What is a Fake Invoice and How it can be misused?

Fake invoice is the one which is issued without actually supplying Goods or Services. As per the SOP issues on how to tackle GST fake invoices, following are the ways in which fake invoices can be misused:

• Issue of invoice without actual supply of goods or services where payment of tax is made by way of Input Tax Credit which is not available to issuer of invoice.
• Issue of invoice by a person where the invoice is issued to one person and goods are diverted to some other person.
  Routing of invoice through a series of shell companies and transfer of input tax credit from one company to another in a circular fashion to increase the turnover.

What can be potential motives for using a fake invoice?

There can be various reasons for which an enterprise can issue a fake invoice. Some of them are mentioned below

• Evasion of GST on taxable output supplies by availing undue ITC and saving cash payment of GST by utilizing undue ITC.
  Converting excessive ITC into cash by transferring of ITC to those who can utilize it or by way of IGST refunds.
• Increasing the turnover for availing bank loans or higher Credit Limit/Overdraft from banks.
• Inflating turnover to improve valuations of stock or to bag in the government contracts.
• Booking fake purchases for showing reduced profit margins and avoiding payment of income tax by reducing net profit.
  Cash generation or diversion of company funds.
• Laundering of Money.

How can Fake Invoice Fraud impact your Business?

• Being an aid to Fake GST Invoice fraud leads to levy of penalties under the Act.
• The department can demand the unrecovered GST amount from you even if you are the victim of such fraud.
• It can hamper reputation of the business.
• Cancellation of GST Registration can also take place.

What steps should be taken to avoid pitfalls?

• Strong KYC procedures of the vendors should be in place.
• Check for the vendor’s name in the fraudster’s list issued by the government.
• Make Return reconciliation as regular practice and follow up with the vendors accordingly.
• Self-verification of the vendors on GST portal.
• Get information of about the owner of the entity.