Two Years Of GST: Arrests Signal A Radical Policy Shift Toward Punitive Action
Even in cases of GST defaulters, arrest powers must be exercised with great responsibility and utmost caution.
A recent Supreme Court order refusing to interfere with a judgment of the Telangana High Court in the context of arrest powers under the Goods and Services Tax for alleged defaulters, has caught the attention of many. In a related development, a Bombay High Court decision on granting protection from arrest has been referred to a three-judge bench of the Supreme Court, which is also expected to decide the legality of arrest powers of Enforcement Directorate under the Prevention of Money Laundering Act, 2002.
Historically, tax officials have possessed inherent powers—for ensuring tax compliance—to audit, search and seize, impose penal interest and penalty, as well as to initiate prosecution. The power to initiate prosecution is synonymous with criminal proceedings to set in motion a process to file criminal complaints. Thereafter, it is the court of the judicial magistrate which determines if it fulfills the requirement under the respective tax statutes and Criminal Procedure Code, to effectuate an arrest.
Under the Income Tax Act, 1961, a tax recovery officer has the power to arrest against a tax recovery notice and a warrant (Sections 222 and 276). Similarly, Chapter XXII of the IT Act contains a host of offences which give unbridled powers to initiate prosecution, including in particular, for failure to pay taxes collected under the withholding mechanism.
Though these powers were seldom invoked, even in situations where they were, taxpayers sought the shelter of compounding (fine) provisions before the magistrate confirmed the offence.
Even in rare situations, where the revenue department proceeded with criminal charges by filing complaints in a magistrate court, errant taxpayers sought protection by way of bail, demonstrating that there was ‘no willful failure’, the prosecution’s failure to establish ‘mens rea’ (guilty mind) etc. Successive verdicts of the Supreme Court diluted the principle of ‘mens rea’ holding that the court must presume a guilty mind and the burden of proof was on the accused to prove the contrary and that too beyond a reasonable doubt.
Indirect Tax Arrests Pre-GST
On the contrary, under the indirect tax laws, the arrest powers are broader, and in specified situations, there is no need for issuing any show cause notice or crystallisation of demand before the arrest. Officials are empowered to arrest where there are ‘reasons to believe’ that specified offences have been committed. In particular under the erstwhile Service Tax law that was introduced by Finance Act, 1994, powers to arrest were conferred by insertion of Section 90 and 91 in the Finance Act of 2013. It was, however, specific to a situation where the taxpayer failed to pay service tax collected and exceeding Rs 2 crore, somewhat similar to income tax.
These provisions were first tested in the case of Makemytrip where a senior executive was arrested without serving a notice of demand for alleged evasion of Service Tax and was challenged before the Delhi High Court. In 2016, the High Court, while coming down heavily on the Revenue Department, declared the arrest to be illegal and held that in the absence of a show cause notice, the power of arrest is to be used with great circumspection and not casually.
The High Court further said, that the investigation wing of the Revenue Department had acted recklessly, causing a violation of the fundamental right to life and personal liberty (invoking Article 21 of the Constitution) of the arrested individual. Although the government filed an appeal before the Supreme Court, the Court refused to interfere and dismissed its petition.
It is also worthwhile to note that arrest powers exist under a host of statutes and depending on the severity and nature of offences, tax official’s and regulator’s powers vary.
For example, under Section 123 of the Customs Act, 1962, in relation to smuggling of goods, the burden of proof shifts to the person from whom the goods are seized.
To summarise, arrest powers cannot be generalised and exercise of such powers, besides the statutory mandate, is hedged by limits on the use by officials, given the restrictions and limitations. Exercise of all arrests are of course subject to constitutional provisions (Article 14 and 21) articulated with clarity in the famous DK Basu case, which was referenced by the High Court in the Makemytrip case.
Powers To Arrest Under GST Laws
Section 19 of the PMLA allowed the ED, as investigating agency, to arrest a person without a warrant if there were ‘reasons to believe’ that such person is guilty of money laundering under the Act. That has now been clubbed with the issue on GST-related arrests. Similar powers are also given to Serious Fraud Investigating Officers with respect to frauds probed under Section 212 of the Companies Act, 2013. With the advent of the GST law, similar provisions have merely been taken forward.
