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Case Studies on GST Evasion due to Fake Invoices

Ujjwala Bhagwat
Joint Director
What do you mean by fake invoice?

Fake invoice means an invoice issued without


supply of any services or goods.
There are 2 types of cases-
1. Fake invoicing in respect of goods
2. Fake invoicing in respect of services.
Purpose of Issuance Of Fake Invoices

 To inflate the turnover of the company.


 To take bank loan.
 To bring IPO in the market.
 To get new contract or to fulfil criteria of
new contracts.
 To earn commission by issuance of invoices.
Purpose Of Receipt Of Fake Invoices

 To increase the expenses of the company/firm to decrease the net


income with an intention to pay less income tax.

 To avail Input Tax Credit to discharge their actual GST liabilities.

 To encash the ITC by claiming refund claim of unutilised ITC


from the Department.

 To facilitate other persons to increase their turnover.


Legal Provisions under CGST ACT 2017

Section 16 of the CGST Act, 2017 provides criteria for eligibility and conditions for taking
ITC.

(1) Every registered person shall, subject to such conditions and restrictions as may be
prescribed and in the manner specified in section 49, be entitled to take credit of input
tax charged on any supply of goods or services or both to him which are used or
intended to be used in the course of furtherance of his business and the said amount
shall be credited to the electronic credit ledger of such person.

(2) Notwithstanding anything contained in this section, no registered person shall be


entitled to the credit of any input tax in respect of any supply of goods or services or
both to him unless,-
Contd.

(a)he is in possession of a tax invoice or debit note


issued by a supplier registered under this Act,
or such other tax paying documents as may be
prescribed;

(a) he has received the goods or services or both.


Demand and Recovery of wrongly
availed and utilised ITC.

Section 74 of the CGST Act, 2017 provides that


(1) Where it appears to the proper officer that ------ or where input tax
credit has been wrongly availed or utilised by reason of fraud, or any wilful
mis-statement or suppression of facts to evade tax, he shall serve notice on
the person chargeable with tax which has ------, or who has wrongly availed
or utilised input tax credit, requiring him to show cause as to why he should
not pay the amount specified in the notice along with interest payable
thereon under section 50 and a penalty equivalent to the tax specified in the
notice
Penalty For Issuance / Receipt Of Fake
Invoices

Section 122 of the CGST Act, 2017 provides for a list of offences;
(1) Where a taxable person who---
(i)----
(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;
(iii)-----
(vii) Takes or utilise 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

He shall be liable to pay a penalty of ten thousand rupees or an amount equivalent to -------
-------------------, input tax credit availed of or passed on or distributed irregularly, ----------
---------, whichever is higher.
Punishment For Issuance Or Receipt Of
Fake Invoices
Section 132 of the CGST Act, 2017, provides a list of offences;
(1) Whoever commits 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 such invoice or bill referred to in clause (b)
(d) --------
() ------
Punishment For Issuance Or
Receipt Of Fake Invoices
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;

(2)---
(5)The offences specified in clause (a) or clause (b) or clause © or
clause (d) of sub-section (1) and punishable under clause (i) of that
sub-section shall be cognizable and non-bailable.
Types Of Movement Of Fake
Invoices

1. LINEAR movement

2. Circuitous movement
Linear Movement

A B C D Avails ITC Utilises ITC

For discharging GST liability or taking refund


Circuitous Movement

A
E B

D C
Flow of invoices

1 2
5 2 1 3
X Y
4 3 5 4

1
5 Z 2

4 3
Source of Detection

• Informer

• Intelligence gathered through open market sources

• Data analysis
Case Study -1

• X is a company. Intelligence gathered by an officer through the open


market sources that X was involved in issuance of bogus invoices.
• After receiving the data, company’s Balance Sheet was downloaded
from the ROC site.
• Form-26AS and Form 26-Q of the assesse was arranged.
• Additional details of the assessee available on the open site like Google
were collected.
• Payment details and ST-3 Returns filed by the Assesse were taken from
ACES site.Thereafter all the details were scrutinised.
Case Study -1__Cont…..

• It was found that the assessee’s turnover had suddenly jumped;

• There was a huge difference between income shown in P&L Account

and the service tax payment made by the assessee;

• More than 90% payment of service tax was made through Cenvat

Credit.
Case Study -1__Cont…..

• Similar pattern was also seen during GST period. Hence


inquiry against the assessee was initiated by the Office of the
DGGI, MZU.
• During search several incriminating documents were
recovered.
• Blank letter heads of different companies were lying in the
premises.
• All these documents / records indicated a racket of bogus
invoices.
Case Study -1__Cont…..

• Further investigation revealed that there was a organised cartel

issuing and receiving bogus invoices.

• The assessee was involved in issuance and receipt of bogus invoices

both during Service Tax era as well as GST era.


Case Study -1__Cont…..

