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Indirect Tax Laws and Practice · Refund

Section 114AC Penalty for Fraudulent Input Tax Credit Refund

Updated 11 October 2026 · Fact-checked

Section 114AC of the Customs Act, 1962 penalises a person who obtains an invoice by fraud, collusion, wilful misstatement or suppression of facts, uses the credit on it to pay duty or tax on exported goods, and claims a refund. The penalty can go up to five times the refund claimed.

Understand Penalty for Fraudulent Refund under Section 114AC

Exporters can claim a refund of duty or tax paid on goods they export. Often the tax is paid by using input tax credit (ITC) under GST. If the ITC rests on a bogus invoice, the refund claim is a fraud on the government. Section 114AC was inserted in 2021 to deal with this.

The section applies when three things are present together:

  • The person obtained an invoice by fraud, collusion, wilful misstatement or suppression of facts.
  • The person used the ITC on that invoice to discharge duty or tax on goods entered for exportation.
  • The export is made under a claim of refund of that duty or tax.

The penalty is "not exceeding five times the refund claimed". So five times is a ceiling, not a fixed amount. The adjudicating officer decides the actual figure up to that cap, based on the facts.

Input tax credit has the meaning given in clause (63) of section 2 of the CGST Act, 2017. You do not need a separate Customs definition.

Do not confuse this with section 114A. Section 114A deals with short-levy or non-levy of duty (or erroneous refund) due to collusion, wilful mis-statement or suppression, and the penalty equals the duty determined. Section 114AC is about the fraudulent invoice behind a refund claim on exports, and the penalty is tied to the refund claimed.

Key rules to remember

Maximum penalty under section 114AC
Penalty ≤ 5 × refund claimed
The text says 'not exceeding five times the refund claimed'. It is an upper limit, not a fixed rate.
Conditions for section 114AC
Invoice obtained by fraud/collusion/wilful misstatement/suppression + ITC on it used to pay duty or tax on goods entered for export + refund claimed
All three elements must be present.
Meaning of input tax credit
As in section 2(63) of the CGST Act, 2017
Stated in the Explanation to section 114AC.
Section 114A penalty (for contrast)
Penalty = duty or interest determined under section 28(8)
Applies for short-levy, non-levy or erroneous refund by collusion, wilful mis-statement or suppression. Reduced to 25% if duty, interest and penalty are paid within thirty days of the order.

How to solve Penalty for Fraudulent Refund under Section 114AC questions

Use this sequence for any question that asks whether section 114AC applies and what penalty follows.

  1. 1Identify the facts: what invoice was used, how it was obtained, and what was done with the credit.
  2. 2Check the fraud element: fraud, collusion, wilful misstatement or suppression of facts in obtaining the invoice. A genuine error does not fit.
  3. 3Check the use: was the ITC on that invoice used to discharge duty or tax on goods entered for export?
  4. 4Check the refund: was a refund of that duty or tax claimed on the export?
  5. 5If all three are met, state that section 114AC applies.
  6. 6Compute the ceiling: five times the refund claimed. Say the penalty is 'not exceeding' this amount.
  7. 7Note any contrast the question needs, such as why section 114A does not fit, and give a clear conclusion.

Quickest way: Three-test check and 5× cap

When to use it: Use in MCQs and short case questions where you must decide quickly if section 114AC applies.

  1. Ask: fraudulent invoice? ITC used to pay duty or tax on exports? Refund claimed? Three yes answers mean 114AC.
  2. Maximum penalty = 5 × refund claimed. Write 'up to' in your answer.
  3. If the question speaks of short-levy or non-levy of duty, think 114A instead.
  4. Check the option wording: 'exactly five times' is wrong; 'not exceeding' is right.

Common mistakes in Penalty for Fraudulent Refund under Section 114AC

  • Stating the penalty is fixed at five times the refund.

    Students remember 'five times' and drop the words 'not exceeding'.

    Fix: Always write 'penalty not exceeding five times the refund claimed'.

  • Calculating the penalty on the invoice value or the ITC amount.

    The fraud is about the invoice, so students link the penalty to it.

