoices. Although it is well settled that in case due diligence has been exercised appropriately by the recipient taxpayer and goods have been further supplied under the cover of proper invoice, no penal action can be taken against the bonafide taxpayer. This is backed by various judicial pronouncements such as decision of Orissa High Court in the case of M/S BRIGHT STAR PLASTIC INDUSTRIES V/S ADDITIONAL COMMISSIONER OF SALES TAX (APPEAL) & ORS. The above clarification is a sigh of relief for the taxpayers as far as the confusion regarding recovery of tax along with interest is concerned from the recipient in the supply chain because it appeared that department would recover the tax along with interest from all the persons in the supply chain. It is hoped that the clarification issued by this circular is scrupulously followed by the departmental authorities.

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GST Update No 235 on circular issued for fake invoices

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