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Power of Arrest Under Central Goods and Services Tax (CGST) Act

The power to arrest an assessee is prescribed under Section 69 of the CGST Act. However, without assessing the actual liability of an assessee, the arrest is onerous and must always be avoided.

The tax administration in India provides for provisions like Inspection, Search, Seizure and Arrest in order to protect the interest of the genuine tax payers, thereby separating them from tax evaders, who end up getting an unfair advantage over the genuine tax payers. Provisions like these act as a deterrent towards tax evasion. Such provisions are required to safeguard Government’s legitimate dues.

The options of Inspection, Search, Seizure and Arrest are exercised, only in exceptional circumstances and as a last resort, to protect the Government Revenue. Therefore, to ensure that these provisions are used properly, effectively and the rights of taxpayers are also protected, the CGST Act stipulates that Inspection, Search or Seizure can only be carried out when an officer, of the rank of Joint Commissioner or above, has reasons to believe the existence of such exceptional circumstances. However, in case of arrests the same can be carried out only where the person is accused of offences specified for this purpose and the tax amount involved is more than specified limit.

GST Authorities' Power Of Arrest Under The CGST Act:

The provisions for arrests under CGST Act have sufficient inbuilt safeguards to ensure that these are used only under authorisation from the Commissioner. Besides this, the CGST Act also stipulates that 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 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:

  • 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.
  • The Officer authorised to arrest must then inform the person the grounds of arrest and produce them before a Magistrate within twenty-four hours.
  • The person is then admitted to bail or custody of the Magistrate.
  • 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.

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. DGGI had 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.

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.

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. 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:

Different High Courts have adopted contradictory views on this issue. The Telangana High Court in the case of P.V. Ramana Reddy v. Union of India had upheld the Commissioner’s power to order an arrest if a cognisable and non-bailable offence had been committed. The Court said there was no need for a First Information Report to be filed and denied pre-arrest bail to the taxpayer. Whereas the Bombay High Court in the case of Sapna Jain v. Union of India said that no coercive action should be taken against the taxpayer and no arrests should be made.

Recently, the Bombay High Court in the case of Yogesh Jagdish Kanodia v. The State of Maharashtra dealt 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.

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.

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