Demand and Penalty for Issuance of Bogus Invoices under GST

Consult experienced GST consultants or CAs in Udaipur for the legal implications, penalty, demand and consequences for issuing bogus invoices under GST law.

Introduction

The issuance of bogus invoices without the actual supply of goods or services has become a growing concern in the business ecosystem. Such practices are primarily undertaken to claim ineligible Input Tax Credit (ITC) fraudulently, thereby evading tax liabilities. To address these issues, the Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 171/03/2022-GST dated July 6, 2022, clarifying the legal position regarding demand, recovery, and penalties in such cases. Experienced GST consultants or CAs in Udaipur explores the relevant provisions under the GST law, quoting pertinent sections, rules, and examples to provide a comprehensive understanding of the subject.

Definition of Bogus Invoices

A bogus invoice typically refers to an invoice issued without the actual supply of goods or services. These invoices are often used to:

  1. Fraudulently claim ITC by the recipient.
  2. Inflate turnover figures.
  3. Evade tax payments or provide benefits to related entities.

Key Legal Provisions under GST Law

  1. Section 7 of the CGST Act, 2017: Defines ‘supply’ as including all forms of supply of goods or services for consideration in the course or furtherance of business.
    • Relevance: If no actual supply occurs, such transactions do not qualify as ‘supply’ under this section.
  2. Section 73 and Section 74 of the CGST Act, 2017: Deal with demand and recovery provisions for tax short-paid or not paid due to bona fide mistakes or fraud, respectively.
    • Relevance: In cases of bogus invoices without actual supply, there is no tax liability; hence, no recovery can be made under these sections.
  3. Section 122(1)(ii) of the CGST Act, 2017: Prescribes penalties for issuing invoices without the actual supply of goods or services.
    • Penalty: A penalty of Rs. 10,000 or an amount equivalent to the tax evaded, whichever is higher.
  4. Rule 86A of the CGST Rules, 2017: Provides powers to GST officers to block ITC in cases of fraudulent claims.
    • Relevance: ITC claimed using bogus invoices can be restricted.

Key Clarifications from Circular No. 171/03/2022

The circular categorizes scenarios into three types to address demand, penalty, and recovery in cases of bogus invoices:

Scenario 1: Invoice Issued Without Actual Supply by Registered Person ‘A’

  • Facts: ‘A’ issues an invoice to ‘B’ without any supply of goods or services.
  • Clarification:
    • Supply Status: Such transactions do not qualify as ‘supply’ under Section 7.
    • Demand and Recovery: No proceedings under Section 73 or 74 can be initiated since no tax liability arises.
    • Penalty: Penal provisions under Section 122(1)(ii) apply.

Scenario 2: Fraudulent ITC Claimed by Registered Person ‘B’

  • Facts: ‘B’ claims ITC based on a bogus invoice issued by ‘A’.
  • Clarification:
    • Demand and Recovery: Proceedings under Section 73 or 74 can be initiated against ‘B’ for ITC wrongly availed.
    • Penalty: Penalty under Section 122(1)(vii) for fraudulent ITC claims.

Scenario 3: Circular Flow of Transactions Among Multiple Parties

  • Facts: Involves a network of entities issuing bogus invoices without actual supply.
  • Clarification:
    • Demand and Recovery: Action can be taken against parties availing or passing ITC fraudulently.
    • Penalty: Penalties apply to all parties under relevant provisions.

Powers of GST Officers

  1. Investigation: Officers can initiate investigations based on suspicious transaction patterns or ITC mismatches.
  2. Audit and Inspection: Conduct audits under Section 65 and inspections under Section 67 to detect bogus transactions.
  3. Blocking of ITC: Use Rule 86A to block fraudulent ITC claims.
  4. Attachment of Property: Provision under Section 83 for provisional attachment of assets.

Examples of Bogus Invoice Scenarios

  1. Single-Party Involvement:
    • Situation: A registered person issues an invoice to inflate turnover without actual supply.
    • Outcome: Penalty under Section 122(1)(ii).
  2. Multiple Parties Involved:
    • Situation: A chain of entities issues bogus invoices to pass ITC.
    • Outcome: Demand and penalty for each party involved in fraudulent ITC claims.
  3. Shell Companies:
    • Situation: Bogus entities created solely for issuing fake invoices.
    • Outcome: Cancellation of GST registration, demand for ITC reversal, and penalties.

Penalty Proceedings

  1. Penalties for Issuers (Section 122):
    • Minimum Rs. 10,000 or equivalent to the tax evaded.
    • Additional penalties under other sections for repeated offenses.
  2. Penalties for Claimants (Section 122 & Section 132):
    • Penalty for fraudulent ITC claims.
    • Imprisonment for offenses involving significant tax evasion (Section 132).
  3. Compounding:
    • Option available for compounding offenses under Section 138.

Preventive Measures

  1. Regular Audits: Conduct internal audits to ensure compliance.
  2. Vendor Verification: Verify the authenticity of suppliers before claiming ITC.
  3. Training: Educate staff about GST provisions and risks of bogus invoices.

Conclusion

Issuance and use of bogus invoices not only disrupt the tax ecosystem but also attract stringent legal consequences under GST law. Businesses must adhere to compliance norms, conduct thorough vendor checks, and maintain accurate records to avoid penalties. By Consulting the experienced GST consultants or CAs in Udaipur about the provisions and clarifications from the issued by CBIC, taxpayers can mitigate risks and contribute to a transparent and fair taxation system.

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