The word arrest usually comes within the realm of criminal jurisdiction. That being said, there has been a increasing amount of legislative backing which countries are now giving to civil arrests, especially in the field of taxation.
It must be clarified, that civil prosecution under tax laws is neither new nor an isolated occurrence. Direct tax laws, like Income tax have several provisions, wherein the assessee can be prosecuted. Comparative study between powers of arrests under various tax laws would be an extremely interesting case study for a different article.
Under the Goods and Services Tax laws, power to arrest is found in Section 69. Before going into the discussion about the sweeping powers granted to any Commissioner to order ‘arrest’ of any person against whom he has ‘reasons to believe’ that he has committed an offence, which is non bailable and cognizable, it would be prudent to dwell into the history of why the indirect tax laws are enacted to be increasingly stringent bordering on draconian.
Compared to the true predecessor of GST, the State Vat Laws, as per section 74 of the Maharashtra Value Added Tax Act, the maximum punishment is one year, extendable up to 2 years. Therefore all prosecutable offences were bailable and non cognisable. Importantly, the MVAT officer did not have powers to ‘make’(order) the arrest. Therefore the actual power of prosecution lay with the Police.
If the sections dealing with imprisonment were to be read in isolation, upon reading the sweeping powers of arrests under the GST regime they come across in stark contrast to the almost mellow provisions of the MVAT Act. Therefore one can be forgiven if they presume that both laws deal with totally different scenarios. Previous Excise laws did have prosecution powers as well, but it is best to keep the reference to the VAT laws, since the taxable events under VAT and GST are closest and so are the breaches, offences, etc.
This tectonic change in the prosecution powers under the GST laws is a growing trend or if I may dare say indicative of the general annoyance and derision towards tax evasion by the Revenue. Such an attitude is usually a popular move amongst the unaffected public in general, who tend to have equal annoyance and derision towards tax evaders or so called ‘tax thieves’.
The above statements are not India specific, but is prevalent internationally. Validation from the same comes from the OECD guidelines ‘Fighting Tax Crime: The Ten Global Principles’ of 2017 (OECD (2017), Fighting Tax Crime: The Ten Global Principles, OECD Publishing, Paris. http://www.oecd.org/tax/crime/fighting-tax-crime-the-ten-global-principles.htm). Most democracies are members of OECD or in the case of India member of several committees within OECD including taxation.
The first principle enshrined is ‘Ensure tax crimes are criminalised’
Item No. 5 and 6 state the following:
5. The precise way of criminalising violations of tax law will vary from one jurisdiction to another. Each jurisdiction has a different legal system, which reflects and interacts with the particular culture, policy and legislative environment.
6. Whatever the particular details of the legal framework are,it will be most effective if:
The law clearly defines the tax offences that are criminalised;
A criminal sanction applies if the offence is proven;
More serious offences are punishable by more serious criminal sanctions; and
Criminal sanctions are applied in practice.
The above principles indicate, that countries are no more just content at tax recovery, more and more emphasis is now being given to criminal sanctions.
Discussions of Various Provisions under GST Laws and judgments
Section 69 : Power to Arrest
69. (1) Where the Commissioner has reasons to believe that a person has committed any offence specified in clause (a) or clause (b) or clause (c) or clause (d) of sub-section (1) of section 132 which is punishable under clause (i) or (ii) of sub-section (1), or sub-section (2) of the said section, he may, by order, authorise any officer of central tax to arrest such person.
(2) Where a person is arrested under sub-section (1) for an offence specified under subsection (5) of section 132, the officer authorised to arrest the person shall inform such person of the grounds of arrest and produce him before a Magistrate within twenty-four hours.
(3) Subject to the provisions of the Code of Criminal Procedure, 1973,––
(a) where a person is arrested under sub-section (1) for any offence specified under sub-section (4) of section 132, he shall be admitted to bail or in default of bail, forwarded to the custody of the Magistrate;
(b) in the case of a non-cognizable and bailable offence, the Deputy Commissioner or the Assistant Commissioner shall, for the purpose of releasing an arrested person on bail or otherwise, have the same powers and be subject to the same provisions as an officer-in-charge of a police station.
From the above section it is clear that, the Commissioner has power to authorise an arrest if he has ‘reason to believe’ that any person has committed an offence which are enumerated in Section 132. Thus it is clear, that a Commissioner of a commercial tax regime can now act in the role of a ‘de facto’ Police Officer.
Section 132 gives out a list of all offences and the also lists out severity of the same.
List of offences as per Section 132 are not reproduced here for the sake of brevity.
Offences can be classified into 3 major categories:
1. Tax evasion
2. Wrong/ fraudulent availing of Input tax credit
3. Wrong/ fraudulent obtaining of Refund
All other offences are associated with above three categories. The punishment for offences in Section 132 (a),(b), (c ), (d) where the quantum involved is more than 5 crore is cognisable and non bailable. All other offences with lesser quantum are non cognisable and bailable.
Section 2 (c) of the Criminal Procedure Code, 1973 defines Cognizable offences.
Cognizable offence/case means a case in which, a police officer may arrest without warrant, as per the First Schedule of the Criminal Procedure Code, 1973 or under any other law for the time being in force.
Cognizable offenses are usually offenses which are serious in nature.
A non-cognizable offence has been defined in Section 2(l) of Criminal Procedure Code 1973. Non-cognizable offence means an offence for which, and ₹non-cognizable case’ (NC) means a case in which, a police officer without any warrant has no authority to arrest.
Whether an offence is cognisable or non cognisable usually always depends on the severity and quantum of tax impact involved.
It is almost a daily news item nowadays where GST authorities cause arrests of several persons in a group companies . These are mainly for the fraudulent availing of ITC. What it effectively means is that ITC is transferred amongst group of several companies with barely any value addition. This modus operandi is adopted to avail Input tax credit and enhance the turnover without there being an actual presence of goods and subsequent transfer of property in goods. Merits of whether there is a loss of revenue and several other aspects including Section 16, which specifically allows ‘constructive delivery’ require deep analysis in appropriate forums.
In the light of the above background, let us examine in brief the judicial pronouncements in the short span of time since GST has been implemented.
1. 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’).
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 contest 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 contest 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 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.
2. 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.
3. 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 accussed 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.
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.