TAX INVOICES AND FAKE INVOICES IN GST

What is Tax invoice? [Section 2(66)]

Section 2(66) of CGST Act, 2017 defines the meaning of tax invoice as follows:

(66) 'Invoice' or 'tax invoice' means the tax invoice referred to in section 31.

As per section 2(66) read with section 31 of the CGST Act, 2017, invoice 'tax invoice' is required to be issued by a registered person showing description of goods and/or services, value, tax charged and other particulars at the time of supply. It is a document evidencing supply of goods and/or services which becomes the basis for charge of tax.

According to explanation provided under section 31 of the CGST Act, 2017 'tax invoice' shall also include any revised invoice issued by the supplier in respect of a supply made earlier. Debit notes and credit notes are separately dealt with in section 34 of the Act.

Invoice or tax invoice is a document which provides evidence of existence of transaction of supply of goods and/or services. Tax invoice issued by the registered taxable person is an essential document to establish time of supply and for the recipient of goods and/or services to avail input tax credit. The matching of transactions of inwards and outward supplies is also done on the basis of tax invoice.

It is mandatory for every registered person to issue a tax invoice in terms of section 31 read with Rule 46 of CGST Rules, 2017, as amended.

As per section 31(1) of the CGST Act, 2017, a registered taxable person supplying taxable goods shall issue, before or at the time of supply, a tax invoice showing the description, quantity and value of goods, the tax charged thereon and other prescribed particulars.

Therefore, a registered taxable person supplying taxable goods shall issue a tax invoice-

(a) before or at the time of supply,

(b) tax invoice should show-

(i) the description, quantity and value of goods,

(ii) tax charged thereon, and

(iii) other details.

A registered person can only issue a tax invoice before or at the time of supply of goods. Thus, determining the time of supply of goods is important.

What is Fake Invoice?

The term 'fake invoice' is not defined in CGST law. However, Fake invoice refers to a 'Non-compliant GST invoice'.

'Non-compliant GST invoice' means any invoice which does not comply with the provisions of the CGST Act and Rules, 2017. Usually, 'fake invoice' refers to a non-compliant GST invoice of the following types:

1. Invoice without any 'supply'

2. Invoice with a 'Non-compliant' supply.

The 'Invoices' that are usually treated as 'fake' are those wherein the GST invoices are raised by an entity without actual supply of goods or services or payment of GST. There are three ways in which such fake invoices could be misused in the GST regime.

1. Issue of invoices without supply of goods or services where payment of tax is made by way of Input Tax Credit which is not available to the issuer of invoice. In such cases, there is no receipt of goods or credit by the issuer of invoice. He merely issues invoices and shows payment of tax by non-existent input tax credit. This results in actual loss of revenue where the buyer of the invoice avails inadmissible credit which is used for payment of tax. There have also been instances where no GST has been paid even by input tax credit by the issuers of the fake invoice.

2. Issue of invoices by persons where the invoice is issued to one person and the goods are diverted to some other person. The person who purchases invoices may utilize the credit for payment of taxes at the time of export of goods and claim refund of the said tax paid, resulting in loss of revenue.

3. Routing of invoices through a series of shell companies/dummy companies and transfer of input tax credit from one company to another in a circular fashion to increase the turnover. In such cases, there is no supply of goods or services and thereby availment of credit based on such invoices gets hit by the provisions of Section 16 of the CGST Act, 2017, which stipulates that the conditions that to avail credit, the buyer should have an invoice on which tax has been paid and he should have received the goods. In such cases, availment of credit without receipt of goods is inadmissible and utilization of such credit for actual regular supplies results in loss of revenue and financial accommodation. In such cases, unscrupulous traders are utilizing the GSTN System to create invoices, fake e-way bills showing movement of goods etc., to defraud the revenue and the banking system.

In normal course, any fake invoice passes through a chain of fake invoice generators before it reaches the hands of recipient of goods or services who is actually involved in making an output supply.

Motive behind Fake Invoices

Any business or trade, who use 'fake invoice' earn input tax credit which is illegal and hence are liable for punishment under CGST law.

There could be following possible objectives which encourage fraudsters to indulge in issuing and using fake invoices:

• Evasion of GST on taxable output supplies by:

(a) Availing undue Input Tax Credit (ITC)

(b) Saving GST (cash) by payment of tax liability using undue Input Tax Credit (ITC)

(c) Clandestine supply without invoices and without payment of taxes

• Converting excess Input Tax Credit (ITC) into cash by:

(a) Transferring of Input Tax Credit (ITC) to those who can utilize it

(b) Shifting Input Tax Credit (ITC) from exempted supplies to taxable supplies\

(c) Encashment of Input Tax Credit (ITC) by way of IGST refund or unutilized Input Tax Credit (ITC) refunds

• Inflating turnover for the purpose of:

(a) Availing higher Credit Limit/Overdraft from Banks

(b) Obtaining bank loans

(c) Improving valuations for issue of capital or sale of stake

(d) Obtaining contracts including Government contracts

• Booking fake purchases for getting Income-tax benefits by:

(a) Showing reduced profit margins and higher expenses

(b) Avoiding payment of Income-tax by reducing net profit

• Cash generation/diversion of company funds
• Laundering of money

Possible reasons for issuing fake invoices

Following reasons can be cited for possible reasons or causes leading to issuance of fake invoices:

1. Prevalence of multiple GST tax rates including composition rates leading to rate disputes and classification disputes.
2. Avoidance of issuance of tax invoices
3. Lakh of knowledge and education among tax payer
4. Ignorance of law
5. Circulation of cash and black money in the system including trade and industry
6. Illegal availment of Input Tax Credit
7. Corruption
8. Greed for easy money and existence of fly by night operators
9. Non exemplary punishments

Data Analytics on GST Frauds

CBIC and GSTN have started detailed data analytics across a number of data sets available with them. The outcome of preliminary data analysis has revealed interesting insights such as:

• It has emerged that there is variance between the amounts of IGST & Compensation Cess paid by importers at Customs ports and input tax credit of the same claimed in GSTR-3B.
• There are major data gaps between self-declared liability in FORM GSTR-1 and FORM GSTR-3B.

The menace of fake or bogus invoices is so rampant in India these days that few cases get reported so frequently from any part of the country. Since GST is a tax law which is implemented, complied with and administered online, it becomes relatively easier for the tax regulators to find out transactions outside the system - unrecorded transactions unverified transactions outside the system and broken links. The route of fake or bogus invoices is resorted to avoid payment of tax, evasion of tax, record bogus transactions, fraudulent availment of input tax credit, or even inflating incomes, turnover, expenditure or input in the business or circular trading.

Large number of GST fraud cases involving the use of fake invoices for wrong availment of input tax credit (ITC), which is further used to pay GST on outward supply are being detected since the rollout of GST by the Central GST authorities as well as State GST authorities. Whereas the mensrea for the use of such fake invoices appears to be fraudulent availment /encashment of Input Tax Credit (ITC), the unscrupulous entities engaged in this also defraud other authorities such as Banks by inflating turnovers, laundering of money etc.

Ethics, integrity and transparency are fundamental pillars of any fiscal or tax system and so is the case with Goods and Services Tax law. To the core of this principle, is the provision contained in section 31 of the CGST Act, 2017 in relation to issuance of tax invoices by registered persons. Accordingly, every registered person is required to issue a tax invoice for the supply of goods or services. Invoices serve as crucial documents for various purposes. They are essential for claiming input tax credits, maintaining accurate Financial Records, facilitating audits, and resolving disputes between parties.

The deceptive practice of fake invoices erodes the confidence and trust of all stakeholders in the system, more so of honest taxpayers.

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