JUNE 24, 2019

By Dr G Gokul Kishore

GST Council in the 35th meeting held on 21-6-2019 has not taken any major decision warranting immediate and elaborate discussion. Therefore, in this 43rd part, we look at the implementation of GST through serious issues of evasion, arrest and prosecution. Tax laws are generally perceived as draconian. Tax officers wield enormous powers and taxpayers are considered as vulnerable to harassment and penalties. GST was publicised as a liberal tax law introduced to simplify the life of taxpayers, enrich government coffers and gladden consumers' heart through reduced price for goods and services. Let us see the gap between such pious objectives and the ground realities.

Verifying IGST refund claims of risky exporters

Penalties and punishment would make us believe that they instil fear and deter commission of offences. GST law is just a sub-set of the universe of laws. It contains lot of well thought out provisions to wean away the deviant and make them fall in line. But the reports on arrests, denial of bail and host of investigations highlighted in media on suspected GST evasion point to status quo being retained. The government is worried over leakage of revenue. But how can evasion be estimated when the same is an outcome of unreported taxable transactions? It is rather impossible to find how much is lost unless there is reliable information on how much ought to have been there before such loss. Tax payment is based on quid pro quo - the perception that the tax paid is used by the government to provide services to the public. The extent to which such perception is poor, compliance cannot be higher. Measures to modify taxpayers' compliance behaviour need to start from greater efficiency in public service delivery. Understanding taxpayers' psychology is not the subject of this article.

By Circular No. 16/2019-Cus., dated 17-6-2019, CBIC sought to curb bogus IGST refund claims based on fraudulent input tax credit (ITC). Exporters who had availed ITC based on ineligible documents will be identified based on certain risk parameters and based on alert in the system, refund will be suspended. After verification by GST officers on absence of any malpractice, refund of IGST will be released. The automatic system of IGST refund has thus been put on hold at least to one section of exporting community. On how to conduct verification, CBIC will release SOP shortly. To contain adverse inferences arising out of such circular, press release has been issued to assure genuine exporters that refund will be granted automatically. Statistics have been taken for support to impress that only a minimal percentage is/will be subjected to such scrutiny.

Over-valuation of exports for claiming higher export benefits has been a modus operandi for decades. Bogus claims or forged documents to claim undue duty or tax benefits are not new. Reports suggest that amendment to Customs Act is being sought to provide for more powers to Customs officers to take punitive action in cases involving IGST. If the problem is adoption of different values in GSTR-3B and shipping bill and ITC being availed based on false claims, then the solution cannot lie in more powers. Nor will the system of physical verification of claims by two wings of the same department mitigate such risks. Nervous circulars and press releases cannot be considered as mature response given the magnitude or seriousness of the issues. Within two years of implementation, GST has become unmanageable for the tax administration. The issue may lie in capacity constraint, lack of orientation and training and trust deficit that the department has with taxpayers. Considering the quantum of data that the department has now accumulated through various GST returns filed online, deciphering the same will help in curbing false claims in non-obtrusive manner.

Prosecution under GST law and IPC

In the prosecution proceedings launched by the revenue department in cases of tax evasion, it is treated as private complainant and not the ‘State'. Complaint is filed with subordinate judiciary on the criminal side, but police machinery does not come into picture. Surprisingly, for alleged tax evasion, FIR has been lodged by SGST officers and the same was sought to be quashed by the petitioner before Allahabad High Court [Govind Enterprises v. State of UP - 2019-TIOL-1170-HC-ALL-GST]. The High Court refused to quash the FIR after holding that the relevant provisions of UPGST Act as applicable to offences punishable under such GST law are not applicable to offences punishable under Indian Penal Code (IPC). It further noted that there was no provision in UP GST Act having overriding effect vis-à-vis IPC and the former does not bar lodging of FIR. Analysing the standard of proof, the High Court noted that offences punishable under IPC are qualitatively different from those punishable under UP GST Act.

Rule against double jeopardy is supreme and no person shall be punished twice for the same offence. This has been considered in the above judgment. However, GST law apparently contains gaps and the same might have led to the above interpretation. If the intention of GST law is different from the one as can be gleaned from the observations of the High Court, then GST Council should recommend suitable amendments to CGST Act and SGST Acts. Otherwise, a taxpayer will have to face three different proceedings viz., adjudication, prosecution under GST law and trial under IPC for the offences traceable to same transaction.

In Part-25 of this series, the increasing frequency of arrests was highlighted along with the need for issuance of appropriate instructions by CBIC for launching prosecution as was the practice under Customs and Central Excise. The Supreme Court is now seized of this issue. It has constituted 3 judges Bench to clarify the position of law on pre-arrest bail and arrest per se for alleged offences under GST law [UOI v. Sapna Jain & Others, Supreme Court Order dated 29-5-2019 - 2019-TIOL-217-SC-GST]. Prosecution for tax evasion has always been there and what makes it different now is the deviation from the liberal face projected for GST and the rapid rise in use of such powers. Though prosecution and adjudication can continue simultaneously, it has always been felt that even without conclusion of adjudication at the first level, taking a taxpayer to court may not advance the case of the department. The rigours of evidence for criminal prosecution to prove an offence beyond reasonable doubt are far more than those required for departmental adjudication which proceeds on preponderance of probability.

Considering the nature of powers relating to arrest and prosecution, the revenue side should also appropriately take up the entire gamut of issues before Supreme Court in the above said case by including the questions arising out of the Allahabad High Court judgment. This will provide opportunity to the Supreme Court to not only clarify the position of law but also direct the tax administration to issue much-needed guidelines.

[The author is an Advocate. Views expressed are strictly personal.]

See Part 42.