GST Fake Invoices: Supreme Court Pulls Up GST Department
The Supreme Court of India recently addressed a critical issue affecting genuine taxpayers under the GST regime. The matter concerns purchasers who, despite making legitimate payments (including GST), face penalties due to suppliers issuing fake invoices. The Court’s observations highlight systemic gaps in the GST framework, urging the GST department to improve due diligence and protect genuine taxpayers.
The Core Issue: Who’s Responsible for Supplier Fraud?
In a recent hearing, Chief Justice of India (CJI) Sanjiv Khanna emphasized a recurring problem: genuine purchasers are being held liable when suppliers commit fraud by using fictitious GST registrations or raising fake invoices. The Court raised an important question:
“How can a buyer, who has purchased goods, made payments, and paid GST, be penalized for the supplier’s wrongdoing?”
This observation puts the spotlight on a flaw in the GST system, where the liability shifts to the buyer for verifying the supplier’s credentials—a responsibility that should primarily lie with the GST department.
Key Observations from the Court
- Genuine Procurement, Real Payments
The Court acknowledged that, in most cases, goods are genuinely procured and payments (including GST) are made. However, the subsequent discovery of the supplier’s invalid GST registration creates problems for the buyer. - Department’s Due Diligence Lapses
The bench clarified that the GST Act places the responsibility of verifying suppliers’ credentials on the department. As CJI Khanna remarked:“Diligence work is your responsibility under the GST Act.” - Impact on Legal and Other Professions
Drawing a parallel, the Court observed that similar verification expectations in the legal profession would create widespread challenges, emphasizing the impracticality of the current system. - Flaws in Existing Mechanisms
Although the GST department proposed linking supplier and buyer transactions via online mechanisms, the Court noted such measures might not resolve the root issue. Fraudulent registrations and benami transactions could still surface despite such measures.
Case Laws Supporting Buyers
Several judgments align with the Supreme Court’s recent observations:
- M/s D.Y. Beathel Enterprises v. State Tax Officer
The Madras High Court ruled that penalizing buyers for supplier fraud without evidence of collusion is unjust. - Arise India Ltd. v. Commissioner of Trade & Taxes
The Delhi High Court highlighted the importance of protecting genuine taxpayers from the consequences of fraudulent supplier activities.
What This Means for Taxpayers
This ruling is a step toward safeguarding honest taxpayers from undue harassment. Buyers who act in good faith—procuring goods, making payments, and paying GST—should not be penalized for fraud committed by suppliers.
Proactive Measures for Taxpayers
To minimize risks, taxpayers can:
- Verify GST registration of suppliers on the GST portal.
- Maintain comprehensive documentation, including invoices and payment records.
- Regularly review GST compliance reports to identify discrepancies early.
What the GST Department Must Do
The Supreme Court’s observations call for a robust mechanism to address fake invoices without penalizing genuine buyers. Key measures include:
- Automating Supplier Verification: Use AI and machine learning to flag suspicious registrations and transactions.
- Enhanced Accountability: Ensure officers conducting verifications are held accountable for lapses.
- Awareness Campaigns: Educate taxpayers about common fraud schemes and preventive measures.
Conclusion: A Path Toward Fairer Taxation
The Supreme Court’s strong stance on the issue signals a much-needed push for systemic reforms in the GST framework. By focusing on departmental due diligence and creating a taxpayer-friendly system, the government can restore trust in the GST regime.
For taxpayers, this ruling serves as a reminder to prioritize compliance while advocating for a fairer taxation environment.