Analysis of Provisions of Inspection, Search, Seizure & Arrest under GST

Dear Friends,

As you are aware that after implementation of Goods and Services Tax Act,2017( GST ), the dream of one tax and one nation has materialized. Implementation of GST Act, 2017 is one of the most important   steps taken by the Modi Government. The GST Act,2017 wiped out various complex and unnecessary acts in direct and indirect domain in India. The rate of taxes also lowered and the most important  was removal of cascading effects of taxes charged on various staged of transactions. The GST provides smooth and hassle free availment of Input Tax Credits and simplified procedures of Import and Exports. The taxpayers are filing their returns and paying taxes on the basis of self-determination on the portal provided by CBIC.

But there are various changes and amendments done in GST Act,2017 since its inception and same is going on today also. The expert in this field are also confused and not sure that ,when government will change the existing forms/rules and regulations.

The GST Act,2017 has given enormous power in the hand of GST Officers ,even to arrest person evading tax or claiming fake input tax or in case of fraud.

In this article we shall discuss and analyze powers of GST Officers to arrest person on the basis of some judicial judgements.

POWERS OF GST OFFICERS

Similar to the powers granted to various officers under other sorts of laws, the GST law also granted unique powers to officials. 

GST officers have been given powers under Section 5 of the CGST Act, 2017, which they may exercise subject to the criteria and limitations established by the board. It also allows a commissioner to assign his authority to any subordinate officers. 

“What are the powers of SGST officers?” is a question that may arise. The answer is that all powers granted to CGST officers under the CGST Act will be granted to SGST officers mutatis mutandis under the SGST Act, 2017.

SECTION 5 OF CGST ACT 2017:

POWERS OF OFFICERS (CHAPTER II – ADMINISTRATION)

(1) Subject to such conditions and limitations as the Board may impose, an officer of central tax may exercise the powers and discharge the duties conferred or imposed on him under this Act.

(2) An officer of central tax may exercise the powers and discharge the duties conferred or imposed under this Act on any other officer of central tax who is subordinate to him.

(3) The Commissioner may, subject to such conditions and limitations as may be specified in this behalf by him, delegate his powers to any other officer who is subordinate to him.

(4) Notwithstanding anything contained in this section, an Appellate Authority shall not exercise the powers and discharge the duties conferred or imposed on any other officer of central tax.

GENERAL POWERS OF GST OFFICER UNDER GST ACT 

Here’s a summary of situations where the GST officer might have to use his or her General powers under Section 155 of the CGST Act: 

1. Any goods and services are provided without the need for an invoice. 
2. Intentionally declares the supply’s description incorrectly on the invoice in order to avoid paying taxes. 
3. To claim ITC or a refund without the actual supply of goods and services by issuing e-invoices or bills (shipping or air-way). 
4. Collects any sum as tax but fails to deposit it to the credit of the proper government within three months of the date on which payment is due. 
5. Takes use of or makes use of Input Tax Credit without receiving goods or services in full or in part. 

The above-mentioned rights are the general powers bestowed on GST officers by the GST Act, and there are also additional powers conferred on appropriate officers by the GST Act. However, it is critical that GST officers exercise these general powers with caution. 

Section 155 of CGST Act 2017: Burden of Proof (CHAPTER XXI – MISCELLANEOUS)

Where any person claims that he is eligible for input tax credit under this Act, the burden of proving such claim shall lie on such person.

SPECIAL POWERS OF GST OFFICER UNDER GST ACT 

INSPECTION AUTHORITY 

Any proper officer, not below the rank of Joint Commissioner, may be authorized by the GST officer to inspect any taxable person’s, transporter’s, business owner’s, warehouse operators, or other person’s business place. However, the person reviewing the above must have written permission from the officer and must hold the level of Joint Commissioner or higher. They have the authority to inspect their place of business, goods, and supplies, as well as transportation. It should be remembered that any officer who does not have the level of Joint Commissioner can only conduct a search and seizure with the permission of a higher-ranking officer. 

PROVISIONS REGARDING INITIATION OF ‘INSPECTION’ UNDER GST

Sub-section (1) of section 67 of the CGST Act empowers proper officer to conduct an inspection at the business place of the taxpayer. 

Section 67(1) reads as below:

“Where the proper officer, not below the rank of Joint Commissioner, has reasons to believe that:

(a) a taxable person has suppressed any transaction relating to supply of goods or services or both or the stock of goods in hand, or has claimed input tax credit in excess of his entitlement under this Act or has indulged in contravention of any of the provisions of this Act or the rules made thereunder to evade tax under this Act; or

(b) any person engaged in the business of transporting goods or an owner or operator of a warehouse or a godown or any other place is keeping goods which have escaped payment of tax or has kept his accounts or goods in such a manner as is likely to cause evasion of tax payable under this Act,

he may authorise in writing any other officer of central tax to inspect any places of business of the taxable person or the persons engaged in the business of transporting goods or the owner or the operator of warehouse or godown or any other place.”

