1. Possession of Tax Invoice / Debit or Credit Note / Supplementary Invoice issued by a supplier.
2. The said goods/services have been received.
3. Returns have been filed.
4. The tax charged has been paid to the government by the supplier.
5. Matching of Invoices and Reversal.
When registered persons claim ITC of the invoices which do not satisfy the eligibility criteria as per the Act, then these are considered as Fake Invoices.
The whole process of Fake Invoicing begins with the making of Bogus/Shell companies which are generally created in the names of peons, drivers or other workers. These companies are eventually closed within limited period of time without payment of actual tax liability.
Let us understand the whole concept with an example:- Mr. A issues an Invoice against Mr. B without any actual supply of goods or services. In this case, Mr. A does not pay tax to the Government or a minor amount of tax liability is paid. He just shows the invoice in GSTR-1. So, Mr. B is able to claim ITC of that invoice being auto-populated in GSTR 2A. Then, Mr. B would again issue invoice to Mr. C, but Now Mr. B pays tax because Mr. B has ITC in its Credit Ledger. Consequently, C would also be able to claim ITC. All of these firms are the parts of same network to take illegal benefit of ITC. Hence, it is very difficult for GST Department to prove Mr. C as fake invoice as he has taken invoice from Mr. B and Mr. B is an absolute tax compliant. Ultimate defaulter is Mr. A, but it is just a shell company.
Rule 86A(1)-Relevant conditions
1. Authorized Officer: commissioner or an officer authorized by him in this behalf not below the rank of an assistant commissioner.
2. Primary conditions before blocking ITC-authorized officer should have reasons to believe.
3. “Reasons to Believe” if credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible for reasons specified in Rule 86A
4. Authorised Officer may, for reasons to recording in writing not allowed debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under Section 49 or for claim of any refund of any unutilized amount.
Penalty for Certain Offences (CHAPTER XIX – OFFENCES AND PENALTIES)
(1) Where a taxable person who–
(i) 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;
(ii) 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;
(vii) 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;
(ix) takes or distributes input tax credit in contravention of section 20, or the rules made thereunder;
(1A) Any person who retains the benefit of a transaction covered under clauses (i), (ii), (vii) or clause (ix) of sub-section (1) and at whose instance such transaction is conducted, shall be liable to a penalty of an amount equivalent to the tax evaded or input tax credit availed of or passed on.
Whoever commits, or causes to commit and retain the benefits arising out of, any of the following offences, namely:-
(a) ……………… ………………. …………..
(b) 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 leading to wrongful availment or utilisation of input tax credit or refund of tax;
(c) avails input tax credit using the invoice or bill referred to in clause (b) or fraudulently avails input tax credit without any invoice or bill;
shall be punishable–
(i) in cases where the amount of tax evaded or the amount of input tax credit wrongly availed or utilised or the amount of refund wrongly taken exceeds five hundred lakh rupees, with imprisonment for a term which may extend to five years and with fine;
(5) The offences specified in clause (a) or clause (b) or clause (c) or clause (d) of sub-section (1) and punishable under clause (i) of that sub-section shall be cognizable and non-bailable
(1) Where the Commissioner has reasons to believe that a person has committed any offence specified in clause (a) or clause (b) or clause (c) or clause (d) of sub-section (1) of section 132 which is punishable under clause (i) or (ii) of sub-section (1), or sub-section (2) of the said section, he may, by order, authorise any officer of central tax to arrest such person.
Section 271AAD in the Income Tax Act –
“Where any person has obtained any invoice by fraud, collusion, willful misstatement or suppression of facts to utilize input tax credit on the basis of such invoice for discharging any duty or tax on goods that are entered for exportation under a claim of refund of such duty or tax, such person shall be liable for a penalty not exceeding five times the refund claimed.”