Understanding GST Circular No. 171/03/2022-GST: Clarifications on Fake Invoices and Penal Actions

02March

Understanding GST Circular No. 171/03/2022-GST: Clarifications on Fake Invoices and Penal Actions

Here's a detailed blog based on Circular No. 171/03/2022-GST, highlighting key aspects:<hr><h1>Understanding GST Circular No. 171/03/2022-GST: Clarifications on Fake Invoices and Penal Actions</h1>The Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 171/03/2022-GST on 6th July 2022, addressing concerns regarding fake invoices and the applicability of demand and penalty provisions under the Central Goods and Services Tax Act, 2017 (CGST Act).This circular provides critical clarity for businesses, tax professionals, and GST officers on how transactions involving fake invoices should be treated.<hr><h2>What are Fake Invoices?</h2>Fake invoices refer to GST invoices issued without any actual supply of goods or services. Such fraudulent transactions are usually conducted to wrongfully claim Input Tax Credit (ITC). The government has noticed an increasing number of cases where businesses are engaging in bogus billing to evade taxes.<h3>Key Issues Addressed in the Circular</h3>The circular covers three key scenarios and their legal consequences:<h3>1. Case Where ‘A’ Issues Fake Invoices Without Any Actual Supply</h3><ul><li>If a registered taxpayer issues a GST invoice without actually supplying goods or services, it does not qualify as "supply" under Section 7 of CGST Act.</li><li>Since no supply has occurred, there is no tax liability or demand for recovery under Sections 73 or 74 of the CGST Act.</li><li>However, the person issuing fake invoices (A) will face a penalty under Section 122(1)(ii) for issuing tax invoices without actual supply.</li></ul><h3>2. Case Where ‘B’ Avails ITC on Fake Invoices and Utilizes It for Outward Supplies</h3><ul><li>If a taxpayer (B) claims ITC on a fake invoice (issued by ‘A’) without receiving any goods/services, it violates Section 16(2)(b) of the CGST Act.</li><li>‘B’ will face:<ul><li>ITC reversal and recovery under Section 74.</li><li>Penalty & Interest under Sections 50 & 74.</li><li>No additional penalty under Section 122, as Section 75(13) prevents double penalties for the same offense.</li></ul></li></ul><h3>3. Case Where ‘B’ Passes On Fake ITC to Another Business ‘C’</h3><ul><li>If ‘B’ avails ITC fraudulently and further issues fake invoices (without any actual supply) to ‘C’, then:<ul><li>‘B’ cannot be taxed under Sections 73 or 74 (since no supply occurred).</li><li>However, ‘B’ will face penalties under Section 122(1)(ii) and Section 122(1)(vii) for both issuing fake invoices and availing ITC fraudulently.</li></ul></li></ul><hr><h2>Key Highlights of the Circular</h2><ol><li>Issuing Fake Invoices Without Supply Is Not a Taxable Supply<ul><li>No GST demand can be raised on the issuer of fake invoices under Sections 73 or 74.</li></ul></li><li>Fraudulent ITC Availment Is Liable for Recovery & Penal Action<ul><li>If ITC is availed without actual receipt of goods/services, penalties under Section 74 apply.</li></ul></li><li>Passing Fake ITC to Another Business Also Attracts Penalties<ul><li>Businesses passing on fake ITC without supply face multiple penalties under Section 122.</li></ul></li><li>Section 132 Can Be Invoked for Criminal Offenses<ul><li>If the fraudulent ITC claim exceeds the threshold, prosecution under Section 132 may be initiated.</li></ul></li></ol><hr><h2>Implications for Businesses</h2><h3>✅ What Businesses Should Do</h3>✔ Ensure actual supply of goods/services before issuing invoices. ✔ Verify supplier details and cross-check GSTR-2B for ITC claims. ✔ Maintain proper records to avoid penalties and legal scrutiny.<h3>❌ What to Avoid</h3>❌ Do not issue fake invoices without actual supply. ❌ Avoid claiming ITC on invoices where goods/services were not received. ❌ Do not pass on ITC without verifying its legitimacy.<hr><a href="https://cms.plasament.com/storage/cir-171-03-2022-cgst.pdf">cir-171-03-2022-cgst</a>

Understanding GST Circular No. 171/03/2022-GST: Clarifications on Fake Invoices and Penal Actions

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