Some of the key aspects of the above provisions are as under:

(a) Authorisation of Inspection has to be given by the officer of the rank of Joint Commissioner and above.

(b) Authorising officer must have reason to believe about Taxable person that—

(i) Suppressing of any transaction relating to the supply of goods or services or both; or

(ii) Suppressing Stock in hand; or

(iii) Claiming of excess Input Tax Credit; or

(iv) Indulging in contravention of any of the provisions of the law to evade tax; or

(c) Authorising officer must have reason to believe that transporter is keeping the goods which has escaped tax or has kept his accounts or goods in such a manner as is likely to cause evasion of tax; or

(d) Authorising officer must have reason to believe that owner or operator of warehouse or godown or any other place is keeping the goods which has escaped tax or has kept his accounts or goods in such a manner as is likely to cause evasion of tax.

It needs to be noted here that, Authorisation for the purpose of Inspection under section 67(1) of the CGST Act, should be in writing and in prescribed form.

Rule 139 of the CGST Rules envisage procedural aspects of Inspection, Search and Seizure. Rule 139 of the CGST Rules read as follows:

“(1) Where the proper officer not below the rank of a Joint Commissioner has reasons to believe that a place of business or any other place is to be visited for the purposes of inspection or search or, as the case may be, seizure in accordance with the provisions of section 67, he shall issue an authorisation in FORM GST INS-01 authorising any other officer subordinate to him to conduct the inspection or search or, as the case may be, seizure of goods, documents, books or things liable to confiscation.

(2) Where any goods, documents, books or things are liable for seizure under sub-section (2) of section 67, the proper officer or an authorised officer shall make an order of seizure in FORM GST INS-02.

(3) The proper officer or an authorised officer may entrust upon the owner or the custodian of goods, from whose custody such goods or things are seized, the custody of such goods or things for safe upkeep and the said person shall not remove, part with, or otherwise deal with the goods or things except with the previous permission of such officer.

(4) Where it is not practicable to seize any such goods, the proper officer or the authorised officer may serve on the owner or the custodian of the goods, an order of prohibition in FORM GST INS-03 that he shall not remove, part with, or otherwise deal with the goods except with the previous permission of such officer.

(5) The officer seizing the goods, documents, books or things shall prepare an inventory of such goods or documents or books or things containing, inter alia, description, quantity or unit, make, mark or model, where applicable, and get it signed by the person from whom such goods or documents or books or things are seized.”

It is pertinent to note that, section 67(1) categorically provides that Inspection can be at the place of business of the assessee. It further needs to be noted here that section 2(85) of the CGST Act defines the phrase ‘place of business’ which reads as follows:

‘“place of business” includes—

(a) a place from where the business is ordinarily carried on, and includes a warehouse, a godown or any other place where a taxable person stores his goods, supplies or receives goods or services or both; or

(b) a place where a taxable person maintains his books of account; or

(c) a place where a taxable person is engaged in business through an agent, by whatever name called;’

Definition of the place of business is inclusive which includes godown or any other place where a taxable person stores his goods or maintains his books of accounts or place of agent. Accordingly, if books of accounts are being maintained or kept at residence of director or any other key managerial person the same may be treated as place of business and inspection can be carried out there as well.

PROVISIONS REGARDING INITIATION OF ‘SEARCH AND SEIZURE’ PROCEEDINGS IN GST

Sub-section (2) of section 67 of the CGST Act empowers proper officer not below the rank of Joint Commissioner to carry out search proceeding, provided that Joint Commissioner has reason to believe that any goods liable to be confiscation or any documents/books which in opinion are relevant for the proceedings under the Act, but such documents/books/things/goods are secreted at any place. 

Section 67(2) and 67(3) of the CGST Act reads as follows:

“(2) Where the proper officer, not below the rank of Joint Commissioner, either pursuant to an inspection carried out under sub-section (1) or otherwise, has reasons to believe that any goods liable to confiscation or any documents or books or things, which in his opinion shall be useful for or relevant to any proceedings under this Act, are secreted in any place, he may authorise in writing any other officer of central tax to search and seize or may himself search and seize such goods, documents or books or things:

Provided that where it is not practicable to seize any such goods, the proper officer, or any officer authorised by him, may serve on the owner or the custodian of the goods an order that he shall not remove, part with, or otherwise deal with the goods except with the previous permission of such officer:

Provided further that the documents or books or things so seized shall be retained by such officer only for so long as may be necessary for their examination and for any inquiry or proceedings under this Act.

(3) The documents, books or things referred to in sub-section (2) or any other documents, books or things produced by a taxable person or any other person, which have not been relied upon for the issue of notice under this Act or the rules made thereunder, shall be returned to such person within a period not exceeding thirty days of the issue of the said notice.”

