FAKE INVOICES AND GST FRAUDS (PART-3)

[Dr. Sanjiv Agarwal]

SOP on fake invoices and Penalties

This part of the article on Fake Invoices and GST Frauds covers the Standard Operating Procedure (SOP) on fake invoices issued by investigation wing of CBIC.

Standard Operating Procedure (SOP) on fake invoices

CBIC through its GST investigation wing has formulated Standard Operating Procedure (SOP) on dealing and tackling the issue of frauds arising from fake invoices. Accordingly, the frauds in question need to be tackled by putting in place a regime that enables to the extent possible the identification of suspect entities at the initial stage itself and in other cases the detection of GST frauds at the earliest. The former becomes especially important as the past experience is that many of such operators have a tendency to operate through impersonation in the name of dummy persons who have no real assets making it virtually impossible to recover any amounts from them, if a case is detected at a later stage.

The following safeguards are suggested as key elements of risk profiling to check such GST frauds:

1. Scrutiny/Verification of registered taxpayers through risk profiling and verification for early identification of fraudsters indulging in fake invoices.
2. Historically tax evasion prone sectors.
3. Maintenance of offence database of those figuring in frauds to prevent their re-entry in the System.
4. Some of the risk indicators of such persons or activities done by them or commodities traded by them or patterns behind their activities are as under:

1. Multiple registrations on same PAN.
2. Common email, common mobile numbers, common address, common authorised signatory, common promoters etc.
3. A person whose registration application is rejected or a person whose registration is cancelled may apply again for registration.
4. Live registration against the said PAN with the CGST jurisdiction where offence has been booked by SGST authorities.

Steps involved

The SOP on procedure to detect and tackle ‘fake invoices’ frauds involves the following steps:

1. Identification
   1. Identification of entities to generate fake invoices
   2. Identification of entities who use the fake invoices
   3. Common e-mails / mobiles / addresses
   4. Use of fake (PAN) cards

2. Determination / detection
   5. Search of premises
   6. Physical space availability verification
   7. Ascertainment of non-existent inputs / outputs
   8. Lack of documentation
   1. Mis-match of e-way bills
   10. Fake or non-existent vehicle numbers
   11. Mis-match of information amongst regulators such as Income Tax, commercial & other taxes, ROC etc.

3. Post detection
   50. Issuance of Show Cause Notice (SCN)

1. 1000. Issuance of summons
   14. Blocking of Input Tax Credit (ITC)
   15. Cancellation of registration
   16. Attachment of bank account and other assets
   17. Detention and confiscation of goods and conveyance
   18. Prosecution and arrest

Penal provisions

The penal provisions in relation to GST are contained in section 122 of CGST Act, 2017 as amended by Finance Act, 2020.

The Finance Act, 2020 inserted sub-section (1A) w.e.f. 01.01.2021 to make beneficiary of certain transactions as whose instance such transactions are conducted liable for penalty.

The CGST Act, 2017 in section 122(1) has specified following 21 offences, apart from the penalty prescribed under section 10, i.e., composition levy scheme, for wrongly availing composition scheme. These specified offences committed by a taxable person are enumerated as follows:

1. Supplies any goods and services without issue of an invoice or issue an incorrect or false invoice.
2. Issues any invoice or bill without the supply of any goods and/or services in violation of the provisions of the Act or Rules.
3. Collects any amount of tax and failure to pay it to the credit of Government beyond a period of three months from its due date.
4. Collects any tax in contravention of provisions of this Act and failure to pay it to the credit of Government beyond a period of three months from its due date.
5. Fails to deduct tax or deduction of an amount which is less than the amount required to be deducted or failure to pay to the credit of appropriate Government the amount of tax deducted.
6. Fails to collect tax or collect an amount which is less than the amount which is required to be collected or failure to pay to the credit of appropriate Government the amount of tax collected.
7. Takes and/or utilize input tax credit without the actual receipt of goods and/or services either fully or partly.
8. Fraudulently taking refund of CGST/SGST
9. Takes or distribution of input tax credit in violation of section 20
10. Falsifies or substitutes financial records or producing fake accounts or documents or furnishing any false information or return with an intention to evade tax.
11. Fails to obtain registration, when liable to be registered
12. Furnishes any false information with regard to registration either at the time of applying for registration or subsequently.
13. Obstructs or prevents any officer in discharge of his duties.
14. Transports any taxable goods without the cover of documents
15. Suppresses of turnover leading to evasion of tax.
16. Fails to keep, maintain or retain books of accounts and other documents in accordance with provision of law.
17. Fails to furnish information and/or documents called for by CGST/SGST officer or furnishing false information and/or documents.
18. Supplies, transports and stores of goods which he has reason to believe are liable for confiscation.
19. Issues any invoice or document by using the identification number of another taxable person.
20. Tempers with or destroy any material evidence
21. Disposes off or tempers with any goods that have been detained, seized or attached.

For all the aforementioned offences, the penalty has been prescribed.

Penalty for specified activities

In terms of section 122(3) of the CGST Act, 2017, penalty can be imposed on any person who-

1. Aids or abets any of the offences(21 offences as listed in Q. No.3 above),
2. acquires possession of, or in any way concerns himself in transporting, removing, depositing, keeping, concealing, supplying, or purchasing or in any other manner deals with any goods which he knows or has reason to believe are liable to confiscation.
3. Receives or in any way concerned with the supply of services which he knows are in contravention of provisions of the Act or rules.
4. Fails to appear to give evidence or produce a document, when issued with a summon for giving evidence/producing documents in an enquiry.
5. Fails to issue invoice or fails to account for an invoice in books of accounts.

For the above offences, any person shall be liable for a penalty which may extend to INR 25,000/-. This implies that penalty can be less than INR 25,000/- but subject to maximum amount of INR 25,000/-.

Offences in relation to fraudulent activities

Out of the above mentioned activities, following transactions or activities can be said to be arising out of fake invoices and other fraudulent transactions:

(1) Following supplies and actions:

1. supplies any goods or services or both without issue of any invoice or issues an incorrect or false invoice with regard to any such supply;
2. issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act or the rules made thereunder;
3. takes or utilises input tax credit without actual receipt of goods or services or both either fully or partially, in contravention of the provisions of this Act or the rules made thereunder;
4. fraudulently obtains refund of tax under this Act;
5. takes or distributes input tax credit in contravention of section 20, or the rules made thereunder;
6. falsifies or substitutes financial records or produces fake accounts or documents or furnishes any false information or return with an intention to evade payment of tax due under this Act;
7. transports any taxable goods without the cover of documents as may be specified in this behalf;
8. suppresses his turnover leading to evasion of tax under this Act;
9. supplies, transports or stores any goods which he has reasons to believe are liable to confiscation under this Act;
10. issues any invoice or document by using the registration number of another registered person;

(2) Any person who––

(i)   aids or abets any of the offences specified in clauses (i) to (xxi) of sub-section (1);

(ii)  acquires possession of, or in any way concerns himself in transporting, removing, depositing, keeping, concealing, supplying, or purchasing or in any other manner deals with any goods which he knows or has reasons to believe are liable to confiscation under this Act or the rules made thereunder;

 (iii)  fails to issue invoice in accordance with the provisions of this Act or the rules made thereunder or fails to account for an invoice in his books of account, shall be liable to a penalty which may extend to twenty-five thousand rupees.