Arjun (Fictional Character): Krishna, several cases of fraudulent claim input tax credit (ITC) have been caught by the GST authorities. Considering the same, in Union Budget 2020 it has been proposed to take massive steps to curb issuance of fake invoices. So, what are they?
Krishna (Fictional Character): Arjuna, to curb issuance of fake invoices, New penalty section 271AAD has been proposed to be inserted in the Income Tax Act through Finance Bill, 2020. The amendment will take effect from 1st April 2020. It deals with penalizing for false entries in books of accounts. This insertion would help to reduce the issuance of fake invoices massively under both Income Tax and GST. Let's learn about the same.
Arjun: Krishna, What would be considered as a false entry under Income Tax Act and what would be a penalty for it?
Krishna: Arjuna, Finance Bill, 2020 propose to levy penalty on any person under two circumstances:
i. who is found to have made false entries, or
ii. any entries relevant for computation of total income have been omitted to evade tax liability. Here, false entries include use or intention to use:
a. Forged or false documents such as a fake invoice.
b. Any invoice of supply or receipts of goods or services issued by any person without actual supply or receipt of goods or services.
c. An invoice in respect of supply or receipt of goods or services or both to or from a person who does not exist. Then penalty of an amount equal to the sum of such false or omitted entries may be levied. Even any person who causes a person to make a false entry or causes omission would also be penalized with the sum which is equal to the aggregate amount of such false entry or omitted entry. False entry is a wide term, which includes sales, purchase, expenses, loans, etc. whether shown in books or not.
For ex: If Mr. 'A' is issuing fake invoice of outward supply without making the actual supply of goods to ''B'' of Rs. 1,18,000 ( including GST of Rs. 18,000), then penalty of Rs. 1,18,000 would be levied on both ''A'' as well as ''B''. Penalizing the entire amount of entry may be seen as a harsh step taken by Government.
Arjun: Krishna, What is a false invoice as per GST and what are the consequences of issuing false invoices?
Krishna: Arjuna, The invoice is said to be false in GST when a taxable person:
i. supplies any goods or services or both without the issue of any invoice or issues an incorrect or false invoice with regard to any such supply;
ii. issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act or the rules made thereunder;
iii. issues any invoice or document by using the registration number of another registered person; Then in such cases, he shall be liable to pay a penalty of Rs. 10,000 or amount equivalent to the tax evaded, whichever is higher. Also, a person convicted may be sentenced to imprisonment which may extend to 5 years.
iv. fails to issue an invoice in accordance with the provisions of this Act or the rules made thereunder or fails to account for an invoice in his books of account; Then he shall be liable to a penalty which may extend to Rs. 25,000.
For ex: If Mr. 'A' is issuing a fake invoice of outward supply without making the actual supply of goods to Mr. ''B'' of Rs. 1,18,000 ( including GST of Rs. 18,000), then maximum penalty of Rs. 18,000 may be levied on ''A'' for a fake invoice as well as ''B'' for claiming the wrong ITC.
Arjun: Krishna, What should the taxpayer learn from this?
Krishna: Arjuna, The combined effect of the above examples on both ''A'' and ''B'' is a penalty of Rs. 1,18,000/- under Income tax act, and Rs. 18000/- under the GST Act. Which amounts to Rs. 1,36,000/- in total for a false entry of Rs. 1,18,000/-. Thus if false entry is found under any Act i.e. Income Tax or GST in any Survey, Search or Seizure, etc., it would attract penalty under both. One false entry leads to entry into the litigation world of the Income Tax & GST Act. Just like traffic rules, No entry for false entry on the roads of Income Tax and GST.