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CBIC Clarification on various issues relating to applicability of demand and penalty provisions under CGST Act, w.r.t transaction involving fake invoices

CBIC issued demand and penalty for fake invoice

Circular No. 171/03/2022-GST Dated the 6th July, 2022

Clarification  on  various  issues  relating  to  applicability  of  demand  and  penalty provisions under the Central Goods and Services Tax Act, 2017 in respect of transactions involving fake invoices

A  number  of  cases  have  come  to  notice  where  the  registered  persons  are  found  to  be involved in issuing tax invoice, without actual supply of goods or services or both(hereinafter referred to as “fake invoices”), in  order  to  enable  the  recipients  of  such  invoices  to  avail  and utilize input tax credit (hereinafter referred to as “ITC”) fraudulently. Representations are being received from the trade as well as the field formations seeking clarification on the issues relating to applicability of demand and penalty provisions under the Central Goods and Services Tax Act, 2017 (hereinafter referred to as “CGST Act”), in respect of such transactions involving fake invoices. In order to clarify these issues and to ensure uniformity in the implementation of the provisions of law across the field formations, the Board, in exercise of its powers conferred by section 168 (1) of the CGST Act, hereby clarifies the issues detailed hereunder.

Sr. No.

Issues

Clarification

 

In case where a registered person “A” has   issued   tax   invoice   to   another registered  person  “B”  without  any underlying    supply    of    goods    or services    or    both,    whether    such transaction    will    be    covered    as “supply”  under  section  7  of  CGST Act  and  whether  any  demand  and recovery  can  be  made  from  ‘A’  in respect  of  the  said  transaction under the provisions of section 73 or section 74 of CGST Act. Also, whether any penal action can be taken against registered person ‘A’ in such cases.

Since there is only been an issuance of tax invoice by the registered person ‘A’ to registered  person  ‘B’  without  the underlying supply of goods or services or both, therefore, such an activity 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 such tax invoice in terms of the provisions of section 7 of CGST Act, no tax liability arises against ‘A’ for the said transaction, and accordingly, no demand and recovery is required to be made against ‘A’ under the provisions of section 73 or section 74 of CGST  Act  in  respect  of  the  same. Besides,   no   penal   action   under   the provisions of section 73  or  section  74  is required to be taken against ‘A’ in respect of the said 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  actual  supply  of goods or services or both.

 

A registered person “A” has issued tax   invoice   to   another   registered person  “B”  without  any  underlying supply  of  goods  or  services  or  both. ‘B’ avails input tax credit on the basis of  the  said  tax  invoice.  B  further issues  invoice  along  with  underlying supply of goods or services or both to his buyers and utilizes ITC  availed on the   basis   of   the   above   mentioned invoices issued by ‘A’,  for payment of  his  tax  liability  in  respect  of  his said outward supplies.  Whether ‘B’ will  be  liable  for  the  demand  and recovery  of  the  said  ITC,  along  with penal  action,  under  the  provisions  of section 73 or section 74 or any other provisions of the CGST Act.

Since  the  registered  person  ‘B’  has availed and utilized fraudulent ITC on the basis  of  the  said  tax  invoice,  without receiving the goods or services or both, in contravention of the provisions of section 16(2)(b) of CGST Act, he shall be liable for  the  demand  and  recovery  of  the  said ITC,  along  with  penal  action,  under  the provisions of section 74 of the CGST Act, along   with   applicable   interest   under provisions of section 50 of the said Act. Further,   as   per   provisions   of   section 75(13)  of  CGST  Act,  if  penal  action  for fraudulent availment or utilization of ITC is taken against ‘B’ under section 74 of CGST  Act,  no  penalty  for  the  same  act, i.e.  for  the  said  fraudulent  availment  or utilization of ITC, can be imposed on ‘B’ under any other provisions of CGST Act, including under section 122

 

A registered person ‘A’ has issued tax   invoice   to   another   registered person ‘B’  without  any  underlying supply  of  goods  or  services  or  both. ‘B’ avails input tax credit on the basis of  the  said  tax  invoice  and  further passes  on  the  said  input  tax  credit  to another  registered  person  ‘C’  by issuing  invoices  without  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.

In this case, the input tax credit availed by ‘B’ in his electronic  credit  ledger  on  the basis of tax invoice issued by ‘A’, without actual receipt of goods or services or both, has been utilized by ‘B’ for passing on of input tax credit by issuing tax invoice to ‘C’  without  any  underlying  supply  of goods or services or both. As there was no supply of goods or services or both by ‘B’ to ‘C’ in respect of the said transaction, no tax  was  required  to  be  paid  by  ‘B’  in respect  of  the  same.  The  input  tax  credit availed  by  ‘B’  in  his  electronic  credit ledger  on  the  basis of  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  said  transaction and  also  no  tax  was required to be paid in respect of the said transaction.  Therefore,  in  these  specific cases,  no demand  and  recovery  of  either input   tax   credit   wrongly/fraudulently availed by ‘B’ in such case or tax liability in respect of the said outward transaction by ‘B’ to ‘C’ is required to be made from ‘B’ under the provisions of section 73 or section 74 of CGST Act. However, in such cases, ‘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  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 which may involve complex mixture of above scenarios or even  may  not  be  covered  by  any  of  the  above  scenarios. Any  person  who  has  retained  the benefit of transactions specified under sub-section (1A) of section 122 of CGST Act, and at whose instance such transactions are conducted, shall also be liable for penal action under the provisions  of  the  said  sub-section.  It  may  also  be  noted  that  in  such  cases  of  wrongful/ fraudulent availment or utilization of input tax credit, or in cases of issuance of invoices without supply of goods or services or both, leading to wrongful availment or utilization of input tax credit  or  refund  of  tax,  provisions  of  section  132  of  the  CGST  Act  may  also  be  invokable, subject to conditions specified therein, based on facts and circumstances of each case.

It is requested that suitable trade notices may be issued to publicize the contents of this Circular.

Difficulty, if any, in implementation of the above instructions may please be brought to the notice of the Board. Hindi version would follow.

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