GST UPDATE No 237 ON ANALYSIS OF CIRCULAR ON FAKE INVOICES:-

It has been commonly observed that revenue authorities often raise demand of tax, interest and penalties on every supplier in the fake invoice racket chain. It was represented by the trade and industry to the government that suitable measures should be taken to ensure that the revenue authorities are not resorting to recovery of demand along with penalties from all the persons involved in the fake invoice chain. It appears that the government has realised that the officials need to understand on whom the demand of tax, interest and penalty is to be raised in the fake invoice racket. The analysis of the clarification issued vide CIRCULAR NO. 171/03/2022-GST DATED 06.07.2022 is the subject matter of discussion of our present update. Our earlier update explaining the contents of the circular can be accessed at the following link Update No. 235 on circular issued for fake invoice.

NAME OF SUPPLIER	WHETHER ACTUAL SUPPLY OF GOODS?	WHETHER RECOVERY OF DEMAND UNDER SECTION 73/74	WHETHER PENALTY UNDER SECTION 122	REMARKS
TRADER A	No	No, as there is no supply of goods.	Yes, penalty under section 122(1)(ii) for issuance of tax invoice without actual supply of goods.	As, A is the starting point in fake invoice racket, only penalty under section 122(1)(ii) would be leviable. No penalty for availment of fraudulent credit under section 122(1)(vii).
TRADER B	No	No, as there is no supply of goods.	Yes, penalty under section 122(1)(ii) for issuance of tax invoice without actual supply of goods. Also, penalty under section 122(1)(vii) for availing or utilising input tax credit without actual receipt of goods either, fully or partially.	Penalty under section 122(1)(ii) and 122(1)(vii).
MANUFACTURER C	Yes	Yes, department will recover the wrongly availed credit utilised for discharging output tax liability under section 74 along with interest under section 50 and applicable penalty under section 74 on actual supply of Aluminium ingots.	No penalty under section 122 because as per section 75(13), if penalty has been imposed under section 73/74 then no penalty can be imposed for same default under any other provision of the CGST Act.	Recovery of demand of ITC along with interest applicable as goods have been actually supplied by C thereby attracting GST liability on supply of aluminium ingots. However, as fake invoice credit is utilised, it results into loss of tax to the government on output supplies.

KEY TAKEAWAYS FROM THE ABOVE EXAMPLE:-

1. The trader merely involved in passing on the fake invoice credit earned without actual supply of goods will not be fastened with the recovery provisions as there will be loss of revenue to the government only when there is supply of goods attracting GST liability for which such fake credit has been utilised. Now, the question arises is whether recovery of ITC was possible if in the above example, C is trader but supplies scrap by purchasing from market to D? The answer would be “Yes” because the transaction would lead to loss of revenue by short payment of GST on the supply of scrap by D. Hence, it would not really matter if the actual supply of goods is being made by trader or manufacturer.

2. If in the example, C is a trader of scrap. However, C utilises the credit earned by it from fake invoices partially on the actual supply of goods and partially on mere invoices issued for passing fake invoice credit earned. The situation is not covered by the clarification as there is possibility that the entire fake invoice credit has not been passed on as it is basis but is being utilised for discharging GST liability on actual supply of goods. In such a case, C would be at disadvantageous position as the department would demand entire ITC earned and so the benefit claimed by Trader A and B by invocation of only penalty provisions under section 122 would not be available to C.

3. Whether department can still recover tax/interest or levy penalties on suppliers D to M when the department has made recovery of fake invoice credit utilised by manufacturer C along with interest and penalty under section 73/74 of the CGST Act? In our opinion, once the transaction has been regularised by actual supply of goods in case of fake invoice racket chain, the subsequent suppliers should not be issued notices for recovery of tax/interest or penalties under either of the sections. However, it is commonly observed that the department catches supplier M and invokes the provisions of section 73/74 for recovery of tax/interest and penalty. On the contrary, reality is that supplier M is a bonafide supplier availing and utilising credit on the strength of valid GST invoice and actual receipt of goods. It is irony that the clarification issued by the circular would be extremely difficult to be implemented in practical scenario as department is not able to trace the point where the transaction has been regularised, as stated in our example to be at point of sale by manufacturer C.

In order to better understand the various points, we hereby present a diagrammatic presentation of the various suppliers in the fake invoice chain:

We submit that thereafter, the transaction of supply of aluminium ingots by the trader D to E was regularised. The transaction of supply went upto Trader M in the chain.

Now, we make the following observations in light of the clarification issued by the CBIC:-

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GST UPDATE No 237 ON ANALYSIS OF CIRCULAR ON FAKE INVOICES:-

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