Goods and services tax (GST) collections for the month of April 2022 rose almost 20% to reach record high of Rs 1.68 Lakhs crores. This growth in GST collection is due to increase in economic activity coupled with tighter regulations under GST. GST collections have been consistently higher than the GDP growth rate in recent years, with the monthly collection in FY22 exceeding Rs 1.25 Lakhs crores for six months in a row till March 2022. Monthly GST collections hit an all-time high of Rs 1.68 Lakhs crores in April 2022 (March-22 transactions), broadly reflecting efficient plugging of tax evasion, a sustained shift of business to the formal sector of the economy and inflationary impact.
The government might be looking at improving revenues through legal and administrative changes, including tightening enforcement to curb leakages and better compliance. The same is evident from,
> Recent changes made in availment of Input Tax Credit under the GST Act and Rules made thereunder,
> Action on identifying the fake rackets of issuing invoices without supply of goods / services,
> Identifying and taking action on fake firms with the help of data analytics,
> Mass GST notices to taxpayers coupled with investigations by DGGI (the central government investigation wing under GST).
With due respect to investigating rights of the GST authorities, the industry in general was whispering concerns about the methodology in which the investigation by the GST Authority particularly by the officers of Director General of GST Intelligence (DGGI) was getting carried out. In some cases, the DGGI officers barged into the offices of the taxpayers and requested (but forcefully) to the taxpayer to deposit the voluntary tax in the middle of night or face the arrest provisions. This all was happening under the broad day light and without following the due process prescribed under the law. In some cases, the taxpayers approached Hon’ble high courts and alleged use of force and coercion by the officers for making the recovery during search or inspections. In fact, in some cases, even the consultants are hassled in the process showing them the amended provision under Section 132 wherein the GST authorities have power to arrest even person “causing & retaining the benefits”. The officers were claiming to evoke these provisions to silence the advisors and consultants.
The above facts were corroborated by the instruction issued by the GST – Investigation Wing of Department of Revenue, Government of India to its officers reminding them due process to be followed while undertaking the investigation. The Instruction No 01/2022 dated 25th May 2022 was issued to address the above concerns and allegation by the industry. The welcome step to issue instruction is itself the testimony of the challenges faced by the taxpayers during the investigation.
It was already stated by the CBIC in the guidance note that the options of inspection, search, seizure and arrest are to be exercised, only in exceptional circumstances and as a last resort, to protect the government revenue. But last resort was being adopted as first which led to disruption in the industry.
In this piece will be deliberating on the instructions issued by GST – Investigation Wing along with the rights and responsibilities of the taxpayers during the investigation provided under the GST Act.
1. When can a GST officer undertake an inspection / a search?
Section 67 of the CGST Act, 2017 empowers the officers not below the rank of Joint Commissioner to undertake inspection of the premises of the taxable person if she/he has reason to believe that,
> The taxable person has supressed any transaction relating to supply of goods / services or both.
> The taxable person has claimed input tax credit more than his entitlement.
> The taxable person has indulged in contravention to any of the provisions of the CGST Act, 2017 or rules made thereunder to evade the tax.
It is important to note that, the act has not defined the words “reason to believe”. However, Hon’able Supreme Court in case of ITO VS. Lakhmani Mewal Das held that
The powers of the Income Tax Officer to reopen assessment, though wide, are not plenary. The words are “reason to believe” and not “reason to suspect”.
The above ratio laid down by the Hon’able Supreme Court for the matter under the Income Tax Act, 1961 is squarely applicable in GST also.
2. Who can issue authorization for search of premises?
In any of the above cases mentioned in above question, the officer not below the rank of Joint Commissioner can undertake inspection of the premises. It can be noted from the above that the GST officer has very wide power for undertaking inspection.
3. Which rank of officers can inspect the premises and records?
The officer not below the rank of Joint Commissioner can delegate the inspection power to any other officer (of any rank) in writing in FORM INS-01 as prescribed under Rule 139 of the CGST Rules, 2017.
4. Whether the taxpayer has right to check the authorisation for inspection of the premises?
First thing the taxpayer facing investigation should do is to check whether the officer coming for inspection is authorised and possessing the INS-01 duly authorised by any officer not below the rank of Joint Commissioner.
In case the investigation officer presents the copy of INS-01, the taxpayer should humbly ask a copy of the INS-01 for his records. Taxpayer can also check the i-card of the officers to ensure authenticity. This is well within the rights of the taxpayer.
5. To whom the summon can be issued?
Section 70 of the CGST Act, 2017 empowers the proper officer under this act to summon any person whose attendance he considers necessary either to give evidence or to produce the documents or any other things in any inquiry. In other words, the GST officer can issue summon to any person related to the operations of taxpayer.
6. Can a person in whose name the summon is issued, authorise any other person to appear?
As per Section 70 of the CGST Act, powers are given to summon any person as per the provisions of Code of Civil Procedure, 1908. Section 9 (3) of Code of Civil Procedure, 1908 clearly provides that a person who is summoned can authorise any other person to appear before the proper officer. Considering these provisions, a person in whose name the summon is issued can authorise any other person to appear.
During the investigation, the officer has tendency to issue summon to the Directors or major stake holders of the organisation. However, if the director is not directly involved in day-to-day operations and decision making under Indirect Tax then Director can reply to the summon with the name of the person who takes such decisions or possess such information to appear before the proper officer.
