Arrest under GST still remains a grey area

The concept of taxation is based on the foundation of the welfare of citizens. While the primary focus of indirect tax legislation is on revenue recovery and monetary penalties, indirect tax authorities can also take actions including arrests in disciplining those who misuse the provisions of such legislations.

The provision giving powers to arrest a person dates back to the pre-GST era. This has remained controversial with cases where it can be exercised legally.

Under GST, a commissioner may arrest or authorise arrest if he or she has sufficient ‘reason to believe’ that the person concerned has committed an offence. These include:

  • Supplied goods or services or both without invoice with the intention to evade tax
  • Issued any invoice or bill without supply of goods or services or both leading to wrongful utilisation of input tax credit or refund of tax
  • Wrongfully or fraudulently availed input tax credit using the invoice or without any invoice or bill
  • Failed to deposit collected tax beyond three months

These offenses are cognizable and non-bailable if the tax amount involved exceeds Rs 5 crore. Rest of the arrests are non-cognizable and bailable under the Act. Cognizable offense is one where the taxpayer can be arrested without a warrant. In a non bailable offense, the taxpayers are required to be produced before a judicial magistrate within 24 hours who takes a decision regarding releasing him or otherwise.

It is interesting to note that one of the important terms i.e. ‘reasons to believe’ which is the foundation of GST arrest has not been defined anywhere in the CGST Act, 2017. The courts have consistently held that the term ‘reason to believe’ does not mean the officer’s arbitrary satisfaction, there shall be some subjectivity in exercise of such powers.

If the GST commissioner has a ‘reason to believe’ that the person has committed some offense and the amount of tax evasion is more than 5 crore, then he can order his arrest. The officers would arrest the taxpayer and produce before a judicial magistrate.

The arrests in GST are different from how other arrests are made.

The measures relating to arrest have been introduced to aid in the investigation of GST related crimes, prevent evidence tampering and the suspected offender from fleeing. It is an investigative tool provided to the department and should only be utilised in extraordinary circumstances.

Misuse of these rules for the purpose of meeting revenue objectives will result in harassment of taxpayers, which is not the intention of these laws. Finally, all departments must obey the landmark ruling in D.K. Basu v. State of West Bengal, in which the Supreme Court established certain guidelines to be followed while conducting arrests.

The provisions under GST have reignited the discussion over tax terrorism and appear to run counter to the government’s aspirations to develop a tax administration that is for the benefit and welfare of the taxpayers.

(Tushar Aggarwal is Co Founder Tattvam Advisors, Kushagrah Mehta is Associate at Tattvam Advisors)

(The one-stop destination for MSME, ET RISE provides news, views and analysis around GST, Exports, Funding, Policy and small business management.)

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