Tax Evasion Through Fake Invoices & Actions by Government

The fake invoices are those invoices where the GST invoices are raised by an entity without payment of GST or actual supply of goods/services.

Fake invoices are raised for these purposes:

  1. Claiming undue excess ITC
  2. For showing excess turnover
  3. Without any actual supply, transfer of credit from one registration to another
  4. Other reasons.

These are some ways in which such fake invoices could be misused in the GST Regime:

I. Issue invoice without the supply of goods or services where payment of tax is made by using ITC.

II. Issue invoice to one party and divert the goods to another party. The person who purchases invoices may utilize the credit for payment of taxes at the time of export of goods & claim a refund of the said tax paid, resulting in revenue loss.

III. Routing of invoices through a series of dummy companies and transfer of ITC from one company to another in a circular manner to enhance the turnover.

What are the Benefits to various parties?

For Retailers/First Party:

  1. Gets commission for issuing an invoice to the fake company
  2. No sales variance issues invoice equal to cash sales [less risk]
  3. Increased bank transaction which would indirectly help the retailer to get many of banking facilities such as loan, OD, cash credit, etc.,
  4. No mismatch between GSTR-2A & GSTR-3B as the retailer has uploaded the invoices by filing his GSTR-1.

For Fake Company:

  1. Gets commission on a fake invoice by passing the credit to genuine company
  2. No identity & dissolves soon after target transaction done
  3. Under GST presence all over India, it makes fake companies work PAN India basis

For ABC Company:

  1. Utilizes the ITC and pays less tax to the government saving in the outflow of cash.
  2. Makes bank payment claims as the expense of purchase invoice and receives back the cash thereby saves income tax liability.
  3. Converting excess ITC into cash
  4. No mismatch between GSTR-2A and GSTR-3B credit as the fake company has loaded the invoices by filing GSTR-1

What are the Measures were taken by the Government?

1.  By inserting various provisions:

Section 16(2) Conditions:

A registered person can claim ITC of tax paid on supply of goods or services or both only if:

  1. He/She is in possession of Tax invoice, debit note or any other taxpaying document,
  2. He/She has received the goods or services or both,
  3. The tax charged from the supplier side has been paid to the government, and
  4. He/She has furnished the return.

Rule 36(4) – Restriction of Availment Of Credit

CGST Rules- Rule 36(4)  provides restriction on availment of eligible ITC wherein the recipient could avail eligible ITC in GSTR-3B, not in excess of 20% (from 09/10/2019 to 31/12/2019) or 10% (from 01/01/2020) further amended to 5% (from 01/01/2021] vide Notification No. 94/2020 CT on 23/12/2020 as applicable of eligible ITC appearing in the GSTR-2A of such recipient.

This rule has failed to take control the fake invoice scam as in all the stages of the fake invoice scam the parties GSTR-2A and GSTR-3B credit agree each level and there would be no disparity as these involved parties GSTR-2A and GSTR-3B match 100%.

E-Invoicing provisions

The GOI has made e-invoicing provisions compulsory for taxpayers having turnover greater than INR 500 Crore with effect from 1/10/2020 vide N/No. 61/2020 – CT dated 30th July, 2020. Further, another notification namely, N/No. 88/2020 – CT dated 10th November, 2020, has made E-Invoicing mandatory for taxpayers having turnover greater than INR 100 Cr with effect from 01/01/2020.

Will the E-Invoicing eliminate the fake invoicing fraud?

Generally retailers issues a postdated tax invoice to fake company once all the cash sales concluded for the month for the same value he/she would issue tax invoice to fake company.

Tax evasion by moving the goods without invoice could be eliminated or reduced by E-invoicing provisions however E-invoicing may not be effective for eliminating or reducing the fake invoicing as E-invoice could be generated without movement of goods. So, fraudster would continue to operate under E-invoice regime also.

Rule 86B

This rule is new and w.e.f. 01 January, 2021

Payment of taxes through the utilization of balance from electronic credit ledger has been restricted up to 99% of such tax liability in the case where the value of taxable supply other than exempt supply and zero-rated supply, in a month, INR 50 lacs with effect from 1st January 2021

This rule overrides all other rules

  • This rule applicable only on in case taxable supply exceeds INR 50 Lacs in a month [exports and exempt supply not included]
  • 1% of such output liability should be paid in cash
  • Such liability does not include the tax liability under the RCM (reverse charge mechanism)

Provison to Rule 86B –

This rule not to Apply in certain cases: –

(a) The said person or the proprietor or the MD or any of its two partners, full-time Directors, Members of Managing Committee of Associations or Board of Trustees, as the case may be, have paid more than INR 1 lac as income tax under the Income-tax Act, 1961(43 of 1961) in each of the last two FY for which the time limit to file ITR under subsection (1) of section 139 of the said Act has expired; or

Notes:

  • Income tax paid includes Advance and self-advance tax paid, and also tax deducted at the source which is adjusted for total income tax payable.
  • The motto of this provision is where the fake company is created with the use of fake profiles and proofs, said unknown profiles would not have paid any tax liability. Fake invoice normally involves the large amount for them paying tax of INR 1 lac would arduous.
  • A further condition that tax should be paid for 2 preceding FY is a great move because creating the fake profiles with two years of records would difficult for fraudsters and definitely a move towards curbing fake invoicing.

