Fake ITC FAQs — Bogus Invoices, Section 74 & GST Fraud

These questions are drawn from real GST compliance scenarios, litigation, and common queries from practitioners. Answers reflect the law as amended up to Finance Act 2024.

• 1 Can a genuine buyer be denied ITC if the supplier turns out to be a fake entity?

  This is the most contested question in fake-ITC litigation. The Supreme Court in <em>State of Karnataka v. Ecom Gill Coffee Trading</em> (2023) held that the onus is on the taxable person to prove that the transaction was genuine and that the supply actually took place. The burden is not discharged merely by producing invoices and payment records — the recipient must also show the physical movement of goods and the identity of the actual supplier. However, several High Courts have held that a bona-fide buyer who had no means to detect fraud and who paid tax through regular banking channels should not be penalised under Section 74.

• 2 What is the difference between a Section 73 demand and a Section 74 demand in fake ITC cases?

  Section 73 applies to non-fraud situations — genuine errors, omissions, or differences without any intent to evade. Section 74 applies where the short payment or wrong ITC availment is by reason of fraud, wilful misstatement, or suppression of facts. In fake ITC cases, the department invariably issues demands under Section 74 because the allegation is fraud. The consequences differ: Section 74 carries a mandatory penalty of 100% of tax (vs 10% under Section 73) and a longer 5-year limitation (vs 3 years).

• 3 What is Rule 86A and how is an ITC credit block challenged?

  Rule 86A of the CGST Rules, 2017 empowers a Commissioner-level officer to block the use of ITC available in the Electronic Credit Ledger (ECL) if there are reasons to believe that the credit was fraudulently availed or is ineligible. The block is valid for one year from the date of the order. Courts have held that Rule 86A requires recorded reasons and cannot be applied mechanically. A blocked credit ledger can be challenged by writ petition; the High Courts have consistently required the department to provide the relied-upon material to the taxpayer.

• 4 Can provisional attachment be made during a fake ITC investigation?

  Yes. Section 83 of the CGST Act empowers the Commissioner to provisionally attach the property (including bank accounts) of a taxable person during the pendency of proceedings under Sections 62, 63, 64, 67, 73, or 74. In fake ITC cases, provisional attachment under Section 83 is frequently used alongside Rule 86A credit blocking. The attachment order expires after one year automatically. Courts have held that Section 83 cannot be used as a tool of harassment and requires formation of an opinion on 'necessity to protect revenue'.

• 5 Is criminal prosecution under Section 132 and civil demand under Section 74 simultaneously possible?

  Yes. Civil proceedings (Section 74 SCN and demand) and criminal prosecution (Section 132) can proceed simultaneously. There is no doctrine of election requiring the department to choose one or the other. The Supreme Court has upheld the validity of parallel proceedings in direct tax contexts, and GST courts have followed the same principle. A taxpayer who settles the Section 74 demand does not automatically get immunity from Section 132 prosecution, unless compounding under Section 138 is specifically invoked.

• 6 What documents should a taxpayer maintain to defend against a fake ITC allegation?

  Based on judicial guidance, particularly the Supreme Court's Ecom Gill ruling, taxpayers should maintain: (1) tax invoices with complete supplier GST details; (2) e-way bills for goods movement; (3) lorry receipts / bilty / transporter records; (4) payment records through banking channels (no cash above ₹2 lakh); (5) weighment slips, inspection reports, or goods receipt notes; (6) GSTR-2A / GSTR-2B showing supplier filing history; and (7) any third-party verification of supplier premises or goods. Courts have held that the more documentation a buyer can produce of actual receipt of goods, the stronger the defence.

• 7 What is the limitation period for raising a fake ITC demand under Section 74?

  Under Section 74(10), the proper officer must issue the order (not just the SCN) within 5 years from the due date for filing the annual return for the year to which the tax relates, or within 5 years from the date of erroneous refund. This is a hard statutory outer limit — unlike Section 73 (3-year limit). Finance Act 2024 has restructured Sections 73 and 74 into a merged Section 73 framework w.e.f. prospective date; the old Section 74 five-year limit remains applicable to pre-amendment periods.