Some of the key aspects of the above provisions are as under:

• Authorisation of Search and Seizure has to be given by the officer of the rank of Joint Commissioner and above.
• Authorising officer must have reason to believe about:

(a) Goods liable for confiscation are secreted in any place;

(b) books, documents or something, which is useful or relevant for proceeding under GST law, are secreted in any place.

• Authorisation should be in writing in Form GST INS-01 for Search.
• In case of Seizure, Order of Seizure is to be issued in Form GST INS-02.

MEANING OF REASON TO BELIEVE

It is most humbly submitted here that meaning of ‘Reason to believe’ is not defined under the CGST Act/SGST Act. It needs to be noted here that the said term is defined under Section 26 of the Indian Penal Code, which reads as follows:

‘Reason to believe — A person is said to have “reason to believe” a thing, if he has sufficient cause to believe that thing but not otherwise.’

It is settled legal position that belief should be honest and reasonable belief.

• Hon’ble Supreme Court in the case of Barium Chemicals Ltd. v. Company Law Board AIR 1967 SC 295/[1966] 36 Comp. Cas. 639 (SC), – the Supreme Court pointed out, on consideration of several English and Indian authorities that the expressions “is satisfied”, “is of the opinion” and “has reason to believe” are indicative of subjective satisfaction, though it is true that the nature of the power has to be determined on a totality of consideration of all the relevant provisions.
• Further, Hon’ble Supreme Court in the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC)/AIR 1976 SC 1753, the Supreme Court construed the expression “reason to believe” employed in section 147 of the Income-tax Act, 1961 and observed that the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief.

Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully or truly all material facts. It is not any or every material, howsoever vague and indefinite or distant which would warrant the formation of the belief relating to the escapement of the income of the assessee from assessment. The reason for the formation of the belief must be held in good faith and should not be a mere pretence.

PLEASE NOTE THAT–  The words “where the proper officer has reasons to believe” in section 67 of the Act suggest that the belief must be that of an honest and reasonable person based upon the relevant materials and circumstances. The satisfaction has to be of the Proper Officer not below the rank of Joint Commissioner. The Proper Officer should have reasons to believe that a taxable person has suppressed any transaction relating to supply of goods or services or both.

• Further, Hon’ble Supreme Court in the case of Pukhraj v. D. R. Kohli 1983 (13) ELT 1360/AIR 1962 SC 1559, the Supreme Court observed as follows:

“When we are dealing with a question as to whether the belief in the mind of the officer who effected the seizure was reasonable or not, we are not sitting in appeal over the decision of the said officer. All that we can consider is, whether there is ground which prima facie justifies the said reasonable belief.” (p. 1563)

Hence, if the information is such as leads the Proper Officer to believe that the articles of search are secreted in a place, he may thereby have ‘reasons to believe’ as contemplated under section 67 of the Act and authorise in writing any other officer to search and seize such goods. All that the Court can consider is, whether there is ground which prima facie justifies the reasonable belief. Further, the statutory requirement of reasonable belief, rooted in the information in possession of Proper Officer under the Act, is to safeguard the citizen from vexatious proceedings.

‘Belief’ is a mental operation of accepting a fact as true, so, without any fact, no belief can be formed. It is true that it is not necessary for the Proper Officer under the Act to state reasons for his belief. But if it is challenged that he had no reasons to believe, in that case, he must disclose the materials upon which his belief was formed, as it has been held by the Court.

• Hon’ble Supreme Court in Sheo Nath Singh v. Appellate Asstt. CIT [1971] 82 ITR 147/AIR 1971 SC 2451, that the Court can examine the materials to find out whether an honest and reasonable person can base his reasonable belief upon such materials although the sufficiency of the reasons for the belief cannot be investigated by the Court.
• It is further submitted here that the Hon’ble Gujarat High Court Patran Steel Rolling Mill v. Assistant Commissioner of State Tax [2019] 101 taxmann.com 80 (Guj.)held that provision of section 67, should not be exercised as a matter of course, but only after due application of mind to the relevant factors.

SECTION 139(2) OF CGST RULES,2017

It further needs to be noted here that, in Form, GST INS-02 prescribed under rule 139(2) of the CGST Rules. Rule 139 of the CGST Rules relates to inspection, search and seizure.

Sub-rule (1) thereof provides for the issuance of authorisation in Form GST INS-01 by the proper officer not below the rank of Joint Commissioner authorising any officer subordinate to him to conduct the inspection or search or, as the case may be, seizure of goods, documents or things liable to confiscation.

Sub-rule (2) thereof provides that any goods, documents, books or things are liable to seizure under sub-section (2) of section 67, the proper officer or an authorised officer shall make an order of seizure in Form GST-INS-02.

Sub-rule (5) thereof provides that the officer seizing the goods, documents, books or things shall prepare an inventory of such goods or documents, books, or things containing inter alia, description, quantity or unit, make, mark or model where applicable, and get it signed by the person from whom such goods or documents or books or things are seized.

