🚨 Fraudulent Supply GST Liability: Gujarat AAR Ruling Clarifies the Law
The Gujarat Authority for Advance Rulings (AAR), in a landmark decision dated 21st March 2025, clarified that fraudulent supply GST liability arises even if the consideration is never received. The ruling emerged in Case No. GUJ/GAAR/R/2025/03 involving M/s. Acube Engitech Company, a manufacturer duped by fraudsters into supplying goods against forged documents.
🔍 Key Legal Issue
Whether GST is applicable on goods supplied in a fraudulent transaction where no payment is received?
The applicant argued that since the supply was induced by fraud and no payment was received, GST shouldn’t be levied. They referenced Section 21 of the IGST Act, but the AAR clarified that this section only applies to import of services—not goods.
đź“š Relevant Legal Provisions Cited
| Provision | Relevance |
|---|---|
| Section 7, CGST Act | Defines “supply”—includes all forms of supply made for consideration in the course of business. |
| Section 12, CGST Act | Determines time of supply—earlier of invoice date or payment date. |
| Section 20, IGST Act | Extends CGST provisions to inter-State supplies. |
| Sale of Goods Act, 1930 | Held inapplicable—GST is based on supply, not contractual sale. |
⚖️ What Did the AAR Rule?
- Misinterpretation of Law:
The applicant wrongly invoked Section 21 of IGST Act which relates to import of services—not supply of goods. - Valid Supply Despite Fraud:
Once the invoice is issued and goods are dispatched, the transaction qualifies as a “supply” under Section 7 of CGST Act. - Time of Supply:
As per Section 12, since no payment was received, date of invoice becomes the time of supply. Thus, tax liability arises on that date. - No GST Exemption for Fraud Victims:
The AAR clarified: Fraud may trigger criminal/civil actions, but it doesn’t undo GST liability. Once supply conditions are fulfilled, GST is due.
🧠Expert Insight: Why This Ruling Matters
- This decision underscores a strict interpretation of GST law—focusing on objective criteria like invoice and dispatch, rather than outcome or intent.
- It separates taxation from contractual enforceability, emphasizing that legal remedies (civil or criminal) for fraud must be pursued separately.
- Businesses need to exercise caution before dispatching goods—due diligence and verification of buyer credentials are crucial.
âś… Key Takeaways
| Point | Summary |
|---|---|
| 🎯 GST Trigger | Dispatch + invoice = Supply, regardless of fraud |
| 💸 No Payment? Still Liable | Non-receipt of consideration doesn’t cancel GST |
| đź“… Time of Supply | Date of invoice when payment is absent |
| ⚖️ Remedy for Fraud | Seek criminal/civil remedies, not GST exemption |
| 🧾 Be Vigilant | Always verify orders before supply |
🛡️ What Businesses Should Do Now
- Implement KYC processes for large buyers.
- Insist on advance payments or secure credit terms.
- Consult a GST professional before raising invoices to unfamiliar clients.
- Maintain proper documentation in case recovery or litigation is needed.