• For the Service Tax, the assessee accepted that they had collected service tax from

their clients and the same time they passed on the tax to their vendors and

accordingly they had sufficient Cenvat Credit to discharge their tax liability.

• When they were asked for the copy of invoices in support of their claim in respect of

cenvat credit , they submitted copy of invoices.

• On verification of invoices, it appeared that the vendors were not registered with the

Service Tax Department.


Case Study -1__Cont…..
• On being asked to clarify the same they submitted three sets of

different input invoices in support of their claim of cenvat credit.

During inquiry all appeared fake /bogus.

• Later on the director of the assessee also accepted the fact that

they submitted all the bogus input credit invoices.


Case Study -1__Cont…..

• During GST era it was observed that X was involved in issuance of bogus invoices
to pass on the ITC to their clients

• At the same time they also procured invoices without receipt of any services or
goods and availed ITC on those invoices.

• Final beneficiary i.e. Z who had availed ITC on the strength of invoices of X,
encashed the ITC by filing refund claim of unavailed ITC against export of
services.
Case Study -1__Cont…..

• In this case A (unregistered person) issued invoices to B, then B to C and

C to X,

• In this chain every person passed on Input Tax Credit and whereas Z

availed the Input Tax Credit and claimed this ITC against export of

services and claimed refund claim from the GST Department and received

the same.
Case Study -1__Cont…..

• In this case another company Y was also involved who was actually

providing services to Z

• But was not raising any invoice to X or Z.

• The money was routed from Z to Y through X without raising any

invoices.

• Y was in turn sending this money to a Company related to Z


Case Study -1__Cont…..
In short-
• X who was raising taxable invoices was not providing any service.
• Y who was providing service was not raising any invoice.
• It was also observed that Z has not made payment of all the invoices
raised by X but has taken credit of the same in violation of the Act and
has also claimed and received refund of the ITC.
Case Study -1__Cont…..

• In this case motto of company X was to earn commission, to inflate the


income of the company so that bank loan could be taken.

• They also wanted to launch IPO in the market.

• The motto of Z was to encash the ITC by way of refund.

• Whereas Y had an intention to get subsidy from some agency on account of


inflated banking transactions.
Case Study -1__Cont…..

• During investigation the director / proprietor of C,X and Z had

been arrested.
• The main beneficiary, Z accepted their liability, submitted a schedule

of payment and started to pay the same.


RED FLAGS
1. QUANTUM JUMP IN TURNOVER WITHIN SHORT SPAN OF
TIME.

2. MULTIPLE RELATED PARTY TRANSACTIONS.

3. THE PARTY IS ENGAGED IN MULTIPLE STREAMS OF BUSINESS


OR SUDDENLY DEVELOPS A NEW BUSINESS VERTICAL.
e.g. He is doing trading, but all of a sudden he starts providng
consulting engineer service.
RED FLAGS
4. E-WAY BILL DATA AND GSTR1, GSTR2A, GSTR3B DATA DOES NOT MATCH IN
CASES OF GOODS.

5. HIGH UTILIZATION OF ITC

6. ITC AVAILED ON INVOICES OF ENTITYWHICH CAN BY IT’S VERY NATURE CAN’T


BE CONSIDERED INPUT FOR ANY OUTWARD SUPPLY OF GOODS/SERVICES.
e.g. INVOICES RAISED BY SERVICE PROVIDER PROVIDING SERVICE OF
CONSTRUCTION OF COMPLEX TO COMPUTER SOFTWARE SERVICE.

7. SINGLE HIGH VALUE INVOICES ARE RAISED.


RED FLAGS

8.IRREGULARITY IN FILING OF RETURNS.

9. DUBIOUS ADDRESSES OF BUSINESS PREMISES.

10. MULTIPLE ENTITIES REGISTERED IN SINGLE PREMISE.


MEASURES TO TACKLE THE ISSUE
OF FAKE INVOICING
1. INVOICE MATCHING.
2. SHARING OF DATA WITH DIFFERENT AGENCIES SUCH AS
INCOME TAX, MCA,BANKS,ENFORCEMENT
DIRECTORATE.
3. REAL TIME DATA SHARING OF STRs.
4. INITIATING ACTION ON COMPANIES NOT FILING
MANDATORY RETURNS WITH ROC.
5. RANDOM VERIFICATION OF PREMISES.
6. CRITICAL VERIFICATION IN RESPECT OF GRANTING
DIRECTOR IDENTIFICATION NUMBER
MEASURES TO TACKLE THE ISSUE
OF FAKE INVOICING
8. One of the critical issue is few of such companies are going to
NCLT in connivance with their trade partner, which in turn obstruct
the possibility of recovery of Govt dues. The facts of these frauds need
to be brought to the knowledge of appropriate authorities to avoid
misuse of legal provisions.
9. System like Advait which is an integrated database can prove to be
useful in identifying such cases.
THANK YOU

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