PLEASE NOTE THAT – that Section 67 read with rule 139 of the CGST Rules mandate that, seizure proceedings shall be authorised by a proper officer, not below the rank of the Joint Commissioner. Hence, every search and seizure shall be authorised by the proper officer.

Further, at this juncture, it is germane to refer to section 157 of the CGST Act/SGST Act which provides protection/immunity to officers of CGST/SGST officer for action taken by him in good faith. Section 157 of the CGST Act/SGST Act reads as under:

“157. PROTECTION OF ACTION TAKEN UNDER THIS ACT.—

(1) No suit, prosecution or other legal proceedings shall lie against the President, State President, Members, officers or other employees of the Appellate Tribunal or any other person authorised by the said Appellate Tribunal for anything which is in good faith done or intended to be done under this Act or the rules made thereunder.

(2) No suit, prosecution or other legal proceedings shall lie against any officer appointed or authorised under this Act for anything which is done or intended to be done in good faith under this Act or the rules made thereunder.”

ANALYSIS- Thus, a bare perusal of sub-section (2) of section 157 of the CGST Act gives immunity to an officer appointed or authorised under that Act for anything which is done or intended to be done in good faith under that Act or the rules made thereunder. Thus, an officer is protected provided he is authorised to do something under the CGST Act and provided such act has been done in good faith.

PLEASE NOTE THAT – On reading provisions of 157(2) of the CGST Act, 2017 it is clear that , any search and seizure proceedings conducted by a proper officer without any proper authorising shall not get immunity under section 157 of the CGST Act and therefore liable for exemplary cost. At this juncture, it needs to be noted here that when an officer functioning under the CGST Act, acts in a highhanded and arbitrary manner in excess of the authority vested in him the same is required to be viewed very seriously. Justice demands that such citizen be compensated for the undue harassment faced by him on account of the unauthorised action of the concerned officer.

TERM ‘SECRETED PLACE’ UNDER SECTION 67(2)

Sub-section (2) of section 67 of the CGST Act empowers proper officer not below rank of Joint Commissioner to carry out search proceeding, provided that Joint Commissioner has reason to believe that any goods liable to be confiscation or any documents/books which in opinion of the proper officer is relevant for the proceedings under the Act, but such documents/books/things/goods are secreted at any place.

It is imperative to mention here that since it is settled position that tax laws are always interpreted in strict manner therefore one may take a view that search and seizure proceedings can be initiated by proper officer only when such proper officer have an opinion that any goods/books/documents/things which are relevant/useful to any proceedings under the CGST Act and/or rules made thereunder, are secreted at any place. However, here it is pertinent to note that, where all goods are duly recorded in the books or where all relevant books/documents/things are found at business place of taxpayers even in then the word ‘secreted’ have significant role.

The word secreted has not been defined under the Act. It is also settled principle that a word used in legislation may be given the meaning in the context in which it has been used.

It is important to note that, section 67(2) of the CGST Act/SGST Act is pari materia to section 105 of the Customs Act, 1962.

“105. POWER TO SEARCH PREMISES.—

(1) If the Assistant Collector of Customs, or in any area adjoining the land frontier or the coast of India an officer of customs specially empowered by name in this behalf by the Board, has reason to believe that any goods liable to confiscation, or any documents or things which in his opinion will be useful for or relevant to any proceeding under this Act, are secreted in any place, he may authorise any officer of customs to search or may himself search for such goods, documents or things.

(2) The provisions of the Code of Criminal Procedure, 1898, relating to searches shall, so far as may be, apply to searches under this section Subject to the modification that sub-section (5) of section 165 of the said Code shall have effect as if for the word ‘Magistrate’, wherever it occurs, the words “Collector of Customs” were substituted.”

• The Supreme Court in the case of Gian Chand v. State of Punjab [1961] 1961 taxmann.com 8/1983 (13) ELT 1365 (SC) had an occasion to consider the meaning of theword “secreted” within the meaning of section 105 of the Customs Act. The Supreme Court in the aforesaid decision has observed and held as under:

“…It cannot be said that the documents have not been ‘secreted within the meaning of section 105 of the Customs Act unless they are hidden or concealed. In the context of the section the word means documents which are not kept in the normal or usual place’ or it may even mean ‘documents or things which are likely to be secreted;’ in other words, documents or things which a person is likely to keep out of the way or to put in a place where the officer of the law cannot find it.

The power to search granted under section 105 of the Customs Act is a power of general search and it is not necessary for its exercise that the authorisation should specify the documents for which search is to be made. But it is essential that before this power is exercised the preliminary conditions required by the section must be strictly satisfied that is, the officer concerned must have reason to believe that any documents or things which-in his opinion are relevant for any proceeding under the Act are secreted in the place searched.”

In view of the above, even if the authority has reason to believe that the goods liable to be confiscated are likely to be secreted the authority will have the power to pass an order of prohibition pursuant to the order of seizure.

