The Process of Arrest, Inspection, and Seizure under the 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.

Wed May 05 2021 | Govt. Agencies and Taxation | Comments (0)

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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.

Circumstances which warrant exercise of Inspection by Authorities:

Inspection is a softer provision than search which enables officers to access any place of business or of a person engaged in transporting goods or who is an owner or an operator of a warehouse or godown. Inspection can be carried out by an officer of CGST/SGST only upon a written authorization given by an officer of the rank of Joint Commissioner or above. A Joint Commissioner or an officer higher in rank can give such authorization only if he has reasons to believe that the person concerned has done one of the following actions:

  • Suppression of any transaction relating to supply of goods or services or stock in hand
  • Claimed excess input tax credit
  • Contravention of any provisions of the Act or the Rules to evade tax
  • Transporting or keeping goods which escaped payment of tax or manipulating accounts or stocks which may cause evasion of tax

Inspection can also be done of the conveyance, carrying a consignment of value exceeding specified limit. The person in charge of the conveyance has to produce documents/devices for verification and allow inspection. Inspection during transit can be done even without authorization of the Joint Commissioner.

Inspection in movement:

  • Any consignment, value of which, is exceeding INR 50,000, may be stopped at any place for verification of the documents/ devices prescribed for movement of such consignments.
  • If on verification of the consignment, during transit, it is found that the goods were removed without prescribed document or the same are being supplied in contravention of any provisions of the Act then the same can be detained or seized and may be subjected to penalties as prescribed.
  • To ensure transparency and minimise hardships to the trade, the law provides that if during verification, in transit, a consignment is held up beyond 30 minutes the transporter can feed details on the portal. This will ensure accountability and transparency for all such verifications. Moreover, for verification during movement of consignment will also be done through a Digital interface and therefore the physical intervention will be minimum and as has already been mentioned that in case of a delay beyond 30 minutes the transporter can feed the details on the portal.

Circumstances which warrant exercise of Search & Seizure by Authorities:

The provisions of search and seizure also provides enough safeguards and the GST Law stipulates that search of any place of business etc. can be carried out only under authorisation from an officer not below the rank of Joint Commissioner and if he has a reason to believe that the person concerned has done at least one of the following:

  • Goods liable to confiscation or any documents/books/record/things, which may be useful for or relevant to any proceedings, are secreted in any place then all such places can be searched
  • All such goods/documents/books/records/ things may be seized, however, if it is not practicable to seize any such goods then the same may be detained. The person from whom these are seized can be entitled to take copies/extracts of seized records
  • The seized documents/books/things can be retained only till the time the same are required for examination/enquiry/ proceedings and if these are not relied on for the case then the same can be returned within 30 days from the issuance of show cause notice
  • The seized goods can be provisionally released on execution of bond and furnishing a security or on payment of applicable tax, interest and penalty
  • In case of seizure of goods, a notice has to be issued within six months, if no notice is issued within a period of six months then all such goods can be returned. However, this period of six months can be extended by Commissioner for another six months on sufficient cause.
  • An inventory of the seized goods/documents/ records is required to be made by the officer and the person, from whom the same are seized, must be given a copy of the same.
  • To ensure that the provisions for search and seizure are implemented in a proper and transparent manner, the Act stipulates that the searches and seizures must be carried out in accordance with the provisions of Criminal Procedure Code, 1973. It ensures that any search or seizure should be made in the presence of two or more independent witnesses, a record of entire proceedings is made and forwarded to the Commissioner forthwith.

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 assessment:

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 Officer 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.

In the case of Jayachandran Alloys Pvt. Ltd. v. Superintendent of GST & Central Excise, the Madras High Court had held that determining excess credit provided under Section 73 and Section 74 of the CGST Act is one of the requirements for recovery. A recovery like that can be initiated once the amount of excess credit has been quantified and determined in an assessment. The Court finally held that the power to punish as prescribed under Section 132 of the CGST Act would only come into play once it is established that an assessee has actually ‘committed’ an offence.

Can an Anticipatory Bail be granted for such offences?

Section 438 of CrPC provides for grant of anticipatory bail, which is a statutory right. This provision is, however, not available in those states where it has been statutorily omitted or for those offences where some special enactment under which a person is prosecuted ousts the application of this provision.

The Telangana High Courts in the case of P.V. Ramana Reddy v. Union of India widely discussed the grant of anticipatory bail and its challenges. The Court in this case had held that since the power of arrest under Section 69 of CGST Act is exercised before an FIR is registered, 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.

Is the Remedy under Article 226 of the Constitution available?

The Supreme Court in the case of P.V. Ramana Reddy v. Union of India had held that a remedy can be availed under Article 226 of the Constitution. The petitioners in the case had approached the High Court under Article 226 seeking directions to be issued to the respondent Authorities to not arrest the petitioners as provided under Section 69(1) of CGST Act. In essence, the petitioners indirectly prayed for grant of anticipatory bail.

The Court refused to grant protection against arrest because of the nature of the offence involved. The Court also observed that while offences under the CGST Act are compoundable, as per the proviso to Section 138(1), compounding can be allowed only after making payment of tax, interest and penalty involved in such cases.

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.

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