Govt plans to impose penalty for fake invoices used to claim input tax credit

The Centre plans to levy penalty for fake invoicing – used to claim input tax credit (ITC) illegally – with effect from April 1. While this seems to be a reasonable step, experts say that such provisions, if not properly implemented, may counter the government’s aim to alleviate tax terrorism.

Background

Several cases were found by tax authorities, where the assessees had claimed ITC using fake invoices after implementation of GST. It was noticed that these fake invoices were issued by racketeers who do not actually carry on any business or profession. As per the memorandum of Budget FY21, the GST charged on such invoices was neither paid nor was intended to be paid. But using these fake invoices, a few registered tax payers fraudulently claimed ITC to reduce their GST liability. Therefore, the Budget has proposed a new provision under GST to levy penalty on those issuing fake invoices. The provision will be triggered if the issuer of invoice makes any false entry or if any transaction is omitted from the books of accounts to evade tax liability. In such cases, any other person (including the buyer) involved in such fraudulent activity will also be penalised. The penalty amount will be equal to the aggregate amount of false or omitted entries.

Need for caution

While the logic behind the move seems sound, tax experts also express the concern that this provision should not lead to harassment of tax payers.

The concern, as per a tax expert, has been on the back of notices sent by the department to a few tax payers, stating mismatch of ITC, despite the claims being genuine. For instance, there have been cases in which taxpayers were sent notices for mismatch of ITC in a particular month, due to the taxpayers claiming previous month’s ITC, which was not claimed earlier due to some genuine reasons.

Gautam Khattar, Partner, Indirect Taxes, PwC says that the penalty provision should not lead to harassment of tax payers. “If that happens, the new provision will be against the stated objective of the Government to free the tax payers from tax harassment,” he said.

Mekhla Anand, partner, Cyril Amarchand Mangaldas, also says that the new provision achieving its intended aim depends on how it will be implemented.

Further, FY21 will also see the applicability of GST e-invoicing (mandatory for companies with turnover more than ₹100 crore), simplified returns (just one monthly return in place of two now – GSTR 3B and GSTR -1), full-fledged use of e-way bills, applicability of provision for penalty for fake invoicing, and probable use of artificial intelligence and data analytics to match input tax credit with returns.

As businesses have to brace themselves to adjust to the new changes in the GST system, tax experts believe the government should also make sure that the process is seamless and should not inconvenience tax payers in case of genuine transactions.

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