GST Frauds using Fake Invoices

The implementation of GST is the most significant indirect tax reform since India’s independence. With so many additional benefits, it has made everything online, including registration, tax payment, returns filing, and other compliances. Furthermore, via the application of artificial intelligence and data analytics, GST has enabled the tax administration to discover and track tax evasion, fake invoices, mismatches, and fraudulent activities.

CBIC and GSTN have begun thorough data analyses on a variety of data sets accessible to them. Preliminary data analysis yielded several intriguing findings, including:

It has been discovered that there is a discrepancy between the amounts of IGST and Compensation Cess paid by importers at Customs ports and the input tax credit claimed in GSTR-3B.

There are significant data gaps between self-declared obligations in FORM GSTR-1 and FORM GSTR-3B.

Fake or phony invoices are so prevalent in India these days that they are reported each day. As GST is a tax policy that is imposed, complied with, and managed online, it is comparatively easy for tax officials to identify undocumented and unverified transactions occurring outside of the system. These fake or phony invoices are used to avoid paying taxes, evading taxes, record spurious transactions, fraudulently claiming input tax credits, or even exaggerating incomes, turnover, expenditure, or input in a business or circular trading.

Since the introduction of GST, a large number of GST fraud instances involving the use of fraudulent invoices for incorrectly claiming input tax credit (ITC), which is then utilized to pay GST on outward supply, have been found.

What Exactly is an Invoice?

Section 2(66) of the CGST Act, 2017 defines tax invoice as follows: The term “invoice” or “tax invoice” refers to the tax invoice mentioned in section 31.

According to Section 2(66) read with Section 31 of the CGST Act, 2017, a ‘tax invoice’ must be produced by a registered person at the time of supply, detailing the description of goods and/or services, value, the tax levied, and other particulars. It is a document that proves the supply of goods and/or services and serves as the foundation for taxation.

According to the explanation provided under section 31 of the CGST Act, the term “tax invoice” includes any updated invoice produced by the provider to a previous supply. Section 34 of the Act deals with debit notes and credit notes individually.

An invoice, often known as a tax invoice, is a document that proves the presence of a transaction for the delivery of goods and/or services. A tax invoice issued by a registered taxable person is required to verify the date of supply and to claim an input tax credit by the recipient of goods and/or services.

Issuance of Tax invoices (Section 31)

A registered taxable person delivering taxable goods should provide, before or at the time of removal or delivery, a tax invoice specifying the type, amount, and value of goods, the tax payable thereon, and other relevant particulars, according to section 31(1) of the CGST Act, 2017.

As a result, a registered taxable person that supplies taxable products must provide a tax invoice.

(a) Before or at the time of supply
(b) The tax invoice should include-
(i) Description, amount, and price of the products,
(ii) Tax levied thereon, and
(iii) GSTIN of the supplier and buyer
(iv) HSN code or SAC
(v) Other information

What is a Fake Invoice?

A ‘fake invoice’ is one that contains altered (false) information.

A “non-compliant GST invoice” is any invoice that does not comply with the provisions of the CGST Act and Rules, 2017.

‘Invoices’ that are commonly regarded as ‘fake’ are those in which GST invoices are issued by an entity without any actual provision of goods or services or payment of GST. The following are the instances that will distinguish these invoices:

Fake Invoices:

Fake or bogus invoices are created through an unethical process. For example, issuing the same series of numbered invoice, mentioning a party’s name that does not exist, or providing any type of false information with the specific intent of reducing or evading GST.

a. 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
b. Issue of invoices by persons where the invoice is issued to one person and the goods are diverted to some other person
c. 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

Non-Compliant Invoices:

Non-compliant invoices are those that may be true to their transaction but are not structured or made in accordance with Rule 46 of the CGST Rules, 2017. The rule specifies a number of details that must be included in an invoice in order to comply with GST. Here are a few examples:

a. A correct HSN code should be mentioned in the invoice for reference of correct GST rate.
b. Mention the place of supply in correlation with IGST sections, for the accurate application of whether the GST will be CGST, SGST/UTGST, or IGST.
c. If applicable, also follow the new rules regarding QR Code bearing invoice.