• In Pukhraj v. D. R. Kohli 1983 (13) ELT 1360 (SC)/AIR 1962 SC 1559 the Hon’ble Supreme Court observed as follows:

“After all, when we are dealing with a question as to whether the belief in the mind of the officer who effected the seizure was reasonable or not, we are not sitting in appeal over the decision of the said officer. All that we can consider is, whether there is ground which prima facie justifies the said reasonable belief.”

If the information is such as leads the Proper Officer to believe that the articles of search are secreted in a place, he may thereby have ‘reasons to believe’ as contemplated under section 67 of the Act and authorise in writing any other officer to search and seize such goods. All that the Court can consider is, whether there is ground which prima facie justifies the reasonable belief.

POWERS OF ARREST

In the administration of taxation, the provisions for arrests are created to tackle the situations created by some unscrupulous tax evaders. To some these may appear very harsh, but these are necessary for efficient tax administration and also act as a deterrent and instil a sense of discipline. The provisions for arrests under GST Law have sufficient inbuilt safeguards to ensure that these are used only under authorisation from the Commissioner.

Besides this, the GST Law also stipulates those arrests can be made only in those cases where the person is involved in offences specified for the purposes of arrest and the tax amount involved in such offence is more than the specified limit. The salient points of these provisions are:

• Provisions for arrests are used in exceptional circumstance and only with prior authorisation from the Commissioner.
• The law lays down a stringent criteria and procedure to be followed for arresting a person. A person can be arrested only if the criteria stipulated under the law for this purpose is satisfied i.e., if he has committed specified offences (not any offence) and the tax amount is exceeding rupees 200 lakhs. However, the monetary limit shall not be applicable if the offences are committed again even after being convicted earlier i.e., repeat offender of the specified offences can be arrested irrespective of the tax amount involved in the case.
• Further, even though a person can be arrested for specified offences involving tax amount exceeding Rs. 200 lakhs, however, where the tax involved is less than 500 lakhs, the offences are classified as non-cognizable and bailable and all such arrested persons shall be released on Bail by Deputy/Assistant Commissioner. But in case of arrests for specified offences where the tax amount involved is more than Rs. 500 lakhs, the offence is classified as cognizable and non-bailable and in such cases the bail can be considered by a Judicial Magistrate only.

The provisions of Section 69 of the CGST Act,2017 delas with power of GST Officers to arrest persons.

The fact that GST authorities have the power to arrest an assessee cannot be refuted, however, an arrest even before the assessment of the tax  is completely unjustified and illegal too.

The High Court of Punjab and Haryana in the case of Akhil Krishan Maggu v. DGGI had held that authorities cannot without an enquiry go ahead to make an arrest merely on the suspicion of evasion of service tax or failure to deposit service tax that has been collected.

SECTION 69 OF THE CGST ACT DISCUSSES SUCH POWERS:

1. If the Commissioner has sufficient reason to believe that a person has committed an offence under Section 132(1) (a) to (d) of the CGST Act, they may by order authorise to arrest that person.
2. The Officer authorised to arrest must then inform the person the grounds of arrest and produce them before a Magistrate within twenty-four hours.
3. The person is then admitted to bail or custody of the Magistrate.
4. In case of a non-cognizable and bailable offence, the Deputy/Assistant Commissioner can release a person on bail since they have the same powers as an officer-in-charge of a police station.

WHAT OFFENCES COULD LEAD TO AN ARREST UNDER THE CGST ACT?

SECTION 132 OF THE CGST ACT LISTS OUT THE OFFENCES UNDER THE CGST ACT WHICH CAN LEAD TO AN ARREST:

• If a person supplies any goods or services or both without issue of any invoice, in violation of the provisions of this Act with the intention to evade tax.
• When a person issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act, leading to wrongful availment or utilisation of input tax credit or refund of tax.
• If a person tries to avail input tax credit using such invoice or bill referred to in above.
• If a person collects any amount as tax but fails to pay the same to the Government beyond a period of three months from the date on which such payment becomes due.
• evading tax, fraudulently availing input tax credit or fraudulently obtaining refund can lead to an arrest.
• If a person falsifies or substitutes financial records or produces fake accounts or documents or furnishes any false information with an intention to evade payment of tax due under this Act.
• If a person obstructs or prevents any officer in the discharge of their duties under this Act.
• If a person acquires possession of, or in any way concerns themselves in transporting, removing, depositing, keeping, concealing, supplying, or purchasing or in any other manner deals with, any goods which they know or have reasons to believe are liable to confiscation under this Act.
• If a person receives or is in any way concerned with the supply of, or in any other manner deals with any supply of services which they know or have reasons to believe are in contravention of any provisions of this Act.
• If a person tampers with or destroys any material evidence or documents.
• If a person fails to supply any information which they were required to supply under this Act or supplies false information.

EXCEPTIONAL CIRCUMSTANCES WARRANTING ARREST BEFORE ASSESSMEN

A person can be arrested under Section 69 of the CGST Act even before the completion of the assessment proceedings. Such an arrest can be carried out only if there are reasonable grounds to believe that one of the offences detailed under Section 69 has been committed. However, the reasons to believe need not be stated on the authorization for the arrest itself. It is sufficient if these reasons have been recorded separately in a file.

