Penalty for Fake Invoices explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
When a fake invoice is issued, GST law looks at three people: the one who issued it, the one who took credit on it, and the one at whose instance and for whose benefit the transaction was run. Each faces a different provision, and the Supreme Court has now limited how far the third one reaches. Our GST notices and litigation team handles these notices.
The issuer of a tax invoice without any supply is liable to penalty under section 122(1)(ii), but no tax demand lies against him under section 73 or 74 (Circular 171/03/2022-GST). The recipient who took ITC without receiving goods or services faces ITC recovery and penalty under section 74 (or 74A from FY 2024-25), and no second penalty under section 122. A person who retains the benefit of such a transaction and at whose instance it was conducted faces a penalty equal to the tax evaded or ITC availed or passed on under section 122(1A).
The three provisions
Section 122(1) lists 21 offences carrying a penalty of Rs. 10,000 or the tax evaded or ITC involved, whichever is higher. Two matter here: clause (ii), issuing an invoice or bill without supply of goods or services in violation of the Act, and clause (vii), taking or utilising ITC without actual receipt of goods or services, fully or partly.
Section 122(1A), inserted by the Finance Act 2020 with effect from 1 January 2021, reads: any person who retains the benefit of a transaction covered under clauses (i), (ii), (vii) or (ix) of sub-section (1), and at whose instance the transaction is conducted, is liable to a penalty equal to the tax evaded or ITC availed or passed on. There is no Rs. 10,000 floor in this sub-section.
| Person | Conduct | Provision | Amount |
|---|---|---|---|
| Issuer | Invoice without supply | 122(1)(ii) | Higher of Rs. 10,000 or tax involved |
| Recipient | ITC without receipt of goods or services | Section 74 demand (74A from FY 2024-25), and 122(1)(vii) where it applies | See below |
| Beneficiary at whose instance | Retains benefit of clauses (i), (ii), (vii) or (ix) transactions | 122(1A) | Tax evaded or ITC availed or passed on |
| Aider or abettor | Helps with clauses (i) to (xxi) | 122(3)(a) | Up to Rs. 25,000 |
What Circular 171/03/2022-GST says
The Background Material reproduces the CBIC clarification on fake invoices. It works through three chains.
A issues a tax invoice to B with no supply. An invoice alone is not a "supply" under section 7, so no tax liability arises against A, and no demand under section 73 or 74 is required. A is, however, liable to penal action under section 122(1)(ii).
B takes ITC on A's invoice and uses it to pay tax on his own real outward supplies. B has taken fraudulent ITC in contravention of section 16(2)(b). He is liable to demand and recovery of that ITC, with interest and penal action, under section 74 of the Act. Under section 75(13), where penal action for fraudulent availment or utilisation of ITC is taken under section 74, no penalty for the same act can be imposed under any other provision, including section 122.
B takes ITC on A's invoice and passes it on to C by an invoice with no supply. There is no supply from B to C, so no tax was payable, and no demand under section 73 or 74 is made on B for either the ITC or an outward tax liability. B is, however, liable to penal action under both section 122(1)(ii) and section 122(1)(vii).
Illustration (not a real case): A issues invoices showing GST of Rs. 1,80,000 to B with no goods moved. B takes Rs. 1,80,000 of ITC and uses it against tax on genuine sales. A faces penalty under 122(1)(ii), the higher of Rs. 10,000 and the tax involved, so Rs. 1,80,000. B faces recovery of Rs. 1,80,000 ITC plus interest, and a penalty under section 74, which for the period up to FY 2023-24 is equal to the tax if no early payment window is used. See section 74 penalty slabs.
Note that because A has no tax demand against him, any appeal against a penalty-only order on A falls under the 10% pre-deposit rule, covered in appeal against a penalty-only order.
The limit on section 122(1A)
Both conditions in section 122(1A) must be met: the person must be the one at whose instance the transaction was conducted, and he must retain the benefit. The Background Material records that the Bombay High Court, in Shantanu Sanjay Hundekari v. Union of India, read the sub-section as applying to a taxable person, and that the Supreme Court has upheld that view. The Supreme Court affirmed that section 122(1A) is attracted only where the person is a taxable person and has both retained the benefit and caused the transaction at his instance. No principle of vicarious liability can be imported, so an employee, authorised representative or power of attorney holder who is neither a taxable person nor a beneficiary cannot be penalised merely because of association with the defaulting entity.
For a director, manager or consultant named in a notice under section 122(1A), the first reply point is therefore: is the noticee a taxable person, did he benefit, and is there evidence the transaction was at his instance? The position of persons named as co-noticees is covered in co-noticees and the section 122(1A) personal penalty.
Other exposure that sits alongside
- Prosecution: section 132(1)(b) covers issuing an invoice without supply that leads to wrongful ITC or refund, and clause (c) covers availing ITC on such an invoice. Section 138 bars compounding for a person accused under clause (b), which is relevant to the issuer; see compounding under section 138.
- Proceedings against others: where a notice is issued to the main person and others, and the main person's proceedings are concluded under section 73 or 74, proceedings against the persons liable to penalty under sections 122 and 125 are deemed concluded.
Need help with a fake-invoice notice?
These notices mix demand, penalty and prosecution risk, and the right defence depends on who the noticee is and what the evidence shows. Our team can review the notice, the supplier trail and your credit claim, and prepare the reply through GST notices and litigation. For the credit side, a GSTR-2B to books reconciliation checks which suppliers and invoices are exposed before a notice arrives.
Key takeaways
- Issuer of a no-supply invoice: penalty under 122(1)(ii); no tax demand (Circular 171/03/2022-GST).
- Recipient who uses the ITC: demand and penalty under section 74; no separate section 122 penalty (section 75(13)).
- Recipient who passes ITC on by another no-supply invoice: penalty under 122(1)(ii) and (vii), no demand under 73 or 74.
- Section 122(1A) needs both retained benefit and "at whose instance"; it applies to a taxable person, and the Supreme Court has rejected vicarious liability.
- Check the pre-deposit for any penalty-only order before appealing.
Read next
- Co-Noticees and the Section 122(1A) Personal Penalty
- Fake Invoicing: The Full Consequence Chain
- Section 74: Fraud, Suppression and the Penalty Slabs
- Compounding of GST Offences: Section 138 and Rule 162
Disclaimer: Positions stated as on 30 September 2026, based on the CGST and IGST Acts and Rules as amended, the Finance Act 2026, and the ICAI Background Material on GST (14th Edition, July 2026). Verify current notifications before acting.