How do Taxpayers Use these Fake Invoices?

In the GST regime, such fake invoices can be exploited in three ways:

1. Issuance of invoices without the provision of goods or services when tax is paid through Input Tax Credit, which is not accessible to the person who has issued the invoice. There is no receipt of goods or credit by the invoice issuer in such instances. He just sends invoices and makes tax payments through a non-existent input tax credit. This leads to actual revenue loss when the buyer of the invoice obtains inadmissible credit for tax payment. There have also been occasions where the issuers of the fake invoice did not pay GST, even by utilizing ITC.
2. When the invoice is issued to one person and the products are redirected to another. The purchaser of invoices may use the credit for tax payment at the time of export of goods and seek a refund of the tax paid, resulting in revenue loss.
3. To enhance turnover, invoices are routed via several shell firms/dummy businesses, and input tax credits are transferred from one company to another in a continuous cycle. In such circumstances, there is no supply of goods or services, and therefore credit based on such invoices is barred under the requirements of Rule 16 of the CGST Act, 2017, which states that the buyer must have an invoice on which tax has been paid and must have received the items to obtain credit. In such circumstances, credit is inadmissible without receipt of products, and using such credit for genuine regular supply leads to revenue loss and financial accommodation.

The Reason Behind the Issuance of Fake Invoices

Any business that uses a ‘fake invoice’ claims an illegitimate input tax credit and is thus punishable under CGST rules.

The following are some of the probable motivations for fraudsters to issue and use fraudulent invoices:

i. GST evasion on taxable output supplies by:

a) Obtaining an erroneous Input Tax Credit (ITC)
b) Saving GST (cash) by paying tax liabilities with undue Input Tax Credit (ITC)
c) Unauthorized supply without invoices or payment of taxes

ii. Converting surplus Input Tax Credit (ITC) into cash using the following methods:

a) Transferring Input Tax Credit (ITC) to individuals who are eligible for it
b) Converting the Input Tax Credit (ITC) from exempted to a taxable supply
c) Input Tax Credit (ITC) encashment via IGST refund or unutilized Input Tax Credit (ITC) refunds

iii. Inflating turnover to:

a) Obtaining a greater credit limit or overdraft from a bank
b) Getting bank loans
c) Improving values for capital raises or stake sales
d) Obtaining contracts, particularly those from the government

iv. Making fictitious purchases to obtain income-tax breaks by:

a) Displaying lower profit margins and increased expenditures
b) Avoiding income tax by minimizing net profit

v. Cash generation/distribution of corporate money

vi. Laundering of money

The Consequences of Issuing Fake Invoices

The issuance of a fraudulent invoice results in illegal trading. Preparing and trading ‘false invoices’ is prohibited; while structuring or using a fake invoice may benefit relevant parties in the short run, the consequences of such an offence may be severe.

It is punishable by a fine of Rs. 10,000 or the amount of tax involved (whichever is greater) under Section 122, and it is also punishable by jail time under Section 132 in certain circumstances, where the fake invoices involve a tax amount of more than Rs. 5 crores. This offence is punishable by up to five years in prison, as well as the recovery of unauthorized input tax credits with interest and penalties. (Note: the offense turns out to be cognizable & non-bailable). Aside from that, the person who assists in the creation of these invoices or goes along with these invoices in a transaction is fined Rs. 25,000 or the tax amount involved (whichever is higher) for abetment.

In reality, it is a societal hazard; it is harmful to the economy, society, and progress. Illegal input tax credit obtained through the use of a ‘fake invoice’ is a drain on the economy and has an impact on GST revenue collections. Evil forces utilize ‘false invoices’ to produce ‘cash,’ which is most likely to be used for nefarious acts and to incite societal unrest.

However, as a taxpayer, you can use these 5 techniques to spot fake invoices.