Customs Act, 1962 Section 114ac — Penalty for fraudulent utilisation of input tax credit for claiming refund

Overview

Section 114AC of the Customs Act, 1962, prescribes a penalty for those fraudulently using input tax credit (ITC) to claim refunds on exported goods. This section aims to deter the misuse of ITC to artificially inflate refund claims, thereby safeguarding government revenue.

Who Does This Apply To?

This section applies to any person who obtains an invoice through:

• Fraud
• Collusion
• Willful misstatement
• Suppression of facts

and subsequently utilizes the ITC based on that fraudulent invoice to discharge duty or tax on goods exported under a refund claim. Essentially, anyone manipulating invoices to wrongly claim export refunds falls under its purview.

How It Works

The penalty mechanism under Section 114AC works as follows:

• Fraudulent Invoice Acquisition: The process begins with a person obtaining an invoice via fraud, collusion, willful misstatement, or suppression of facts. This implies intentional wrongdoing in securing the invoice.
• ITC Utilization: This fraudulently obtained invoice is then used to avail input tax credit (ITC). This ITC reduces the duty or tax liability on goods meant for export.
• Export with Refund Claim: The goods, on which duty/tax has been 'paid' using the fraudulent ITC, are then exported. The exporter then claims a refund of the duty or tax amount 'paid' using the fraudulent ITC.
• Penalty Imposition: If the authorities determine that the ITC was fraudulently utilized for the refund claim, a penalty is imposed. The penalty can be up to five times the refund claimed.

Important Conditions & Exceptions

• Condition 1: The fraud must be directly linked to the utilisation of ITC for claiming a refund on exported goods.
• Condition 2: The penalty is capped at five times the refund claimed. The adjudicating officer can impose a lower penalty depending on the severity of the fraud.
• Explanation: The section explicitly clarifies that the term "input tax credit" holds the same meaning as defined in Section 2(63) of the Central Goods and Services Tax Act, 2017. This refers to the credit of input tax charged on any supply of goods or services or both used or intended to be used by the registered person in the course or furtherance of his business.

Practical Example

Consider ABC Exports, which wants to claim a substantial refund. ABC Exports colludes with a supplier to generate a fake invoice worth ₹50 lakhs, falsely showing GST paid on raw materials. They utilize this fraudulent ITC of ₹50 lakhs to offset the customs duty payable on their exported goods. They then claim a refund of this amount.

If the customs authorities uncover this fraud, ABC Exports will be liable to a penalty not exceeding five times the refund claimed. In this case, the maximum penalty would be ₹2.5 crores (5 x ₹50 lakhs). The actual penalty levied could be less, depending on the adjudicating officer's assessment of the situation.

Key Amendments

No major amendments since enactment.