Fake Invoice and ITC Fraud Notices Under GST: Defending a Bona Fide Purchaser

One of the most common GST problems for honest businesses is buying from a supplier who turns out to be fake. The supplier’s registration is cancelled, the department says no tax was paid, and the buyer receives a notice to reverse the input tax credit with interest and penalty. Sometimes the credit ledger is blocked without notice. This guide explains the law and the evidence that helps a genuine buyer.

What Does the Department Allege in These Cases?

The usual allegations are that the supplier is a non-existent or paper entity, that invoices were issued without any real supply of goods or services, and that the buyer availed input tax credit on those invoices. Where fraud, wilful misstatement or suppression is alleged, the notice is issued under Section 74. Where it is not, Section 73 applies. Our guide to Section 73 and Section 74 notices explains why the difference affects penalty and time limits.

What Must a Buyer Prove to Claim Credit?

Section 16 of the CGST Act sets the conditions for taking credit. In outline, the buyer must hold a tax invoice, have received the goods or services, have the tax actually paid to the government by the supplier, and have filed the returns. The disputes arise from the condition that the tax be paid by the supplier. Our article on Section 16(4) and the ITC time limit covers the time rules.

Courts have repeatedly said that a genuine buyer cannot be expected to guard against a supplier’s default after the transaction, and that the department should in the first instance proceed against the defaulting seller. Whether that argument succeeds depends heavily on the evidence of a real transaction.

What Evidence Helps a Bona Fide Purchaser?

The department looks for proof that goods or services really moved and that you paid. Keep and produce:

• Purchase orders, quotations and correspondence with the supplier
• Tax invoices, e-way bills and transport receipts or lorry receipts
• Proof of delivery and stock entries in your books
• Payment through banking channels, with bank statements, and not in cash
• The supplier’s registration certificate and returns on the portal at the time of purchase
• Proof that the goods were used or sold on, such as your own sales invoices

Payment by cheque or bank transfer to the supplier’s account, and goods that you can show on your stock register, carry far more weight than invoices alone. Cash payments and missing transport records are the usual reason a buyer loses.

What Is Rule 86A and Can the Department Block Your Credit?

Rule 86A allows an officer, on written reasons to believe that credit has been fraudulently availed or is ineligible, to block the use of the credit available in the electronic credit ledger. The restriction ends after one year from the date it was imposed. A blocking order passed without recorded reasons, or without any material linking you to the fraud, can be challenged before the High Court. Courts have also said the officer must give reasons in writing and cannot rely on a bare statement.

What Does Section 132 Add?

If the department says the invoices were issued without supply, it can start criminal proceedings under Section 132 against those who issued them, and in some cases those who knowingly took the credit. See our guide to GST arrest, summons and anticipatory bail for how that works.

How Should You Reply to the Notice?

Reply within the time given in the notice, even if you ask for more time to collect papers. Answer provision by provision. Attach the proof of receipt and payment with a document index, state clearly that you were unaware of any default by the supplier, and ask for a personal hearing. A reply that only says the supplier is responsible, without proof of the transaction, is unlikely to succeed. Our guide to replying to a GST show-cause notice gives a step-by-step approach.

Can You Challenge the Order Later?

Yes. An adverse order can be appealed under Section 107 within the time allowed, with the pre-deposit explained in our article on the GST appeal pre-deposit. An order passed without hearing you, or without considering your documents, can also be a ground for a writ.

Need Advice on an ITC Notice?

Our GST and Tax practice reviews ITC notices and prepares replies and appeals. Book a consultation through our website and bring your notice, purchase records and bank statements. This article is general information and not legal advice.