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February 28, 2021

Know how GST department tracking fake invoices using smart technology

by CA Jessica Nagaonkar in GST

Know how GST department tracking fake invoices using smart technology

For the past 9-10 months the COVID 19 pandemic had forced India into a lockdown. Most of the countries small businesses which relied on physical availability of customers have had the most hit. Small business revenues have plunged everywhere. Nevertheless, tax evaders have proved to be an exception to this rule, who no matter what the situation persists, find a way to evade tax. In the last one month, the Directorate General of Goods and Services Tax Intelligence (DGGSTI) arrested over 100 people and booked 3,479 entities in 1,161 cases for illegally availing or passing on input tax credit (ITC) by using fake GST invoices, and causing loss to the exchequer.

Further investigations in these cases unravelled the network and multiple chains of fake invoices’ benefactors and, also, to ascertain the exact amount of tax evasion and usurpation by these fake entities and fraudsters. Use of fake invoices to wrongfully avail ITC credit has been gradually increasing and has become a concern for the government.

What do you mean by fake invoices?

An invoice is basically a bill of the list of goods sent or services provided, along with the amount due for payment. It is a commercial instrument issued by the supplier to the recipient.

What is the importance of an invoice?

  • Evidences of supply of goods or services
  • A registered person cannot avail input tax credit unless he is in possession of a tax invoice or a debit note.
  • Invoice is an important indicator of the time of supply.

Fake invoice refers to a non compliant GST Invoice. It basically means any invoice which does not comply with the provisions of the GST Act and Rules. Usually, it refers to the non-compliant GST Invoice of the following types:

  • Invoice without any supply
  • Invoice with a non-compliant supply

The objective of the taxpayers behind issuance of fake invoicing may involve:

  • Availment of the undue input tax credit on fake invoices by the recipient.
  • Evade GST & Income tax & then Divert funds from companies.
  • To show non-existent transactions to hike figures on the books to obtain loans from banks and to siphon off funds.
  • To claim GST refunds for exporters.
  • To conduct hawala transactions (money transfer without money movement).

GST department tracking fake invoices using technology

  • GST department is tracking taxpayers using smart technology.
  • The GST department is taking concerted action to ensure compliance in the GST net, pooling data with States, the Income Tax (IT) and Customs departments, banks and other agencies.
  • They are now in a position to undertake data analytics to pinpoint those who are trying to game the system and take targeted action against such tax frauds.
  • GST Council has also adopted few standard operating procedures for “how to detect and tackle the fake invoices”. 

What are the effects of issuing fake invoices under GST?

Final action will be taken by the Government after investigating the genuineness of the supplier who generated the fake invoice and buyer who used that invoices for the taking unnecessary tax benefit. Once the forgery is proved then the following steps will be taken:

  • Cancellation of GST registration
  • Re-registration of such entities under GST law is differently dealt with than normal registration. No deemed registration should be done in this case and physical verification by the officer must include before allowing re-registration
  • GSTIN of Such supplier are flagged for generating fake invoices or for any other frauds and this will indicate those buyers who take credit on behalf of fake invoices and automatic alert for further verification by the officer
  • Input tax credit availed on behalf of fake invoices to be recovered as per the provision under the law
  • Even in certain cases, the input tax credit may be blocked from such persons so that no one can get the undue advantage of credit
  • Maximum imprisonment up to 5 years
  • Penalty of sum equal to the aggregate amount of such false or omitted entry. The assessing officer has been given discretionary power to impose penalty.
  • Further, there exists Sec 270A provides a penalty of 200 percent of the tax evaded in the case of misreporting of income.
  • So, if a company accepts a fake invoice of Rs 50 lakh without actual supply of goods or services and shows the same as his purchases or expenses and claims income tax benefit on the same, the amount of penalty shall be U/S 271 AAD of Rs 50 lakh plus 200% of tax evaded U/S 270A of Rs 30 lakh (assuming tax of 30%) i.e., Rs 80 lakh (more than the value of the fake invoice)

If any citizen comes across this kind of criminal activity, they are directed by the GST council to immediately inform the local CGST Seva Kendra either by telephone or e-mail with details. Their identity will be kept confidential and they will be rewarded suitably subject to the guidelines of CBIC.

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