Fake invoicing under the GST- a bigger challenge ahead

02-08-2022 CA Anil Kumar Bezwada

GST has completed 5 years now. Issuance and circulation of fake invoices among companies without actual supply of goods and irregular transfer of input credit to originating companies for payment of GST is contemporary & burning issue. One of key challenges in GST is devising a mechanism to identify & curb issuers of fake invoices at the time of GST Registration itself. Huge amount of public money misappropriated under this scam every year. I am sure it will not be possible for the Government to completely eradicate this menace because in our Society generation of the cash is very much essential for the reasons known to everybody.


The impact & implications of this fake invoice issue are multi-facet like evasion of Income Tax, creation of a turnover on paper for availing the Loans from Banks & subsequent misappropriation/diversions, increasing the corruption among the bureaucrats and politicians, money laundering in some cases e.t.c. The provisions of Section 122 (1) of the CGST Act, 2017 says that where a taxable person issues any invoice without supply of goods or services or both, takes or utilizes input tax credit without actual receipt of goods or services or both shall be liable to pay a Penalty equal to the GST amount evaded.


Recently, the Board vide Circular No. 171/03/2022-GST dated 06.07.2022 issued clarification on various issues relating to applicability of demand of GST and penalty provisions under the GST Act, 2017 in different scenarios in respect of transactions involving fake invoices as explained under:-



Case -1 Where the person issues just an invoice without supply of goods

Where the person issues just an invoice without actual supply of goods, no tax liability arises against such person for the said transaction and accordingly no demand and recovery proceedings shall be initiated against such person under section 73 or 74 of the CGST Act, 2017 as there is no underlying supply. However, he shall be made liable to Penalty under section 122(1)(ii) for issuing tax invoice without actual supply which is equal to wrong ITC passed.

Case 2: Where a person avails ITC on fake invoices and such ITC used for payment

of his output tax liability in respect of his genuine sales

The person availed and utilized fraudulent ITC on the fake invoice, he shall be liable for the demand of such ITC, along with Penalty under section 74 of the CGST Act & no further penalty under section 122 shall be imposed.

Case 3: Where a person avails ITC on fake invoices and issued the fake invoice for passing such credit (Circular Trading)

No demand and recovery of either input tax credit wrongly/ fraudulently availed in such case or tax liability in respect of the said outward transaction is required to be made under the provisions of section 73 or section 74 of CGST Act as there is no underlying supply at all.

However, this person shall be liable for penal action both under section122(1)((ii) and section 122(1)(vii) of the CGST Act which is equivalent wrong ITC availed as well as ITC passed.

Can Government impose Penalty twice for both availing wrong as well as passing such ITC. To my mind it appears availing wrong is one offence and passing such wrong credit is another offense and hence liable for penalty twice. Therefore, in my humble view the concept of ‘double jeopardy’ under Article 20(2) of the Constitution is not applicable as both are separate offenses though they inter-connected and committed one after and another.

Further the adjudication proceedings before the GST Authorities are not `prosecution’ within the meaning of Article 20(2) of the Constitution, the prohibition against `double jeopardy’ would not be applicable. However the issue is debatable.

However, in my humble view intermediaries who issued the fake invoices for small commissions cannot be saddled with the huge penalty equal to tax as their commissions may be lesser than fake credits passed on. What I am saying is that the intermediaries cannot be equated with real beneficiaries, who enjoyed, ultimately benefitted the fake ITC and thereby caused huge loss to the public money. Compared to the person who enjoyed the fake credits by adjusting against their genuine output tax liability, some concession in the penalty amount shall be provided maximum up to their Commission amount so that they do not repeat the Offense again.    


There are lot of cases pending at the investigation stage, the above-Board Circular clarified that when there is no underlying supply, there is no question of recovery of GST. The above fundamental principle helps the GST department issuing the show cause notices as well as intermediary to come out of the proceedings on Tax demands.  


The persons who committed the above offenses also liable for imprisonment/sentence under section 132 of the GST Act for period up to 5 years. However, considering the way the prosecution proceedings go in our Country, infrastructure available, huge burden of pending cases at the Courts it is practically impossible for Government to bring the logical end for the prosecution proceedings against the offender. In my professional career, I have never seen a Tax Offender who awarded the punishment. However, this provision would act as threating measure against the Offenders not to commit the Offenses.


Various questions, concerns, technical questions involved in fake invoicing cases have been pending at various Courts including Supreme Court. I do not think for this dangerous issue Courts would provide the solution because in worst case maximum Court order for 5 years imprisonment. GST department only through machine learning, Artificial intelligence, other tools, rigorous KYC verification at the time of granting the registration itself can curb this dangerous menace.