(b) The registered person has received a refund amount of more than INR 1 lac in the preceding financial year under clause (I) first provision of section 54(3); or (II) first provision of section 54(3).

Notes:

  • Exporters claiming refund of ITC on zero-rated supplies or inverted duty structure of more than INR 1 lac in preceding FY need not apply the rule 86B.
  • Here few of the companies even though there are involved in the fake invoices could be get excluded just because there are getting a refund of tax in preceding the year. It is pertinent to note one of the potential motive behind fake invoices is the encashment of ITC by way of IGST refund or unutilized ITC refunds.
  • Because of this exclusion, fraudsters still get the refund on fake invoices. The government had put this exclusion with the intention not to trouble genuine exporters.

(c) The registered person has discharged his liability towards output tax through the electronic cash ledger for an amount which is in excess of 1% of the total output tax liability, applied cumulatively, up to the said month in the current financial year; or

Notes:

This condition to be applied cumulative for the financial say example April & May taxpayer has made a cash payment and now in the June month taxpayer would require to utilize the ITC for 100% payment. Now he has cumulative take the tax paid and total output tax if the said cash payment is more than 1% of total output tax then the rule 86B need not to be applied for that month.

Here paying 1% of output tax liability would not be a great deal for a fake company it may still continue to issue the fake invoices.

(d) The registered person is –

  1. Government Department; or
    1. PSU; or
    1. Local Authority; Or
    1. Statutory Body:

Notes:

  • This category of persons are out of the ambit of rule 86B as these government branches would not engage in fake invoicing.
  • Using rule 86B as a tool, government can curb tax evasion, however in this procedure definitely it troubles the genuine taxpayers, increases the compliance cost by employing more resources to apply rule 86B.
  • Rule 86B is not going to completely curb the fake invoicing as there were some exclusions given which can make fraudsters to continue the fake invoicing, but definitely it discourages the fraudsters to engage in these kind of activities.

2.  Biometric-based Aadhaar authentication and taking photographs

The rule of verification has been amended vide notification 94 No. 94/2020 – Central Tax dated 22/12/2020 to verify the application as follows

  1. This kind of Aadhaar authentication and taking photograph, unless exempted under section 25- subsection (6D), if he/she has opted for authentication of Aadhaar no.;
  2. Taking Biometric information, photograph and verification of such other KYC documents, as notified, unless the applicant is exempted under section 25- subsection (6D), if he/she has opted not to get Aadhaar authentication done.
  3. Verification of original copy of the documents uploaded would be done with the application in FORM GST REG-01at one of the Facilitation Centers notified by the Commissioner.

Insertion of these rules is a great initiative to curb fake invoicing as fake companies are floated with fake proofs or profiles. However, now it would not be possible as GST registration needs Bio-metric based.

3.  Penalties For Fake Invoicing

New Sub-section (1A) inserted to CGST Act- Section 122 (with effect from 01 April, 2020) – Any person who retains the benefit of a transaction covered under clauses (I), (II), (VII) or clause (IX) of sub-section (1) and at whose paradigm such transaction is conducted, will be liable to a penalty of an amount equivalent to the tax evaded.

With respect to clause (I), (II), (VII) or clause (IX) of sub-section (1) of Section 122

The main aim of the amendment to include the Beneficiary of transactions and at whose instance transactions are conducted for imposing penalty.

Section 132 has been amended to covers many offences.

  • Without issue of any invoice for supplies of any goods/services or both, in violation of the provisions of this Act or the rules made thereunder, with the intention to evade tax
  • In case when without supply of goods or services or both-issue any invoice, in violation of the provisions of this Act, or the rules made thereunder leading to wrongful utilization ITC;
  • Avails ITC using the invoice or bill referred to in clause (b) or fraudulently avails ITC without any invoice or bill
  • Collects any amount as tax but not pay the same to the Gov.t beyond a period of 3 months from the date on which such payment becomes due;
  • Fraudulently obtains refund or evades tax where such offence is not covered under clauses (a) to (d);
Offence InvolvingAmount Involved (in INR)Punishment (Imprisonment minimum 6 months in the absence of special & appropriate reasons  to the contrary to be recorded in the judgment of the Court & extending to)
Tax evaded or  ITC wrongly availed or utilised or refund wrongly taken> INR 5 crores Exceeds INR 2 crores but ≤ INR 5 crores Exceeds INR 1 crores but ≤ INR 2 crores5 Years & with fine 3 Years & with fine 1 Years & with fine1 Years and with fine
For  second & every subsequent offence under Section 132No limit5 Years and with fine

Conclusion:

  • Government’s motto towards ease of doing business would look like just an assurance if the government puts many more restrictions to claims the ITC paid genuinely.
  • The government should ensure that the genuine taxpayer shall remain harmless of such provisions and the necessity of these provisions is only for the fraudsters.
  • Fake invoicing fraud in India maybe 1-5% however increasing problems for the genuine taxpayers (huge in number) is highly unreasonable and obnoxious.
  • Instead of putting more and more blanket restrictions on all the taxpayers’, government need to come up with some policy to identify the fraudsters without restricting the credit to genuine taxpayers.

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