PLEASE NOTE THAT

• Keeping in mind Section 69 and 132 of CGST Act which empower Proper Officers to arrest a person who has committed any offense involving evasion of tax more than Rs. 5 crore and prescribed maximum sentence of 5 years, the High Court of Punjab and Haryana in the case of Akhil Krishan Maggu v. DGGIhad prescribed the exceptional circumstances for arrest stating that power of arrest should not be exercised at the whims and caprices of any officer or for the sake of recovery or terrorising any businessman or create an atmosphere of fear, whereas it should be exercised in exceptional circumstances during investigation:
  • A person is involved in evasion of huge amount of tax and is having no permanent place of business,
  • A person is not appearing in spite of repeated summons and is involved in huge amount of evasion of tax,
  • A person is a habitual offender and has been prosecuted or convicted on earlier occasion,
  • A person is likely to flee from country,
  • A person is originator of fake invoices i.e., invoices without payment of tax,
  • When direct documentary or otherwise concrete evidence is available on file/record of active involvement of a person in tax evasion.”

All the ratios mentioned above are being followed widely by almost all High Courts in the country but have been defied with contemptuous attitude by the revenue authorities and an urgent attention is required in this regard.

• The Madras High Court in Jayachandran Alloys Pvt. Ltd. v. Superintendent of GST & Central Excise had held that determination of excess credit as provided under Section 73, 74 of the CGST Act is a prerequisite for recovery and such recovery can only be initiated once the amount of excess credit has been quantified and determined in an assessment.

The Court then concluded that the power to punish set out in Section 132 of the CGST Act would stand triggered only once it is established that an assessee has ‘committed’ an offence that has to necessarily be post-determination of the demand due from an assessee, that itself has to necessarily follow the process of an assessment.

CAN AN ANTICIPATORY BAIL BE GRANTED FOR SUCH OFFENCES?

Grant of anticipatory bail is a statutory right under Section 438 of CrPC. Although, the same is not applicable in those states where this provision has been omitted or for those offences where some special enactment under which a person is prosecuted ousts the application of this provision.

The Telangana High Court’s findings in P.V. Ramana Reddy v. Union of India posed a significant challenge for grant of anticipatory bail. The High Court observed that as the power of arrest under Section 69 of CGST Act is exercised before a First Information Report is registered, in such cases, Section 438 of CrPC cannot be invoked.

The Court also observed that until a prosecution is launched, by way of a private complaint with the previous sanction of the Commissioner, no criminal proceedings can be taken to commence.

PLEASE NOTE THAT – Since arrest under Section 69 of the CGST Act is done before prosecution, it would not come within the purview of criminal proceedings. Consequently, Section 438 will not apply, and no anticipatory bail can be granted.

The observations regarding the nature of offences also find mention in other proceedings of similar nature where Courts have refused to grant anticipatory bail because of the serious economic offence involved.

COMPOUNDING OF OFFENCES:

Section 138 of the CGST Act provides for Compounding of offences. Compounding generally refers to the process where the person/entity committing the offence submits to having committed default so that the same is condoned.

Under the CGST provisions, the accused can be discharged on payment of compounding fee which cannot be more than the maximum fine leviable under the relevant provisions.

PLEASE NOTE THAT : Compounding will be allowed only after payment of all taxes, interest, and penalty dues. The amount payable for compounding of offences must be 50% of the tax involved subject to a minimum INR 10,000 and the maximum amount for compounding is set to be 150% of the tax or INR 30,000, whichever is higher.

On payment of the compounding amount, no further proceedings can be initiated against the accused person for the same offence and any criminal proceedings, if already initiated, will be abated.

PLEASE NOTE THAT – Compounding will not be available for-

• a person who has been allowed to compound once in respect of any of the offences specified in Section 132 (1) clauses (a) to (f) of the CGST Act.
• A person who had committed an offence before under the ambit of the CGST Act involving supplies above INR 1 crore and has been allowed to compound
• A person who has been accused of committing an offence under this Act which is also an offence under any other law for the time being in force
• Any person convicted by a court under
• Any person giving false information during proceedings or preventing the officer from his duty or destroying.

