Arrest of perpetrators for fraudulent passing and availing ITC in GST – Some issues

27 七月 2022

Under the Cenvat and Modvat regime as well as under various incentive schemes under the Customs law/FTDRA, there were unscrupulous persons, who created various firms/companies in the name of other individuals, existing or non-existing, for the purposes of undertaking fraudulent paper transactions. Such firms/companies may be termed as dummy firms/companies. Under the Cenvat and Modvat schemes, invoices were issued in the name of such companies to pass on credit of duties and taxes without payment of corresponding duties and taxes to the Government. In fact, no goods or services were supplied in respect of which invoices were issued.

The individuals who were employees, partners, shareholders or directors of such firms/companies were held responsible, if any of such fraudulent transactions were unearthed. The persons, who created such firms/companies did not hold any position as an employee, partner, shareholder or director in such firms/companies.

The same practice seems to be continuing under the GST regime. From the investigations under the GST as reported in media or from many of such cases in which various decisions have been passed by the High Courts in writ petitions or on applications seeking anticipatory or regular bail, it may be inferred that the allegations in many of such cases are that unscrupulous persons have created various dummy firms/companies in the name of other individuals, existing or non-existing, for the purposes of undertaking fraudulent paper transactions to pass on input tax credit without supply of goods or services and without payment of any GST in respect of such supplies [2020 (32) G.S.T.L. 516 (P&H), 2020 (35) G.S.T.L. 32 (Cal.)]. Though such proceedings have not attained finality but allegation of the department is that dummy firms/companies are created by some individuals for the purpose of paper transactions. Such invoices are issued from such dummy firms/companies. Further, such firms/companies were also availing input tax credit without receipt of any invoice or credit of tax paid on reverse charge basis [though no such tax is paid], so that such fraudulently availed credit may be passed on. This mayhem was required to be checked by deterrent action. The amendment by the Finance Act, 2020 in the CGST Act, 2017 is relevant in this regard.

The offences and punishment are provided under Section 132 of the CGST Act as well as SGST/UTGST Acts. The following clauses from the unamended CGST Act, 2017 are relevant:

            Section 132. Punishment for certain offences.

(1) Whoever commits any of the following offences, namely:—

(b)   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 leading to wrongful availment or utilisation of input tax credit or refund of tax;

(c)   avails input tax credit using such invoice or bill referred to in clause (b);’

From the above, it may be noted that the offender was ‘whoever commit’ the offences listed under Section 132(1). Further, clause (l) of Section 132(1) lists whoever ‘attempts to commit, or abets the commission of any of the offences mentioned in clauses (a) to (k) of this section’ as an offence.

The plain reading of the above provision makes it clear that the above referred dummy firms/companies or the employees/directors/shareholders/partners of such firms/companies, from which such fraudulent invoices were issued, may fall under the clause ‘whoever commits’ in respect of the offences listed under clause (b) or clause (c). However, the real perpetrators, who created such dummy firms/companies from behind the curtain as explained above, of such offences, might not be covered under clause ‘whoever commits’ in respect of offences under clause (b) or clause (c) before amendment.

This interpretation is further supported by the fact that the Finance Act, 2020 amended the provisions of Section 132(1) and now the amended provision has also expanded the scope to include whoever…causes to commit and retains the benefits arising out of any of the following offences. Further, the Finance Act, 2020 also amended clause (e) by removing clause ‘fraudulently avails input tax credit’ and amended clause (c) by inserting clause ‘fraudulently avails input tax credit without any invoice or bill’.

The visible effect of the above amendment are as follows:

  1. Under main body in sub-section, the actual perpetrators of offences, if the department proves that the benefits received for such invoices is retained by them, are included. However, in cases, if the amount received as consideration against the invoice is retained in the accounts of the firms/companies from which invoices were issued, then, the offence is not complete under this entry.
  2. Fraudulent availing of input tax credit without any invoice or bill is now covered under Section 132.

Even such actual perpetrators may not be penalised for commission of such acts prior to insertion of Sub-section (1A) in Section 122 of the GST Acts.

The GST Act classifies some offences as cognizable and non-bailable and other offences as non-cognizable and bailable. According to Section 132(5), offences specified in clause (a) or clause (b) or clause (c) or clause (d) of Section 132(1) and punishable under clause (i) of that sub-section shall be cognizable and non-bailable. Cognizable and non-bailable offences are where arrest can be made without warrant and in terms of Section 69(1) arrest can be made on authorisation from the Commissioner for such offences mentioned in Section 132(5).

Before the amendment by the Finance Act, 2020 in Section 132(1), as explained above, such perpetrators might not be liable to be arrested without warrant. Such perpetrators may be considered to have committed offence as abetter under clause (l) of Section 132, but they may not be alleged to be the offender in respect of any of the offences which are cognizable and non-bailable.

At the same time, a question may arise as to whether the clause ‘and retain the benefits arising out of’ is also applicable to ‘whoever commits’, then the amendment may now restrict the scope of Section 132(1). However, the way the amendment has been made and structured, ‘whoever commits the offence’ will be covered separately. However, the courts will decide this issue in time to come when this issue is argued specifically.

As the amended provision cannot be applied retrospectively, therefore, a question arises about validity of the continued custody of such persons arrested under Section 69(1) before the amendment in Section 132 and also about the bail terms, wherever those persons were set free on furnishing of bail.

We have to wait for the Court’s decision about whether the offences committed earlier by such persons were covered as cognizable and non-bailable.

[The author is a Partner in Indirect Tax Litigation practice at Lakshmikumaran & Sridharan Attorneys, New Delhi/Prayagraj]


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