Important Keyword: GST Circular 171/03/2022, Fake invoice GST, Fraudulent ITC, Section 74 GST, Section 122 CGST Act, Fake invoice penalty, GST demand and recovery, GST prosecution Section 132, Input Tax Credit fraud, GST Circular 171 explained,
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Table of Contents
F. No. CBIC-20001/2/2022-GST
Government of India
Ministry of Finance
Department of Revenue
Central Board of Indirect Taxes and Customs
GST Policy Wing
New Delhi, Dated the 6th July, 2022
Circular No. 171/03/2022 - GST: Clarification on various issues relating to applicability of demand and penalty provisions under the CGST Act, 2017 in respect of transactions involving fake invoices.
To,
The Principal Chief Commissioners/ Chief Commissioners/ Principal Commissioners/ Commissioners of Central Tax (All)/
The Principal Directors General/ Directors General (All) Madam/Sir,
Subject: Clarification on various issues relating to applicability of demand and penalty provisions under the CGST Act, 2017 in respect of transactions involving fake invoices–Reg
A number of cases have come to notice where the registered persons are found to be involved in issuing tax invoice, without actual supply of goods or services or both (hereinafter referred to as “fake invoices”), in order to enable the recipients of such invoices to avail and utilize input tax credit (hereinafter referred to as “ITC”) fraudulently.
Representations are being received from the trade as well as the field formations seeking clarification on the issues relating to applicability of demand and penalty provisions under the Central Goods and Services Tax Act, 2017 (hereinafter referred to as “CGST Act”), in respect of such transactions involving fake invoices. In order to clarify these issues and to ensure uniformity in the implementation of the provisions of law across the field formations, the Board, in exercise of its powers conferred by section 168 (1) of the CGST Act, hereby clarifies the issues detailed hereunder.
| Sl. No. | Issues | Clarification |
| 1. | In case where a registered person “A” has issued tax invoice to another registered person “B” without any underlying supply of goods or services or both, whether such transaction will be covered as “supply” under section 7 of CGST Act and whether any demand and recovery can be made from ‘A’ in respect of the said transaction under the provisions of section 73 or section 74 of CGST Act. Also, whether any penal action can be taken against registered person ‘A’ in such cases. | Since there is only been an issuance of tax invoice by the registered person ‘A’ to registered person ‘B’ without the underlying supply of goods or services or both, therefore, such an activity does not satisfy the criteria of “supply”, as defined under section 7 of the CGST Act. As there is no supply by ‘A’ to ‘B’ in respect of such tax invoice in terms of the provisions of section 7 of CGST Act, no tax liability arises against ‘A’ for the said transaction, and accordingly, no demand and recovery is required to be made against ‘A’ under the provisions of section 73 or section 74 of CGST Act in respect of the same. Besides, no penal action under the provisions of section 73 or section 74 is required to be taken against ‘A’ in respect of the said transaction. The registered person ‘A’ shall, however, be liable for penal action under section 122 (1)(ii) of the CGST Act for issuing tax invoices without actual supply of goods or services or both. |
| 2. | A registered person “A” has issued tax invoice to another registered person “B” without any underlying supply of goods or services or both. ‘B’ avails input tax credit on the basis of the said tax invoice. B further issues invoice along with underlying supply of goods or services or both to his buyers and utilizes ITC availed on the basis of the above mentioned invoices issued by ‘A’, for payment of his tax liability in respect of his said outward supplies. Whether ‘B’ will be liable for the demand and recovery of the said ITC, along with penal action, under the provisions of section 73 or section 74 or any other provisions of the CGST Act. | Since the registered person ‘B’ has availed and utilized fraudulent ITC on the basis of the said tax invoice, without receiving the goods or services or both, in contravention of the provisions of section 16(2)(b) of CGST Act, he shall be liable for the demand and recovery of the said ITC, along with penal action, under the provisions of section 74 of the CGST Act, along with applicable interest under provisions of section 50 of the said Act. Further, as per provisions of section 75(13) of CGST Act, if penal action for fraudulent availment or utilization of ITC is taken against ‘B’ under section 74 of CGST Act, no penalty for the same act, i.e. for the said fraudulent availment or utilization of ITC, can be imposed on ‘B’ under any other provisions of CGST Act, including under section 122. |
| 3. | A registered person ‘A’ has issued tax invoice to another registered person ‘B’ without any underlying supply of goods or services or both. ‘B’ avails input tax credit on the basis of the said tax invoice and further passes on the said input tax credit to another registered person ‘C’ by issuing invoices without underlying supply of goods or services or both. Whether ‘B’ will be liable for the demand and recovery and penal action, under the provisions of section 73 or section 74 or any other provisions of the CGST Act. | In this case, the input tax credit availed by ‘B’ in his electronic credit ledger on the basis of tax invoice issued by ‘A’, without actual receipt of goods or services or both, has been utilized by ‘B’ for passing on of input tax credit by issuing tax invoice to ‘C’ without any underlying supply of goods or services or both. As there was no supply of goods or services or both by ‘B’ to ‘C’ in respect of the said transaction, no tax was required to be paid by ‘B’ in respect of the same. The input tax credit availed by ‘B’ in his electronic credit ledger on the basis of tax invoice issued by ‘A’, without actual receipt of goods or services or both, is ineligible in terms of section 16 (2)(b) of the CGST Act. In this case, there was no supply of goods or services or both by ‘B’ to ‘C’ in respect of the said transaction and also no tax was required to be paid in respect of the said transaction. Therefore, in these specific cases, no demand and recovery of either input tax credit wrongly/ fraudulently availed by ‘B’ in such case or tax liability in respect of the said outward transaction by ‘B’ to ‘C’ is required to be made from ‘B’ under the provisions of section 73 or section 74 of CGST Act. However, in such cases, ‘B’ shall be liable for penal action both under section 122(1)((ii) and section 122(1)(vii) of the CGST Act, for issuing invoices without any actual supply of goods and/or services as also for taking/ utilizing input tax credit without actual receipt of goods and/or services. |
2. The fundamental principles that have been delineated in the above scenarios may be adopted to decide the nature of demand and penal action to be taken against a person for such unscrupulous activity. Actual action to be taken against a person will depend upon the specific facts and circumstances of the case which may involve complex mixture of above scenarios or even may not be covered by any of the above scenarios. Any person who has retained the benefit of transactions specified under sub-section (1A) of section 122 of CGST Act, and at whose instance such transactions are conducted, shall also be liable for penal action under the provisions of the said sub-section.
