CBIC Guidelines on Input Tax Credit Claims Involving Fraudulent Invoices

The Central Board of Indirect Taxes and Customs (CBIC) recently issued a circular addressing the fraudulent practice of claiming Input Tax Credit (ITC) using counterfeit invoices. This action comes in response to numerous instances where individuals and entities have illegitimately claimed ITC and obtained improper refunds. The government aims to curb these fraudulent activities through Circular No.171/03/2022-GST.

Defining a Fraudulent Invoice

A fraudulent invoice is typically one issued by an entity without any actual transaction involving the supply of goods or services, and without the corresponding payment of Goods and Services Tax (GST).

Methods of Misusing Counterfeit GST Invoices

Fraudsters exploit fake invoices within the GST framework through several mechanisms:

• Issuing Invoices Without Supply: Some entities issue invoices for non-existent goods or services, claiming to have paid tax via Input Tax Credit (ITC) that they do not genuinely possess. This creates a false tax payment record using non-existent ITC. Consequently, the recipient claims this illegitimate ITC, which is then used for tax payments, leading to a direct revenue loss for the government.
• Mismatching Invoice Recipients: In other scenarios, an invoice might be issued to one party, but the actual goods or services are delivered to a different recipient. The nominal recipient of the invoice might then unlawfully use the ITC to pay GST on exports, subsequently claiming a refund for the GST purportedly paid.
• Circular ITC Transfers via Shell Companies: A common tactic involves routing invoices through a network of shell companies. ITC is transferred sequentially between these dummy entities in a circular manner, inflating turnover figures without any real supply of goods or services. Such practices violate the conditions for availing ITC as outlined in Rule 16 of the CGST Act, 2017. This rule mandates that for a buyer to claim ITC, they must possess a valid invoice showing GST payment and must have actually received the goods or services.

In essence, claiming ITC without the physical receipt of goods or services is invalid. When such inadmissible ITC is used for legitimate supplies, it causes significant revenue loss to the government. Dishonest traders leverage the GST system by fabricating invoices and creating fraudulent e-way bills to simulate goods movement, thereby defrauding both the revenue and the banking system.

Repercussions of Issuing Fraudulent Invoices

Following an investigation that leads to a Show Cause Notice (SCN) or other punitive actions, authorities can implement several measures to stop fraudulent entities from continuing their illicit activities:

• Offence Database Integration: A dedicated module within the GST application will be created to flag the GSTINs of all entities implicated in fraudulent activities, such as issuing fake invoices. This system will automatically identify purchasers from these flagged entities and generate alerts for further investigation.
• Cancellation and Scrutiny of GST Registration: The GST registration of such entities will be cancelled. Applications for re-registration from these entities will be subject to heightened scrutiny, alerted to authorities, and will not be granted deemed registration. Physical verification will become mandatory for re-registration in such instances.
• ITC Recovery and Transaction Analysis: Entities that have claimed Input Tax Credit based on fraudulent invoices must be identified, and legal steps for recovery initiated. Their past transactions with other parties will be sampled and investigated to assess their pattern of fraudulent behavior.
• Provisional Attachment of Property: The provisions of Section 83 of the CGST Act, 2017, which allow for the provisional attachment of property, including bank accounts, should be consistently applied.
• Invocation of Penal Provisions for Directors: If initial evidence suggests criminal involvement of directors in GST evasion, Section 89 of the CGST Act, 2017, can be invoked.
• Blocking of Input Tax Credit: The Input Tax Credit for individuals and beneficiaries linked to these defrauding entities will be blocked to prevent them from availing any undeserved ITC.

Circular 171: Penalties and Demand Provisions for Fraudulent Invoices

The circular outlines specific demand and penalty provisions for offences related to fraudulent invoices: