Section 271AAD & 122 : How the Income Tax and GST Acts Work Together
In today’s highly regulated business environment, transparency in accounting and tax filings is not just advisable—it’s essential. Recent amendments in the Income Tax Act (Section 271AAD) and the GST Act (Section 122) aim to combat fraudulent practices like fake invoices, false entries, and misuse of Input Tax Credit (ITC). Both acts work hand in hand to ensure businesses comply with tax laws, and fraud in one area can directly lead to non-compliance in the other.
Let’s understand how these provisions intersect and what this means for businesses & also for professionals.
How Fraud in One Area Can Trigger Penalties in the Other
The government has become increasingly vigilant about fraudulent practices in both direct and indirect taxes, recognizing that non-compliance in one area often leads to violations in the other.
1. Income Tax Act: Section 271AAD – Penalties for False Entries and Omissions
Section 271AAD of the Income Tax Act, introduced in the Finance Act 2020, addresses false entries and omissions in accounting books aimed at evading taxes. The provision clearly states that if the books of account reflect false entries or deliberately omit information to reduce tax liabilities, the business or individual could be penalized. Also person helping to create false entries can be punished.
Examples of False Entries or Omissions:
- Forged or falsified documents, such as fake invoices or any other false evidence.
- Invoices issued for goods or services that were never actually supplied or received.
- Invoices issued for transactions involving non-existent entities
The penalty under Section 271AAD is huge—the penalty equals the amount of the false entry or omitted entry itself. For instance, if a business claims fake expenses of ₹ 7 lakh through false invoices, the penalty would also be ₹7 lakh.
2. GST Act: Section 122 – Addressing Fraudulent Invoices and ITC Misuse
In parallel, the GST Act also targets fraudulent practices, particularly around fake invoices and the misuse of Input Tax Credit (ITC). Section 122 of the CGST Act lays out penalties for various fraudulent activities such as issuing false invoices or claiming ITC without receiving actual goods or services. Section 122(1A) adds further weight by penalizing any individual who benefits from such fraudulent transactions.
Fraudulent GST Practices Include:
- Issuing fake invoices for goods or services that were never supplied.
- Claiming ITC for purchases that never took place (i.e., no actual goods or services were received).
- Passing on or distributing ITC without a legitimate transaction.
Penalties under GST can include fines equal to the tax evaded or the ITC fraudulently claimed.
The Connection Between the Income Tax and GST Acts: One Fraud Can Lead to Non-Compliance in the Other
Here’s where the two acts intersect: fraudulent practices in one can trigger penalties and non-compliance in the other.
Case 1: Fake Invoices in Both GST and Income Tax
Let’s say a business issues fake invoices for supplies that never took place. Under the GST Act, the business would be penalized for issuing fraudulent invoices and misusing ITC. But that same fraudulent invoice, when reported in the books of accounts, would also trigger a penalty under Section 271AAD of the Income Tax Act for false entries.
So, in this scenario:
- The business faces a penalty under GST for false invoices and ITC misuse.
- Simultaneously, the same false invoice triggers a penalty under Income Tax for making a false entry in the books.
Case 2: Misuse of ITC Without Receiving Goods or Services
Imagine a business claims ITC for goods that were never received. The business will face a penalty under Section 122 of the GST Act for claiming ITC fraudulently. However, the same behavior—claiming false expenses to reduce taxable income—can lead to a penalty under Section 271AAD of the Income Tax Act for omitting relevant entries or making false entries in the books of account to evade taxes.
So, in this case:
- The business faces penalties under GST for ITC misuse.
- And, it also faces penalties under the Income Tax Act for false or omitted entries in the books.
Why this is important: A Stronger Compliance Framework
The Income Tax Act and the GST Act now work together to make sure businesses can’t slip through the cracks by committing fraud in one area and escaping scrutiny in the other. With the government’s increased focus on tackling fraud across both direct and indirect taxes, it’s more important than ever for businesses to maintain accurate accounting and transparent financial reporting. This ensures that no fraudulent activity goes unnoticed, helping to create a fairer and more accountable tax system.
The takeaway here is clear: fraud in one area—whether it’s through false invoices, fake entries, or ITC misuse—can lead to penalties in both the Income Tax and GST systems. A business that engages in one form of fraud risks penalties from both fronts.
