SEPTEMBER 11, 2019

By K Srinivasan

A brief background of the discussion:

THE first and foremost guarantee, of the one nation, one market without any barriers of trade, was promptly accomplished by visible action on the part of the Government to abolish all check posts.

A notable achievement to the credit of the Government was not without its drawbacks; So many round tripping did tax invoices, despite prescribing E-way Bills for movement of goods.

It all led to humongous tax frauds committed on the Government leading to huge tax evasion and revenue loss to the Exchequer, due to lack of the otherwise vigilant check-posts.

The crucial Question of round tripping, the Answer and the inevitable result!

How can you expect the Government to be a silent onlooker to these tax frauds happening right, left and centre, right under its nose, across the country?

Hence, the enforcement action of frequent searches, seizures and arrests invoking a hue and cry from the affected tax evaders.

No doubt the innocent taxpayers are getting victimised for their compromising attitude towards these frauds and fraudsters.

The Dialogue:

The Experts have had enough to argue for and against prosecution and the rights and safeguards of both the Government and the Taxpayers.

They have dissected the Act and Rules of GST and the Criminal Procedure Code and the latest rulings in support of trade. I am not here to add or subtract anything from what has been said so well by so many but to so few.

But, all the same I have made an attempt to present happenings around the subject matter of dispute before various state courts and the top Court, to help giving a better coverage of the readers.

The Supreme Court's recent judgement on its refusal to interfere with the order of the 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, gave powers to its officers to enforce the compliance of its provisions. The powers included verification, audit, search and seizure, assessment, and the imposition of interest and penalty.

They are the much famed four pillars of tax administration, is a well-known fact to all people familiar with tax administration

However, in addition to these powers, such laws also contained 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 who act with impunity in flouting these provisions.

The Supreme Court also noted in a judgment of recent origin that the economic offences having deep-rooted conspiracies and involving a huge loss of public funds need to be viewed seriously.

Hence it has opined that they be considered as grave offences affecting the 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, because of the volatility of the transactions, the proneness to quick loss of tax trails and the consequent difficulty in establishing a case and the eventual loss of revenue to the Exchequer.

It may also be noted that the power to arrest was also there under the erstwhile service tax and excise laws, but was not unleashed in this scale before to seek so many judicial presidents.

Scope of Arrest and Prosecution powers of officers under GST, in brief

Legal provisions:

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.

These clauses broadly deal 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.

The power to arrest of GST officer has become a contentious issue now before the courts. 

The starting point of the Legal journey of Arrests and Bail under GST

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 - 2019-TIOL-216-SC-GST, affirmed the judgement dated April 18, 2019, of the Telangana High Court in P.V. Ramana Reddy versus Union of India - 2019-TIOL-873-HC-TELANGANA-GST.

In the said judgment the powers of GST officers had been succinctly put that to arrest tax evaders in grave economic offences, under GST, by its authorized officers, is allowed.

The round trips of conflicting judgments of various Courts!

1) The judgement of Telangana High Court:

The taxpayer approached the Telangana High Court for an anticipatory bail. The issue arose that whether a taxpayer 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 can be given protection from arrest.

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.

2) 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 - 2019-TIOL-1021-HC-MAD-GST, 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 it 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 - 2019-TIOL-65-SC-ST.

3) Supreme Court in Make My Trip 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 - 2016-TIOL-1957-HC-DEL-ST, 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.

Who is 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.

4) 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 dated April 11, 2019 - 2019-TIOL-1146-HC-MUM-GST 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. Please see - 2019-TIOL-217-SC-GST.

However, the Supreme Court has advised all the high courts to take note of its order dated May 27, 2019 (supra), whereby the order of the Telangana High Court was affirmed, for the moment upholding the right to arrest by GST officers, in huge Invoice tax fraud cases.

Epilogue:

But, I would like to conclude that the new tax and its success is much meant for the development of the nation and everyone has a major nation-building role in it.

While the Law makers have the right to make stringent Laws, it must be handled sparingly and well too, so that people are not impudent but a frequent and excess use of it equally embolden them to get used to higher thresholds of committing offences and getting punished.

It will become like an arms race, escalation of tax terrorism and tax war; if all tax payers turn militant, there may not be space for them to be confined nor the task force is enough in any country to counter the surge of a movement to break laws by evade taxes.

Why committing of such Invoice frauds and availing those false credits in cohorts, are not to be punished with imprisonment, even before making out a case and making an assessment order by the assessing officer, is seriously the mind-set of the Government and the top court.

GST tax evasions in the current scale deserve to be classed a major economic offence, and hence to be treated as cognizable and non-bailable, looks like the mood of the Government.

In all likelihood the Government will go seriously for the tax offenders even as it is seeking clarifications from the top court to stall all legal efforts to rescue them even temporarily, by ticking them off for a strict sentence, to put fear in the minds of such tax evaders.

(Views of the author are personal. The author is a Senior Associate, RANK Associates, Chennai.)