JUDICIAL PRECEDENTS HIGHLIGHTING THE SCOPE OF ARREST UNDER CGST ACT:

1. Whereas the Bombay High Court in the case of Sapna Jain v. Union of Indiasaid that no coercive action should be taken against the taxpayer and no arrests should be made.
2. Recently, the Bombay High Court in the case of Yogesh Jagdish Kanodia v. The State of Maharashtradealt with the issue of arrest of an individual and whether it is correct in terms of Section 132 and 69 of the CGST Act. The petitioner in the case was arrested and produced before the Additional Chief Metropolitan Magistrate on account of commission of offence under Section 132 (1) (b) (c) of the CGST Act and that since the input tax credit wrongly availed by the petitioner exceeded INR 500 lakh and the offence was punishable with imprisonment for a term, it was a cognizable and non-bailable offence under sub-section (5) of the same Section. The High Court ruled that such  offences had been committed warranting an arrest and dismissed the bail application of the petitioner.
3. Similarly, the Delhi High Court too recently upheld the arrest provision in the CGST Act for tax evasion. The Court in this case highlighted that when any person is arrested under the CGST Act, the said person has to be informed of the grounds of arrest and must necessarily be produced before a Magistrate within a period of 24 hours. This ensures judicial scrutiny over the acts of the executive, and it cannot be termed as unreasonable or excessive.
4. Union of India v. Sapna Jain (2019), Special Leave to Appeal (Crl.) Nos. 4322-4324/2019, (Supreme Court). Though status quo was maintained as regards the accused Petitioner as per the High Court, but the Supreme Court appreciated that a larger bench of 3 Members is required to be constituted to settle the issue of Powers of Arrest under the GST Regime.
5. Jayachandran Alloys (P.) Ltd. v. Superintendent of GST & Central Excise WRIT PETITION NO. 5501 OF 2019 Dated:- 04-04-19(Madras High Court) Interestingly in this case, the Hon’ble High Court has observed that, with regards offences as per Section 132 of the Act as extracted earlier, imposes a punishment upon the Assessee that ‘commits’ an offence.

The use of words ‘commits’ clearly indicates that act of committal of the offence is to be established first before punishment is imposed. Thus, ‘determination’ of the excess credit by way of the procedure set out in Section 73 or 74, as the case may be is a pre-requisite for the recovery thereof. As the recovery is to be made subject to ‘determination’ in an assessment, punishment for the offence alleged cannot be imposed prior to such assessment.

6. Difference in the language between CrPC (Section 41, 41A) and CGST Section 69. “Reasons are to record” is very different from the term used in CGST i.e., ‘Reasons to believe’. Since term used is reason to believe, it will suffice if the reasons are entered into a file and not disclosed.

The Court had also dismissed the contention that, no prosecution can be initiated without determination or assessment by stating that Section 132 has no co relation to assessment and the same is independent of any assessment.

Though the Court gave a finding that protection under Section 41 and 41-A CrPC may be available, in view of special circumstances and the alleged severity of the breach, no relief was granted.

7. P. V. Ramana Reddy and ANRs v. State of Telangana (WP 4764 of 2019), Telangana High Court, confirmed by the Supreme Court on 27-05-19).

This is the only detailed judgment on the powers of arrest under the GST regime. This case similar to almost all cases all over India where parties have been arrested for fraud and wrongly availing Input Tax Credit. The main contention was a prayer to the Court to grant Interim protection in form of Anticipatory Bails.

The major arguments were based on the applicability of Section 41 and 41A of Criminal Procedure Code, 1973 (‘CrPC’).

SECTION 41 OF INDIAN PENAL CODE

When police may arrest without warrant.

(1) Any police officer may without an order from a Magistrate and without a warrant, arrest any person-

(a) who has been concerned in any cognizable offence, or against whom a reasonable complaint has been made, or credible information has been received, or a reasonable suspicion exists, of his having been so concerned; or

(b) who has in his possession without lawful excuse, the burden of proving which excuse shall lie on such person, any implement of house- breaking; or

(c) who has been proclaimed as an offender either under this Code or by order of the State Government; or

(d) in whose possession anything is found which may reasonably be suspected to be stolen property and who may reasonably be suspected of having committed an offence with reference to such thing; or

(e) who obstructs a police officer while in the execution of his duty, or who has escaped, or attempts to escape, from lawful custody; or

(f) who is reasonably suspected of being a deserter from any of the Armed Forces of the Union; or

(g) who has been concerned in, or against whom a reasonable complaint has been made, or credible information has been received, or a reasonable suspicion exists, of his having been concerned in, any act committed at any place out of India which, if committed in India, would have been punishable as an offence, and for which he is, under any law relating to extradition, or otherwise, liable to be apprehended or detained in custody in India; or

(h) who, being a released convict, commits a breach of any rule made under sub- section (5) of section 356; or

(i) for whose arrest any requisition, whether written or oral, has been received from another police officer, provided that the requisition specifies the person to be arrested and the offence or other cause for which the arrest is to be made and it appears therefrom that the person might lawfully be arrested without a warrant by the officer who issued the requisition.

(2) Any officer in charge of a police station may, in like manner, arrest or cause to be arrested any person, belonging to one or more of the categories of persons specified in section 109 or section 110.

SECTION 41A OF INDIAN PENAL CODE.

Notice of appearance before police officer.—

(1) The police officer shall], in all cases where the arrest of a person is not required under the provisions of sub-section (1) of section 41, issue a notice directing the person against whom a reasonable complaint has been made, or credible information has been received, or a reasonable suspicion exists that he has committed a cognizable offence, to appear before him or at such other place as may be specified in the notice.

