FEBRUARY 17, 2020

By Debasish Bandyopadhyay

AT the time of presenting the budget, while introducing "taxpayer charter" in the statute, the Hon'ble Finance Minister has said the following;

"Our government would like to reassure taxpayers that we remain committed to taking measures so that our citizens are free from harassment of any kind.

There has been a debate about building into statutes, criminal liability for acts that are civil in nature. Hence, for Companies Act, certain amendments are proposed to be made that will correct this. Similarly, other laws would also be examined, where such provisions exist and attempts would be made to correct them."

From a plain reading of the aforesaid statement, one may think that the purpose and intent of the Government is to shift towards decriminalizing a considerable number of provisions in the tax legislations that are civil or procedural in nature in order to provide a harassment-free tax administration to the assessees across the country. However, such impression gets a rude shock while delving deep into the legislative changes that are proposed by the Hon'ble FM in the realm of GST in this year's budget proposals. Let's have a look at few changes that are proposed as under;

In section 122 of the Central Goods and Services Tax Act, after sub-section (1), the following sub-section shall be inserted, namely:-

"(1A) Any person who retains the benefit of a transaction covered under clauses (i), (ii), (vii) or clause (ix) of sub-section (1) and at whose instance such transaction is conducted, shall be liable to a penalty of an amount equivalent to the tax evaded or input tax credit availed of or passed on."

In section 132 of the Central Goods and Services Tax Act, in sub-section (1),-

(i) for the words "Whoever commits any of the following offences", the words "Whoever commits, or causes to commit and retain the benefits arising out of, any of the following offences'' shall be substituted;

It appears from the above that an expansion in the scope of penal provision has been made by inserting a new sub-section 1A in section 122 of the CGST Act, to levy penalty equal to the amount of tax evaded or ITC availed or passed on by any person who retains the benefit of the certain specified transactions and at whose instance such transaction is conducted in respect of the said stated offences. Further, the scope of person committing an offence has significantly been widened by proposing to amend section 132 of the CGST Act, to include the persons who causes to commit and retain the benefits on specified offences and further to extend the punishment for the cases where ITC is availed fraudulently without any invoice or bill.

Therefore, it is clear from the aforesaid amendments that in the backdrop of emergence of certain fraudulent activities such as fake invoicing, incorrect availment of ITC etc. carried out by certain unscrupulous entities in the country, the Government is going back on its stated policy and, therefore, to curb such malpractices, giving teeth to the tax administration to bite such entities by making specified offences cognizable and non-bailable. Now, the question that may emerge is, did the Government make necessary study or survey on the severity of such malpractices before bringing in such an impactful legislative change?

It is pertinent to note that the possibility of mis-using such provision by the tax administration is huge and not at all unfounded. The trade is justifiably apprehensive of the fact that the newly found teeth may disturb the honest taxpayers leading to complete unease of doing business in the country. At this point, introduction of another important restrictive provision worth mentioning is the insertion of Rule 86A in Central Goods and service Tax Rules, 2017 vide Notification No. 75/2019-CT w.e.f. 26.12.2019. In terms of the said provision, power to block input credit is given to the competent authority. The relevant portion of the rule is extracted below;

"Rule 86A. Conditions of use of amount available in electronic credit ledger.-

(1) The Commissioner or an officer authorised by him in this behalf, not below the rank of an Assistant Commissioner, having reasons to believe that credit of input tax available in the electronic credit ledger has been fraudulently availed or is ineligible in as much as-……………………

……………………

……………………

…………………..

may, for reasons to be recorded in writing, not allow debit of an amount equivalent to such credit in electronic credit ledger for discharge of any liability under section 49 or for claim of any refund of any unutilised amount."

It is important to recall that the said restriction has been brought in to invalidate the effect of the Gujarat High Court decision - 2019-TIOL-2335-HC-AHM-GST which had held that in absence of any power in law, blocking of credit is absolutely illegal. The said restrictive Rule will have to test the judicial scrutiny as being violative of Article 14 of the Constitution of India, and the provision being arbitrary and flawed. Again, it is time to understand that such regressive and retrograde rule may result into complete unease of doing business and chaos in the trade.

The purpose and intent of Rule 86A has been made very clear in the last week of January, 2020 by blocking credit ledgers of close to 2000 entities on the suspicion of alleged frauds and presumptive malpractices. It is believed that the reasons for such blocking is due to the mismatch of GSTR-1 data with final GSTR-3B returns, availing of suspicious ITC etc. by such entities. In Kolkata, it is observed that the electronic credit ledger of many big companies have been blocked without giving any intimation to the assesses. It is surprising to know that the jurisdictional authorities have also been clueless about the modus operandi and reasons for such blocking of input credit. Is this the due process of law to make a harassment-free and simple tax administration in the country as promised by the Hon'ble FM? Or does it still run at the whims and fancies of the Babus of the North block? In a way, the said rule has already started showing its true colours.

Coming back to the reasons for bringing in such stringent and regressive provisions in the tax legislation, it can be said that in the process of tightening the noose, the Government is resorting to contrasting principles. In case of widening of section 132, criminal liability extended to the recipient of supply may turn out to be a draconian and onerous, even in certain cases a honest mistake may invite a jail term. Sometimes, the tendency of straitjacketing certain offences with common scale is very dangerously prone to misuse by the tax administration in order to harass the assesse.

Why does the Government take recourse to such regressive policy? Is it driven by the comprehensive guide prepared by the OECD Task Force in fighting tax crimes? The fight against tax crime is being actively pursued by governments around the world. The said guide recommends ten global principles for identifying the risks of tax crimes and other mechanisms that are needed to more effectively combat tax crimes. The said ten broad principles are extracted below -

- Ensure Tax Offences are criminalised

- Devise an Effective Strategy for Addressing Tax Crimes

- Have Adequate Investigative Powers

- Have Effective Powers to Freeze, Seize and Confiscate Assets

- Put in Place an Organisational Structure with Defined Responsibilities

- Provide Adequate Resources for Tax Crime Investigation

- Make Tax Crimes a Predicate Offence for Money Laundering

- Have an Effective Framework for Domestic Inter-Agency Co-operation

- Ensure International Co-operation Mechanisms are Available

- Protect Suspects' Rights

The aforesaid guide ensures that the said principles shall arm and equip tax administration with best practices to promote efficient system for fighting the threats of illicit financial flows that are either derived from tax evasion, international tax schemes, cybercrime or terrorist financing. However, it is also significant to study, whether such principles are workable and implementable in the present slowing down economic paradigms in the country. Moreover, singular focus on criminalizing tax offences without considering other principles may impact business eco-system adversely.

Finally, it is also imperative to examine the effectiveness and efficacy of criminalization of tax offences in India. The pertinent question that may arise - Does criminalization deter tax evasion? The social science research reveals that manipulating criminal law within a particular system to achieve heightened deterrence effects generally will be ineffective. Thus, the available behavioural science data shows that criminalization does not necessarily effect deterrence. On the contrary, formulation and application of criminal law on the basis of working assumptions, sometimes, results in disturbing and dangerous implications on the overall economic architecture of the country.

Before parting, it is pertinent to note that this year's budget is woven around three broad themes - aspirational India, economic development and caring society that is humane and compassionate. Therefore, in order to achieve the goal of aspirational India through economic development, a caring approach is also required to be exercised in framing tax policy of the country. Hence, it is high time that the Government should review such stringent provisions and revisit the same in order to build a harassment-free tax regime in the country.

(The views expressed are strictly personal)