This circular provides clarification on the applicability of demand, recovery, and penalty provisions under the CGST Act in cases involving issuance or use of fake invoices, that is, invoices issued without any actual supply of goods or services.

It clarifies that where a registered person issues an invoice without any underlying supply, such activity does not qualify as a “supply” under section 7 of the CGST Act. Accordingly, no tax demand or recovery can be made from such person under sections 73 or 74. However, the issuer of such fake invoices is liable to penalty under section 122(1)(ii) for issuing invoices without actual supply.

In cases where the recipient avails and utilises input tax credit on the basis of fake invoices without receipt of goods or services, such ITC is ineligible under section 16(2). The recipient is liable for demand, recovery of ITC, interest, and penalty under section 74 for fraudulent availment or utilisation of ITC. Where such penal action is taken under section 74, no separate penalty is to be imposed for the same act under other provisions.

The circular further clarifies that in scenarios where fake invoices are used only to pass on ITC without any supply, no tax demand arises as there is no outward supply. However, stringent penalties under section 122 apply for issuing invoices without supply and for wrongful availment or utilisation of ITC. It also highlights that provisions of section 132 relating to prosecution may be invoked based on the facts of each case. These clarifications aim to ensure consistent and legally sound action against fraudulent invoicing practices.