    Fix: The base is the refund claimed, as the section says.

  • Applying section 114AC where no refund is claimed.

    Students focus on the fake invoice and forget the refund condition.

    Fix: Check that goods are entered for export under a claim of refund of the duty or tax paid using the ITC.

  • Mixing up 114A and 114AC.

    Both mention fraud-type conduct and penalties.

    Fix: 114A: penalty equals duty or interest determined, for short-levy, non-levy or erroneous refund. 114AC: up to five times the refund claimed, for fraudulent ITC invoice on export refund.

  • Applying the 25% reduced penalty of section 114A to 114AC.

    Students carry the 30-day payment benefit across sections.

    Fix: The text of 114AC contains no such proviso. Do not claim a reduction under it.

Worked examples

Example 1

Sunrise Exports Pvt Ltd, Surat, bought goods on invoices from a supplier that did not exist, by giving false details to obtain the invoices. It used the ITC on these invoices to pay IGST on goods entered for export and claimed a refund of ₹8,00,000. Is section 114AC attracted? What is the maximum penalty?

Show the solution
  1. Fraud element: the invoices were obtained by false details, so fraud or wilful misstatement is present.
  2. Use of ITC: the ITC on these invoices was used to pay IGST on exported goods.
  3. Refund: a refund of ₹8,00,000 was claimed on the export.
  4. All three conditions are met, so section 114AC applies.
  5. Maximum penalty = 5 × ₹8,00,000 = ₹40,00,000.

Answer: Section 114AC applies. The penalty may extend up to ₹40,00,000, and the actual amount is decided by the officer within that cap.

Example 2

Bharat Traders paid IGST on exports using ITC from a genuine supplier's invoice. An officer found it had wrongly classified goods in an import, leading to short payment of duty by suppression of facts. Bharat claims no refund. Explain whether section 114AC or 114A applies.

Show the solution
  1. Section 114AC needs a fraudulently obtained invoice, ITC used for export duty or tax, and a refund claim. Here the invoice is genuine and no refund is claimed.
  2. The default is short payment of duty by suppression of facts.
  3. Section 114A covers duty short-levied by reason of collusion or wilful mis-statement or suppression of facts, with penalty equal to the duty determined under section 28(8).
  4. If duty, interest and the 25% penalty are paid within thirty days of the order's communication, the penalty is 25% of the duty, as per the first and second provisos.

Answer: Section 114AC does not apply. Section 114A applies, with penalty equal to the duty determined, reducible to 25% on timely payment of duty, interest and penalty.

Exam tips

  • Learn the three elements of 114AC as a checklist. Case questions usually test whether one is missing.
  • Write 'not exceeding five times the refund claimed'. Examiners look for the cap wording.
  • Be ready for 114A vs 114AC comparison questions. State the trigger and the penalty base for each.
  • In numerical questions, show the multiplication clearly: 5 × refund = maximum penalty.
  • If you cite a section, cite only 114AC and clause (63) of section 2 of the CGST Act as given in the text.

Practice questions from Refund

Penalty for Fraudulent Refund under Section 114AC in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Penalty for Fraudulent Refund under Section 114AC: frequently asked questions

What is section 114AC of the Customs Act?

It is a penalty provision for a person who obtains an invoice by fraud, collusion, wilful misstatement or suppression of facts. The person uses the ITC on it to pay duty or tax on exported goods and claims a refund. The penalty can go up to five times the refund claimed.

What is the difference between section 114A and 114AC?

Section 114A applies where duty is not levied, is short-levied or is erroneously refunded due to collusion, wilful mis-statement or suppression, and the penalty equals the duty or interest determined. Section 114AC applies to fraudulent invoices used for ITC on exports under a refund claim, and the penalty can be up to five times the refund.

Is the five times penalty compulsory?

No. The section says the penalty is 'not exceeding' five times the refund claimed. Five times is the maximum, and the officer fixes the amount up to that limit.

What does input tax credit mean in section 114AC?

The Explanation says it has the same meaning as in clause (63) of section 2 of the CGST Act, 2017.