Arrest powers under GST have been enshrined under Section 69 of the CGST Act whereby, a commissioner-level official is empowered to authorise any officer to arrest, provided he has ‘reasons to believe’ that such person has committed any specified offences, subject to a monetary threshold. Such offences being:
- Supplying goods or services without an invoice, with an intention to evade tax.
- Issuing invoice without actual supply leading to wrong utilisation/availment of tax credit.
- Availing tax credit on bogus invoices arising out of the above scenario.
- Collecting GST and not remitting to the government exchequer.
The offences must involve tax exceeding Rs 2 crore, unless the person is a repeat offender. Safeguards on arrest are in line with CrPC.
Section 69 read with Section 132, envisages the following:
- Where the tax involved is over Rs 5 crore and it falls under the four specified offences, power to arrest is unparalleled without provision for bail, unless the court grants it.
- Where the tax involved is over Rs 2 crore but less than Rs 5 crore and it pertains to the four specified offences, arrest can be made with provision for bail.
- For repeat offenders, no matter what the quantum is, if it falls under the four specified categories, arrest can be made.
- For all other offences, no power to arrest.
The principle of ‘presumption of innocence until proven guilty’, a fundamental principle of criminal procedure has transformed in the context of specified economic offences/white collar crimes, in general, and in the context of specified tax offenders.
In tax cases, a new principle, aligned to western practice, of ‘presumption of guilt’ seems to have emerged.
Keeping the new ‘presumption of guilt’ framework, there are two aspects which merit introspection.
- Judicious exercise of powers
- Safeguard measures, under the statute keeping in mind the constitutional right for freedom of life and personal liberty.
As regards to the basis of ‘reasons to believe’, the recent cases of GST evasion seem to, prima facie, appear to be cases resulting from fake invoicing via shell companies and fraudulent claim of input credits. The arrest provisions are in place to deal with precisely such brazen acts of ‘daylight’ theft. However, the jurisprudence on formation of such opinion, ‘reasons to believe’ lays down principles for recording of reasons based on tangible evidence, arrest being the last method of resort etc.
Inadequate Safeguards
On safeguards, it must be kept in mind that such empowerment, besides dealing with unscrupulous tax evaders, is for the efficient administration of the law and to instill a sense of discipline. This was enshrined in the design of the new GST law. In doing so, the CGST Act appears to have not provided safeguards which were emphasised by the CBIC in its 2016 guidelines which were issued in the context of the then service tax laws. These need reaffirmation.
An arrest impinges on the personal liberty of an individual, even a defaulter, and such power should be exercised with great responsibility and utmost caution.
In summary, there is a radical shift in the approach of the legislation, policy and in tax administration of penal provisions and punitive actions. Lately, the enforcement wings under the GST framework have been sternly dealing with a host of offences and more is expected to follow. Perhaps, broader part of the transparency agenda is being pursued with vigour with the intelligence-gathering agencies for tax evasion and shell companies acting in tandem. A recent statement of Finance Minister Nirmala Sitharaman on taking harsher measures to curb tax evasion was timed to enforce the message. Instances such as extension of the term of National Anti-profiteering Authority by two years, proposal for mandatory e-invoicing suggest a clean-up spree to combat tax evasion. The legislative intent is clear – the law shall sternly deal with tax evasion!
While the Supreme Court shall form the three-member bench to deal with the larger question of arrest powers, philosophically speaking, it is clear in the context of tax evasion, the shift from ‘presumption of innocence’ to ‘presumption of guilt’ is visible. Perhaps, for an alleged tax offender, the truth lies in the middle…
Mukesh Butani is the founder of BMR Legal, Advocates. Joseph K Antony is a Senior Associate at the firm.
The views expressed here are those of the authors, and do not necessarily represent the views of BloombergQuint or its Editorial team
