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Arrest under GST

MARCH 07, 2018

By Vijay Kumar

It has happened! The first arrest under GST has taken place in Mumbai. A press Release dated 01st March 2018 issued by PIB states:

Enforcement Action for Fraud in GST Mumbai?; Two Businessmen arrested by Officers of CGST, Mumbai for creating fictitious invoices and availing ineligible credit?.

Officers of CGST Mumbai have arrested two businessmen for creating fictitious invoices and availing ineligible credit. The persons have been arrested for availing input tax credit on the basis of fraudulent invoices against which no actual goods were bought or sold.

The power to arrest is provided under Section 69 of the CGST Act, 2017 and is to be exercised by the Commissioner in cases of outright fraud where the amount of tax evaded or the amount of input tax credit wrongly availed exceeds Rs. 2 crore.

The Government wants to assure taxpayers that compliant taxpayers do not run the risk of facing such punitive action in carrying out their day to day operations. The power to arrest is to be exercised where there is deliberate fraud of sizeable magnitude with intent to evade tax. It is meant to serve as a deterrent to unscrupulous elements in trade who may try to defraud the system. There are sufficient checks built into the law to ensure that inadvertent or procedural lapses do not attract severe punitive measures.

So, there is nothing to fear, if you are on the right side of the Law!

Yet another Press Release, not well publicised, but selectively leaked reads as:

Press Note

Sh. Sanjiv Pravin Mehta, director Shah brothers Ispat pvt ltd, Trust house Parel, and Sh. Vinay kumar D Arya, director of M/s VN industries, Darukhana, Mumbai have been arrested by CGST Mumbai Central Commissionerate for availing ineligible Credit of Rs. 5.20 crores and Rs. 2.03 crores respectively. They were only exchanging invoices for so called sale and purchase. Only paper/invoice movement was there and no actual goods were being bought/sold. No physical transport of goods was taking place. CGST law is very clear that whoever commits the offence of issuing any invoice or bill without supply of goods or services or both in violation of the provisions of this Act, or the rules made there under leading to wrongful availment or utilization of input tax credit or refund of taxes, or avail input tax credit using such invoice or bill, may be arrested.

The investigations revealed that this was being done prima facie with malafide intention to defraud exchequer and Banks by opening LCs (Letter of credits) on fake purchase transactions.

This is first arrest in India after implementation of GST for fraud under CGST Act. Arrest has been approved by Commissioner Mumbai Central Dr K.N. Raghavan and executed by Additional Commissioner Manpreet Arora, Assistant Commissioner Anand Gokhle and Superintendent Sh. Parecha.

Investigations are still on and there are chances of detection of this kind of trade with many other companies related to Shah Brothers Ispat Pvt. Ltd.

As per CGST Act, 2017, the offence committed by Shah Brothers Ispat is of non-bailable character and offence of VN Industries is bailable being below Rs. 5 Crore. He will be offered conditional bail as per prescribed procedure and Sh. Mehta will be produced in the court tomorrow.

The IRS association tweeted:

Hearty Congratulations to the officers of Mumbai Central Commissionerate under Dr. K N Raghavan, Commr & Ms. Manpreet Arora, Addl. Commr for first two arrests under the CGST Act since the launch of GST .

Albeit the fact remains that had the names of the other two officers been included, the character limit of the tweet would not have crossed 280!

The statement reveals that:

1. Arrest has been approved by Commissioner Mumbai Central Dr K.N.Raghavan, and

2. Executed by Additional Commissioner Manpreet Arora, Assistant Commissioner Anand Gokhle and Superintendent Sh.Parecha .

3. As per CGST Act, 2017, the offence committed by Shah Brothers Ispat is of non-bailable character and offence of VN Industries is bailable being below Rs.5 crore. He will be offered conditional bail as per prescribed procedure and Sh. Mehta will be produced in the court tomorrow.

It raises the following questions:

1. Does the arrest require the approval of the Commissioner?

2. The arrest was executed by an Additional Commissioner, an Assistant Commissioner and a Superintendent. How do three officers arrest two persons?

3. Of the two persons arrested, the offence by one is non-bailable and by the other is bailable. So, one will be released on conditional bail as per prescribed procedure and the other will be produced in the court. Now, what is the prescribed procedure?

The Law does provide some answers:

Section 69 of the GST Act stipulates that

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.

As per this Section, the Commissioner has to authorise an officer to arrest a person. In the Press Statement above, we see that the Commissioner has approved the arrest – maybe that is as good as authorising it.

