Budget 2020: Punitive Measures in GST Law to Weed Out Fake ITC

The Union Budget 2020 has tabled some significant measures to keep a check on fake invoicing and Input Tax Credit (ITC) menace. A couple of amendments are proposed to the CGST and IGST Act via the Finance Bill 2020.

Sections 122 and 132 of the CGST Act deal with the penalty and punishment for offences respectively. The scope of these sections has been expanded. It will now cover such persons who have benefitted from the ITC under the fake invoice or transaction. They need not be a supplier, recipient, warehouse keeper, or a transporter registered under GST but could be remote/indirect beneficiaries unregistered under GST too.

Currently, the penalty defined under Section 122 of the CGST Act is Rs 10,000, the amount of tax evaded, or ITC fraudulently availed, whichever is higher. It has a complete list of contraventions that are penalised for selling goods/services without the issue of invoice or based on an incorrect, erroneous, or invalid invoice. It also includes non-supply of goods after issuing an invoice.

Further, it extends to instances where the tax credit is claimed falsely without a valid invoice cover or distributes tax credit fraudulently as an input service distributor. Earlier, a GST taxpayer, whether as a supplier or a recipient, was liable to the penalty mentioned above. Now, a new subsection (1A) is added, which would canopy any persons (whether or not registered under GST) who are indirectly benefitted by being part of such fraudulent transactions. For people who are found to be offenders, a flat penalty equal to the tax evaded or ITC benefit amount will be imposed.

Under Section 132 of the CGST Act that governs the punishments for offences, a beneficiary of fraudulent ITC claims against fake or invalid invoices or none shall also be included. It is similar to the addition made under Section 122. Moreover, such offences where a person is remotely part of the fake ITC benefit will be cognizable and non-bailable. It means the suspects can be arrested without a warrant and cannot be bailed out until the proceedings are completed.

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On understanding the extended scope of both these provisions, it is essential to note the serious intentions of the government to curb the fake input tax credits present in the tax system. The government had also, previously, announced the introduction of the e-invoicing system as a massive project to cleanse the system.

Besides, the Central Board of Indirect Taxes and Customs (CBIC) has recently blocked the utilisation of tax credits worth Rs.40,000 crore from more than 2,000 companies due to mismatch in GSTR-2A and GSTR-3B returns. However, the legal gaps to take punitive action in GST law had to be filled.

While the move is applauded, the limitlessness of these two additions is questionable since both additions will cover unregistered persons. Any intermediary genuinely facilitating a transaction can be found to be a fraud later by the supplier; such frauds can be caught in the web of litigations. 

Businesses must meticulously raise invoices that are compliant with the GST provisions. Moreover, the debit notes and credit notes must be generously used to correct errors of any size. The new GST return system, effective from 1 April 2020, will soon tie the ITC claims to the invoices more methodically along the supply chain.

The follow-up task for a buyer with their vendors may become difficult without automation in place. Regardless, it would be much simpler when compared to the difficulty of manual ITC matching posed to taxpayers in the present GSTR-2A and GSTR-3B system.

For any clarifications/feedback on the topic, please contact the writer at annapoorna.m@cleartax.in.