(2) Where such a notice is issued to any person, it shall be the duty of that person to comply with the terms of the notice.

(3) Where such person complies and continues to comply with the notice, he shall not be arrested in respect of the offence referred to in the notice unless, for reasons to be recorded, the police officer is of the opinion that he ought to be arrested.

(4) Where such person, at any time, fails to comply with the terms of the notice or is unwilling to identify himself, the police officer may, subject to such orders as may have been passed by a competent Court in this behalf, arrest him for the offence mentioned in the notice.

As per this section mandates the police officer to issue a notice on the alleged offender in certain cases, where he is accused of committing a cognizable offence, but an arrest is not required. There is an additional protection under the Act wherein it bars the arrest of persons against whom a notice under the section is issued, so long as such person complies with the directions under the notice.

That being said the section also allows an arrest if the Police officer has recorded compelling reasons in writing.

It was contended by the petitioners that, when the arrest was authorised under Section 69 of the CGST Act, that drawing parallel to Section 41 and 41A of the CrPC, for the Officer to arrest there must be compelling reasons and the same must be recorded in writing.

The revenue contests this line of reasoning by stating that, arrests are made as per Section 69(1) and that is an independent power granted by the statute to the Commissioner. In fact, it was contesting that CrPC is referenced only in 69(3) where the phrase ‘subject to the provisions of the CrPC’. Since this sub section deals with Bail provisions and producing the arrested party before the Magistrate as per the guidelines of the CrPC.

The Hon’ble High Court in its judgment discussed the interplay of Section 69 and 132 along with the extent of applicability of CrPC.

Following broad observations were made:

a). 69(1) is applicable only to offences specified in Section 132(a) to (d). Therefore, power of Commissioner can only be exercised when the Commissioner has reasons to believe that a cognisable and non bailable offence has been committed.

b). Incongruity between 69(1) and 132(4) and (5), since the power to order arrest is only for cognizable and non bailable offences, the applicability on 132(4) for non-cognisable offences is unclear.

c). Whether CGST is a complete code in itself and thereby CrPC need not be referenced at all? 69(1) make a clear distinction between powers to arrest in case of non bailable offences but is not clear on the powers of the commissioner to order an arrest for non-cognisable offences under 132(4).

d). Difference in the language between CrPC (Section 41, 41A) and CGST Section 69. “Reasons are to be recorded” is very different from the term used in CGST i.e., ‘Reasons to believe’. Since term used is reason to believe, it will suffice if the reasons are entered into a file and not disclosed.

The Court had also dismissed the contention that, no prosecution can be initiated without determination or assessment by stating that Section 132 has no co relation to assessment and the same is independent of any assessment.

Though the Court gave a finding that protection under Section 41 and 41-A CrPC may be available, in view of special circumstances and the alleged severity of the breach, no relief was granted.

CONCLUSION:

Apart from the above-mentioned judgments, several cases are at different stages in their filing. Though the order of P. V. Ramana raises several interesting points. Anticipatory bail is essentially a specie of CrPC and IPC. The Departmental view that Special provisions supercedes general provisions, will have to be tested in the light of the several judgments which are for and against as regards extent of applicability of CrPC on other civil/tax laws. The CGST Law purports to grant extra ordinary discretionary power on the Commissioner, which although had deterrent value, but experience of the tax payers is that it will lead to abuse of discretionary powers and rampant misuse.

One expects the Supreme Court to find a balance between strict reasonable criminalisation of tax offences and discretionary and arbitrary threats of prosecution.

Threat of arrests ought to act as a deterrence for commissioning of any tax crime. That being said, stricter punishments have not had a direct co relation with reduced crime or our case compliance. As the old story of Pick pocketing during the public execution of pick pockets guides us, such sweeping arbitrary powers in the hands of Commissioners who are part of an eco system which considers all tax payers are evaders, will have disastrous consequences on the confidence of the businesses and have an effect which is counter productive to the supposed goal of ensuring tax compliance.

The power of Inspection ,Search , Seizure and Arrest in the hand of GST Officers are need of the time and works as stick for those who are engaged in fraudulent activities. Those true  and law binding taxpayers need not to worry against these powers. But these powers should be applied on to harass taxpayers but to prevent evasion of tax. Since provisions of Sections 69 and 132 provides powers to arrest a culprit must be exercised with the permission of proper and well established authority on the basis of valid reason of believe. Since Section 155 provides immunity to GST Officers under GST Act,2017, against any act done for good faith. It should be remembered that unscrupulously use of these powers should be punished for better implementation of GST in India.

DISCLAIMER:  the article presented here is only for sharing information and knowledge to the readers. The views are personal and same shall not be taken as professional advice. The article has been prepared on the basis of material and information available on various forums at the time of preparation. We have taken all steps to remove mistakes if any in the article. In case of necessity do consult with GST Professionals for more clarification and understanding on subject matter.