The Cr.PC stipulates, "In making an arrest the police-officer or other person making the same shall actually touch or confine the body of the person to be arrested, unless there be a submission to the custody by word or action." The two directors here must have submitted to custody of the three officers.

Now our problem is getting difficult. What is this bailable and non-bailable ? The Press Note says one offence was bailable and the other was not. We should look into a little more legal jargon like cognizable and non cognizable offence.

The FAQ Chapter 19 issued by the Government throws a lot of light:

Q 26. What are cognizable and non-cognizable offences under CGST Act?

Ans. In section 132 of CGST Act, it is provided that the offences relating to taxable goods and /or services where the amount of tax evaded or the amount of input tax credit wrongly availed or the amount of refund wrongly taken exceeds Rs. 5 crores, shall be cognizable and non-bailable. Other offences under the Act are non-cognizable and bailable.

This is how one of the two persons arrested in the very first arrest case under GST, became eligible for bail and the other ineligible.

The FAQ throws further light on the type of offences:

Q 24. What is a cognizable offence?

Ans. Generally, as per Cr. PC, cognizable offence means serious category of offences in respect of which a police officer has the authority to make an arrest without a warrant and to start an investigation with or without the permission of a court. However, GST being a special legislation, only the officers, duly empowered under the Act can act as above.

Q 25. What is a non-cognizable offence?

Ans. Non-cognizable offence means relatively less serious offences in respect of which a police officer does not have the authority to make an arrest without a warrant and an investigation cannot be initiated without a court order, except as may be authorized under special legislation.

But how does an arrested person get bail? The FAQ (Q.21) answers that also:

If a person is arrested for a cognizable offence, he must be informed in writing of the grounds of arrest and he must be produced before a magistrate within 24 hours of his arrest;

If a person is arrested for a non-cognizable and bailable offence, the Deputy/ Assistant Commissioner of CGST/SGST can release him on bail and he will be subject to the same provisions as an officer in-charge of a police station under section 436 of the Code of Criminal Procedure, 1973. (who is this he - officer or arrested person?)

And the FAQ derives its strength from the Act. I cited the FAQ only for the ease of understanding.

Thus, the position seems to be:

1. The Commissioner has to authorise the arrest.

2. Any officer authorised by the Commissioner can arrest

3. If the alleged evasion is less than Rs. Five crores, bail can be granted by the Assistant/Deputy Commissioner, if it is more than five crores, the arrested person has to be produced before a magistrate. Can this magistrate be any magistrate or has it to be the Court competent to try the case?

Anyway, the first arrest has been made and as the Government says, it is meant to serve as a deterrent to unscrupulous elements in trade who may try to defraud the system .

CASH CALL: What is the GST liability?

CASE -1: There are 4 members in the JV including the operating member and each one contributes Rs. 100 as part of their share. A total amount of Rs 400 is collected. The operating member purchases machinery for Rs 400 for the JV to be used in oil production.

CASE -2: There are 4 members in the JV including the operating member and each one contributes Rs 100 as part of their share. A total amount of Rs 400 is collected. The operating member thereafter uses its own machine and performs exploration and production activities on behalf of the JV.

Government has clarified in Circular No. 35/9/2018-GST, dated: March 5, 2018 that:

CASE-1 will not be the subject matter of 'ST/GST' for the reason that the operating member is not carrying out an activity for another for consideration. In this case, the money paid for purchase of machinery is merely in the nature of capital contribution and is therefore a transaction in money.

On the other hand, in CASE-2, the operating member uses its own machinery and is therefore providing 'service' within the scope of supply of CGST Act, 2017. This is because in this scenario, the operating member is recovering the cost appropriated towards machinery and services from the other JV members in their participating interest ratio.

Retreading of tyres - supply of goods or services?

The Government has clarified in Circular No. 34/8/2018-GST, dated: March 1, 2018 that:

In retreading of tyres, which is a composite supply, the pre-dominant element is the process of retreading which is a supply of service. Rubber used for retreading is an ancillary supply. Which part of a composite supply is the principal supply, must be determined keeping in view the nature of the supply involved. Value may be one of the guiding factors in this determination, but not the sole factor. The primary question that should be asked is what is the essential nature of the composite supply and which element of the supply imparts that essential nature to the composite supply.

Supply of retreaded tyres, where the old tyres belong to the supplier of retreaded tyres, is a supply of goods (retreaded tyres under heading 4012 of the Customs Tariff attracting GST @ 28%).

Wish GST could run on new tyres instead of re-treaded ones.


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