It may also be noted that in such cases of wrongful/ fraudulent availment or utilization of input tax credit, or in cases of issuance of invoices without supply of goods or services or both, leading to wrongful availment or utilization of input tax credit or refund of tax, provisions of section 132 of the CGST Act may also be invokable, subject to conditions specified therein, based on facts and circumstances of each case.
3. It is requested that suitable trade notices may be issued to publicize the contents of this Circular.
4. Difficulty, if any, in implementation of the above instructions may please be brought to the notice of the Board. Hindi version would follow.
(Sanjay Mangal)
Principal Commissioner (GST)
📚 Frequently Asked Questions (FAQs): Circular No. 171/03/2022 - GST
Q1. What is Circular No. 171/03/2022-GST about?
Answer: Circular No. 171/03/2022 clarifies the applicability of demand, recovery, and penalty provisions under the CGST Act in cases involving fake invoices, fraudulent ITC, and transactions without actual supply of goods or services.
Q2. What is a fake invoice under GST?
Answer: A fake invoice is a tax invoice issued without any underlying supply of goods or services. Such invoices are commonly used to facilitate fraudulent availment or utilization of Input Tax Credit or to create artificial transactions.
Q3. Does issuing a fake invoice create GST liability?
Answer: No. The circular clarifies that merely issuing an invoice without any actual supply does not amount to a "supply" under Section 7 of the CGST Act. Therefore, no tax liability arises under Sections 73 or 74 solely on that basis.
Q4. Can the person issuing fake invoices still be penalized?
Answer: Yes. Even though no GST demand may arise, the issuer is liable for penalty under Section 122(1)(ii) of the CGST Act for issuing tax invoices without actual supply of goods or services.
Q5. What happens if the recipient claims ITC using a fake invoice?
Answer: If the recipient avails and utilizes ITC without receiving goods or services, the ITC becomes ineligible under Section 16(2)(b). The amount can be recovered under Section 74 along with applicable interest under Section 50.
Q6. Can penalty under Section 122 and Section 74 both be imposed for the same fraudulent ITC?
Answer: Generally, no. Where penalty is imposed under Section 74 for fraudulent availment or utilization of ITC, Section 75(13) prevents imposition of another penalty under Section 122 for the same act.
Q7. What if fake ITC is further passed on through another fake invoice?
Answer: In the specific scenario explained by the circular, no tax demand under Sections 73 or 74 is required because there is no actual outward supply. However, penalties under Section 122 continue to apply.
Q8. Can prosecution also be initiated in fake invoice cases?
Answer: Yes. Depending on the facts and the amount involved, provisions of Section 132 relating to prosecution and criminal proceedings may also be invoked in cases involving fraudulent ITC or fake invoices.
Q9. Does every fake invoice case result in the same legal consequences?
Answer: No. The circular emphasizes that actual action depends on the facts and circumstances of each case. Different combinations of demand, recovery, penalties, and prosecution may apply depending on how the fake invoice was used.
Q10. Who else can be penalized besides the invoice issuer?
Answer: Persons who knowingly retain the benefit of transactions covered under Section 122(1A), or who facilitate fraudulent ITC, may also face penalties depending on their role in the transaction.
Q11. Why is this circular important for businesses?
Answer: The circular clearly distinguishes between tax liability and penal liability. It helps businesses, tax professionals, and GST officers correctly determine when tax recovery is appropriate and when only penalties apply.
Q12. How can businesses avoid issues relating to fake invoices?
Answer: Businesses should verify supplier credentials, ensure actual receipt of goods or services, maintain proper documentation, reconcile ITC regularly, and avoid dealing with suspicious vendors. Strong internal controls are the best defense against fake invoice disputes.
Conclusion
In simple terms, Circular No. 171/03/2022 provides much-needed clarity on one of the most sensitive areas of GST enforcement—fake invoices and fraudulent Input Tax Credit. Rather than treating every case identically, the CBIC explains how the law should be applied based on the actual facts of each transaction, distinguishing between tax liability, ITC recovery, penalties, and prosecution.
Download PDF: Circular No. 171/03/2022 - GST
More Information: https://taxinformation.cbic.gov.in/
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