The Supreme Court's recent judgement on its refusal to interfere with the order of Telangana High Court has caught the attention of people regarding the power of GST commissioner to arrest tax evaders. Historically, both direct, as well as indirect tax laws, give powers to its officers to enforce the compliance of its provisions. The powers include verification, audit, search and seizure, assessment, and the imposition of interest and penalty.
However, in addition to these powers, such laws also contain provisions for prosecution. Until recently, the prosecution provisions were being used sparingly. But, now the tax officers have started using the power to prosecute the offenders with impunity. The Supreme Court had also noted in a judgment that the economic offences having deep-rooted conspiracies and involving a huge loss of public funds need to be viewed seriously and considered as grave offences affecting the Indian economy as a whole and thereby posing a serious threat to the financial health of the country.
Under the Income Tax Act, 1961, the tax officer does not have any power to arrest. However, under the Central Goods and Service Tax Act, 2017 (CGST Act), such powers have been given to tax officers. It may also be noted that the power to arrest was also there under the erstwhile service tax and excise laws. Let's decipher what this cacophony is all about over the arrest:
Scope of power of GST officers
The power to arrest the GST officer has been a contentious issue. The Supreme Court, on the government approaching it for clarification, has referred the matter to a three-judge bench on May 29, 2019, on the ground that different high courts have expressed conflicting views on such powers. Previously, a two-judge bench of Supreme Court had vide its order dated May 27, 2019, affirmed the judgement dated April 18, 2019, of the Telangana High Court in P.V. Ramana Reddy versus Union of India, wherein powers of GST officers were succinctly explained.
Power to punish is set out in section 132 of the CGST Act. Section 132(1) of CGST Act, 2017 lists out 12 different types of offences from clauses broadly dealing with false invoice, illegal collection of GST, false credit, or falsification of books or illegally transporting goods or obstructing the GST officer from discharge of his duties etc.
The nature of offence being cognisable or otherwise would depend on the amount of tax involved. In case the tax involved is likely to be more than Rs 5 crore (for offences relating to false invoice, illegal collection of GST etc), the offence would be cognisable and non-bailable. In other words, the commissioner would have the power to arrest the taxpayer. In other cases, the power to arrest is not absolute and is dependent on the order of the Magistrate.
Section 69(1) of CGST Act, 2017 delineates the power of the commissioner to order the arrest of a person whom he has reasons to believe, to have committed an offence, which is cognisable and non-bailable. A person arrested under this section has to be produced before the Magistrate within 24 hours of his arrest.
Under sub-section (1) of section 70 the proper officer under the CGST Act, 2017 has the power to summon a person either to give evidence or to produce a document.
Was there a conflict in views of the high courts?
i) The judgement of Telangana High Court
The taxpayer approached the Telangana High Court for anticipatory bail. The issue arose that whether a taxpayer can be given protection from arrest who has been summoned under section 70 of the CGST Act for enquiry and investigation for an offence under section 132 of the CGST Act.
The Telangana High Court in P.V. Ramana Reddy versus Union of India held that person who is summoned under section 70(1) and person whose arrest is authorised under section 69(1) is not to be treated as the one accused of any offence until a prosecution is launched by way of a private complaint with the previous sanction of the commissioner.
In other words, no criminal proceedings can be initiated until a prosecution is launched, by way of a private complaint with the previous sanction of the commissioner. Accordingly, the provisions of the Code of Criminal Procedure, 1973 providing for anticipatory bail would not be applicable.
However, the remedy in such cases is to file a writ before the High Court seeking protection from arrest. Nonetheless, based on the facts of this case, no relief from arrest was granted.
It was further held that the GST officer can initiate prosecution even before the completion of assessment or quantification of tax evaded and that the list of offences included in sub-section (1) of section 132 of CGST Act, 2017 has no correlation with assessment. The prosecutions for these offences do not depend upon the completion of the assessment.
ii) The judgement of Madras High Court
This position conflicted with a judgement dated April 4, 2019, of Madras High Court in Jayachandran Alloys (P.) Ltd. versus Superintendent of GST & Central Excise, writ petition number 5501 of 2019, held that the power to punish set out in section 132 of the CGST Act would stand triggered only if it is established that an assessee has 'committed' an offence that has to be necessarily post-determination of demand due from an assessee, that itself has to necessarily follow process of an assessment. The high court relied on the judgement dated January 23, 2019, of the Supreme Court in the case of Union of India & Ors versus Make My Trip (India) Pvt. Ltd. in civil appeal number of 8080 of 2018.
iii) Supreme Court in MakeMyTrip Case
The Supreme Court had in Make My Trip(India) Pvt. Ltd. (supra), upheld the judgement dated September 1, 2016, of the Delhi High Court in Make My Trip (India)(P.) Ltd. versus Union of India  96 VST 3 (Delhi), which examined the power to arrest the tax officer under the erstwhile service tax law.
It held that prosecution should normally be launched only after the adjudication is complete. The court further relied on Central Board of Indirect Taxes and Customs' (erstwhile Central Board of Excise and Customs) Circular No. 1009/16/2015-CX, dated 23-10-2015. The said circular provided that for the launch of prosecution there has to be a determination that a person is a habitual offender.
A taxpayer is treated as a habitual offender if:
- the amount of tax involved is more than Rs 1 crore in the past five years and
- he has been involved in three or more cases of confirmed demand (at the first appellate level or above) of Central Excise duty/ Service Tax/ due to misuse of Cenvat Credit and due to fraud, suppression of facts etc.
iv) Bombay High Court's Position
Similar issues are pending before the Bombay High Court as well. In one such case, the Bombay High Court vide its interim order has given protection to the taxpayer from arrest until it hears arguments on merit. It may also be noted that the apex court has not interfered in the previous interim order dated April 11, 2019, of the Bombay High Court. However, it has advised all the high courts to take note of its order dated May 27, 2019, whereby the order of the Telangana High Court was affirmed.
Since the order of Telangana High Court has not been stayed by the Supreme Court, it is the law of the land until the three-judge bench takes a contrary view. In a nutshell, since the GST law provides a commissioner the power to arrest a person in case he has reasons to believe that the tax evasion is likely to be more than Rs 5 crore without waiting for the final determination of the tax liability. However, the taxpayer has the possibility of approaching respective high courts by way of a writ petition to seek protection from arrest.
(The author is Custodian, Krishnomics Legal)