Summons, arrest under GST law cannot be arbitrary

The Central Board of Indirect Taxes & Customs (CBIC) has recently issued instructions on summons and arrest in respect of investigations initiated under the Goods & Services Tax (GST). Instructions are meant for the departmental officers to follow, but being as they are in the public domain, the taxpayer also gets empowered and forewarned. Similar instructions were there earlier in the Central Excise and Service Tax regimes, too. Given that summons and arrest involve exercise of powers that impinge on a citizen’s rights, they bear reiteration.

But are such harsh powers required in fiscal laws? To put matters in perspective, we pay our taxes reluctantly and in fact have a serious problem of evasion. Proof of that is the regular detection of cases of humongous value. The month of August itself witnessed detection of GST frauds in excess of Rs 5,500 crore. This severely hurts the formal economy. We cannot have laws which require the taxpayer to adhere to their requirements and then ignore somebody who chooses to disregard them. There has to be a legal mechanism to bring such offenders to book.

The process of enquiry starts with summons. Summons issued under the provisions of the CGST Act are deemed to be judicial proceedings within the meaning of the Indian Penal Code. It has statutory force --all persons summoned are bound to appear. The instruction stresses that these powers should be used after due approval. Summons should not be resorted to in the first instance but used only where a letter seeking the information does not work. Senior management should be summoned only if there is indication to suggest their involvement. The instruction also emphasises the need to respect the other’s time -- the official summoning should be present at the time/date for which summons has been issued.

The trigger for the second instruction, issued with regard to arrest and bail, is apparently the observations made by the Supreme Court in a recent judgement. Incidentally, these observations were made by the SC in a seven-year-old non-GST case. The instruction quotes the SC mentioning that “merely because an arrest can be made because it is lawful, it does not mandate that an arrest must be made. A distinction must be made between the existence of the power to arrest and the justification for exercise of it”. This is an observation all government probe agencies and the police would do well to remember.

The powers of arrest can be exercised in terms of the provisions of the CGST Act, where the Commissioner has “reason to believe” that the alleged offender has committed an offence as specified in CGST law. “Reason to believe”, which finds mention in several fiscal laws, has not been defined. The SC has in other matters interpreted the phrase to observe that a person is said to have “reason to believe” a thing if he has sufficient cause to believe that thing, but not otherwise.

The circumstances under which the arrest can be resorted to has been spelt out categorically in the CGST Act and are reiterated in the instructions. Necessary supervisory approval is required. Incidentally, the issue of arrest was discussed extensively in the GST Council when the law was being finalised. While there was a consensus about the need for these powers, concerns were expressed about its exercise. Hence, the Act stipulates several safeguards in the form of threshold limits – evasion of up to Rs 1 crore, Rs 2-5 crore and above Rs 5 crore, having different punishments.

The statute divides offences into non-cognisable and bailable -- in which case the bail can be given by the officer, with suitable conditions attached -- and cognisable and non-bailable offences, which relate to the more serious offences -- clandestine supply, issue of invoice without goods, or receipt of goods without invoice, and collecting tax but not passing it on to the government. In these cases, the arrested person has to be produced before the magistrate. The provisions of the CrPC would kick in.

It may be noted that the magistrate in cases of arrest under CGST is not burdened with the twin conditions -- namely that the accused is not guilty of the offence and that he is not likely to commit any offence while on bail -- having to be fulfilled, like in the PMLA or NDPS Acts. The magistrate may decide to accept or reject the department’s argument that the accused is likely to tamper with evidence or intimidate witnesses.

Arrest involves internment, but at this stage is not a punishment. The punishment in the form of imprisonment or fine happens only after prosecution has been launched, the charges are established and a conviction is obtained from the court. Thus, it is important that in all cases of arrest, a prima facie understanding is there that the case is also fit for prosecution. This is a stricter yardstick that the officers would do well to keep in mind.

Instructions have also been issued separately on the customs side -- both for arrest and prosecution. The significant difference here is that the threshold limits are different. Arrest is to be made only in cases of outright smuggling where the value is above Rs 50 lakh, and Rs 2 crore in cases of commercial frauds. The value limits would not apply in certain type of cases like smuggling of arms, antiques, CITES related offences. These instructions both on the GST and customs side should standardise the procedure.

GST revenue has been on the upswing. The economy must be doing well, but also given the large number of detections and consequential arrests made by the department, obviously these measures too have ensured better compliance.

The credibility of the CBIC will depend on how judiciously these extraordinary powers are exercised.

(The writer is a former Chairman, Central Board of Indirect Taxes & Customs)