Clarification on various issues relating to applicability of demand and penalty provisions under the Central Goods and Services Tax Act, 2017 in respect of transactions involving fake invoices.

Circular No.: 171/03/2022-GST
Date of Circular: 6th July 2022
Relevant Sections and Rules:

• CGST Act, 2017:
  • Section 7: Definition of Supply
  • Section 16(2)(b): Conditions for availing ITC
  • Section 50: Interest on delayed tax payment
  • Section 73 & 74: Determination of tax not paid/short paid or ITC wrongly availed/utilized
  • Section 75(13): Bar on double penalty
  • Section 122(1)(ii) & (vii): Penalty for issuing fake invoices or availing ITC without supply
  • Section 122(1A): Liability of person retaining benefit or instigating such transactions
  • Section 132: Offences and prosecution
  • Section 168(1): Power to issue instructions

Summary of Clarifications Provided:

1. No Supply, No Tax Demand under Section 73/74 for Issuer of Fake Invoice:
   If a registered person ‘A’ issues a tax invoice without actual supply to another registered person ‘B’, the transaction does not constitute “supply” under Section 7.
   Thus, no tax demand or recovery under Section 73/74 arises against ‘A’.
   However, ‘A’ shall be liable for penalty under Section 122(1)(ii) for issuing an invoice without supply.
2. Recipient Availing Fake ITC Will Be Liable Under Section 74:
   Where ‘B’ avails and utilizes ITC based on a fake invoice from ‘A’, without receipt of goods or services:

• It violates Section 16(2)(b).
• ‘B’ is liable for demand, recovery, interest (Section 50), and penalty under Section 74.
• As per Section 75(13), no additional penalty under Section 122 shall be imposed for the same act.

3. Fake ITC Availment & Passing to Another Without Supply – Penalty, No Demand:
   Where ‘B’ not only avails fake ITC from ‘A’ but also passes it to ‘C’ without actual supply, the transaction between ‘B’ and ‘C’ is also not a “supply.”

• No tax liability or ITC recovery under Section 73/74 arises as no supply/tax payment occurred.
• But ‘B’ is liable for penalty under Section 122(1)(ii) (fake invoice) and Section 122(1)(vii) (wrongful ITC utilization).

4. Penal and Criminal Liability for Beneficiaries and Instigators of Fake Invoice Chains:
   Persons who retain the benefit or instigate such transactions are also liable under Section 122(1A).
   In serious cases of fraudulent ITC utilization or refund, prosecution under Section 132 may also be invoked based on facts and thresholds.

Source: Circular No.: 171/03/2022-GST