Top Stories The Issue of Fake Invoices and Non-Existent Businesses: Legal and Practical Considerations [Find Draft Reply Format Here] The discussed issue is a common occurrence since the implementation of the Goods and Services Tax in 2017. By Avinash Kurungot – On February 21, 2025 1:36 pm – 3 mins read The issuance of fake invoices and the operation of non-existent businesses have become significant concerns under the Goods and Services Tax (GST) regime. Tax authorities have been taking stringent measures to curb these fraudulent activities, as they often lead to revenue loss, tax evasion, and illegal financial transactions such as money laundering.

This article explores the probable events leading to the issuance of a Show Cause Notice (SCN) by the Revenue Department, the mechanisms behind fake invoicing, and the relevant judicial precedents that establish the legal principles governing such cases. Events Leading to the Issuance of an SCN A Show Cause Notice (SCN) is typically issued when the Revenue Department suspects fraudulent activities concerning tax evasion. The sequence of events leading to an SCN usually involves: Tax authorities monitor transactions through GST returns, electronic records, and third-party data to identify suspicious activities.

During investigations, they may discover that a supplier does not exist at the registered place of business. In some cases, the supplier or an intermediary may admit to issuing invoices without an actual supply of goods or services. A mismatch in Input Tax Credit (ITC) claims can also indicate fraudulent transactions, where the ITC claimed does not correspond with genuine supplies. Based on these findings, the Department may issue a notice under Section 74 of the CGST Act, alleging that ITC has been availed fraudulently. How Fake Invoices Are Used Fake invoices are primarily used for two purposes – the first being to claim fraudulent ITC and the second being for money laundering purposes and running of shell companies. Businesses issue invoices without an actual supply of goods or services to claim ITC fraudulently. This results in undue tax credits being adjusted against legitimate tax liabilities, causing revenue leakage. Some entities use fake invoices for layering transactions and laundering illicit money. Shell companies are often created to issue such invoices, making it difficult for authorities to trace the flow of funds. Judicial Precedents on Fake Invoice Allegations Several judgments have laid down principles concerning the burden of proof, natural justice, and procedural safeguards in cases involving fake invoices.

Some of the most relevant judgments include: CCE, Bangalore vs. Brindavan Beverages (P) Ltd: Civil Appeal Nos. C.A. No. 003417 – 003425 / 2002 where the Supreme Court held that an SCN must contain specific allegations and supporting evidence; vague and unintelligible notices violate principles of natural justice. Similarly, in Kaur & Singh vs. CCE, New Delhi (1997), the Apex Court ruled that the party to whom a show cause notice is issued must be made aware of the allegations against them, as it is a key requirement of natural justice. Legal Defenses Against Allegations of Fake Purchases A taxpayer facing an SCN for alleged fake invoices can raise the following defenses: Demand for Relied-Upon Documents: Authorities must provide all documents used to frame allegations. Cross-Examination Rights: The taxpayer has the right to cross-examine individuals whose statements form the basis of the SCN. Proving Bona Fide Transactions: By providing valid purchase orders, transport records, and payment proofs.

Challenging Vague Notices: SCNs that lack clarity on alleged violations can be challenged as invalid. Conclusion Fake invoices and non-existent businesses pose a significant challenge to tax compliance and revenue collection. While authorities must crack down on fraudulent activities, taxpayers should be aware of their legal rights when facing allegations. Judicial precedents have established that the burden of proof lies with the department, and any violation of natural justice principles renders an SCN unsustainable. Businesses must maintain thorough documentation to defend against wrongful allegations and ensure compliance with GST regulations. By understanding the legal landscape, businesses can better navigate SCNs and protect their rights against arbitrary tax demands.