7. What is the implication of non-cooperation during the inquiry?
Section 70 (2) of the CGST Act, 2017 states that the inquiry is deemed to be “judicial proceedings” within the meaning of Section 193 and Section 228 of the Indian Penal Code (IPC).
> Section 228 of IPC provides for simple imprisonment for a term which may extend to six months, or with fine which may extend to one thousand rupees, or with both in case of intentional insult or interruption to public servant sitting in judicial proceeding.
> Section 193 of IPC provides for the punishment which may extend to seven years in case of false evidence given intentionally during the investigation.
Therefore, any non-cooperation or false evidence are subjected to actions under IPC.
8. What is the implication of not attending the summon?
Nonattendance of summon or non-submission of the information requested in summon may lead to action as under,
> Nonattendance – Action under Section 174 of IPC (punishable with simple imprisonment for a term which may extend to one month, or with fine which may extend to five hundred rupees, or with both) in case of non attendance.
> Non submission of Information – Action under Section 175 of IPC (punishable with simple imprisonment for a term which may extend to one month, or with fine which may extend to five hundred rupees, or with both) in case of non attendance.
9. Can a person be arrested for any offence under GST?
Section 69 of the CGST Act, 2017 gives power of arrest. If the Commissioner has reason to believe that if a person has committed any one of the below offences mentioned in Section 132 of the CGST Act, 2017,
> Supplies goods or services without issuance of invoices with intention to evade the tax.
> Issues tax invoice without supply of goods or services.
> Avails input tax credit of the invoices which have been issued without supply of goods / service or fraudulently avails the input tax credit without any invoice.
> Collects any amount as tax and fails to deposit the same beyond 3 months from the due date.
The arrest can be made by only if the amount of tax involved in above offences exceeds Rs 200 Lacs (i.e. 2 Cr). In other words, in case the amount of tax is upto 2 Cr then the person cannot be arrested.
The arrest can be made by Commissioner, or any officer authorised by him.
10. Which are the offences are non-bailable & cognizable?
Offences mentioned under clause (a) to (d) of Section 132 (1) of CGST Act, 2017 (specified below) and tax involvement of more than Rs. 5 crores are non-bailable and cognizable.
> Supplies goods or services without issuance of invoices with intention to evade the tax.
> Issues tax invoice without supply of goods or services.
> Avails input tax credit of the invoices which have been issued without supply of goods / service or fraudulently avails the input tax credit without any invoice.
> Collects any amount as tax and fails to deposit the same beyond 3 months from the due date.
Rest of the other offences would be bailable and non-cognizable.
11. Can a person other than taxpayer be arrested?
Recently, the CGST Department has unearthed considerable rackets wherein it was observed that the GSTIN was taken in the name of XYZ but someone else was operating that GSTIN for the purpose of issuing fake invoices or fraudulently availing input tax credit. To catch hold of real culprit, the Section 132 of the CGST Act, 2017 was amended to include “any person who causes to commit and retains the benefit arising out of offences”
By virtue of above amendment, any person who causes to commit and retains the benefits can be arrested for the offence.
12. Can a consultant or a professional advising the taxpayer be arrested under Section 132?
As mentioned earlier, to catch hold of real culprit, the Section 132 of the CGST Act, 2017 was amended to include “any person who causes to commit and retains the benefit arising out of offences”.
It is important to note the wording of the section. Both the conditions i.e. “Causes the offence” and also “retains the benefits arising out of the offence”. If both these conditions are satisfied, then any person be it consultant or a professional can be arrested.
However, if any one of the conditions is not satisfied then such person cannot be arrested. Therefore, the professionals / consultants need to be vigilant while filing the returns or certifying the refund applications. The professionals / consultants should cross check the authenticity of supply or input tax credit.
13. Can a director or manager of company / LLP / Firm be arrested in case of offence by the company?
Company / LLP / Firm are artificial legal persons run by its directors / partner / managers etc. In case companies, the director / manager / any officer of the entity with whose consent or connivance or negligence the offence has been committed can be arrested.
However, if a person proves that the offence was committed without his knowledge or that he has exercised all due diligence to prevent the commission of such offence then penal provision shall not apply to such person.
14. What are the rights of the person arrested?
The proper officer arresting any person must inform such person of the grounds of arrest and the right to be presented before a magistrate within 24 hours of the arrest.
In addition to the specific provisions under the GST, the accused has constitutional right not to be ill-treated or tortured during arrest or in custody.
Further, the Hon’ble Supreme Court of India in case of D.K.Basu vs. State of West Bengal (1997) AIR 1997 SC 610) has laid down specific requirements and procedures that the police and other agencies who has power to arrest under any law (including GST law) need to follow for the arrest, detention and interrogation of any person. These are summarised as under:
- Confessions made during the custody cannot be used as evidence against the accused. However, under Section 136 of the CGST Act, 2017 provides that statement can be admitted as evidence of if the court allows the same. In other words, the statement records under Section 70 cannot be sole evidence.
- A boy under 15 years of age and women cannot be called to the police station (or GST office) only for questioning.
- A memo of arrest must be prepared at the time of arrest. This should have the time and date of arrest, be attested by at least one witness who may either be a family member of the person arrested or a respectable person of the locality where the arrest was made.
- The person arrested should be told of his rights.
- The person arrested, detained or being interrogated has a right to have a relative, friend or well-wisher informed as soon as practicable, of the arrest and the place of detention or custody.
- An entry must be made in the diary at the place of detention about the arrest, the name of the person informed and the name and particulars of the police officers in whose custody the person arrested is.
- The person being arrested can request a physical examination at the time of arrest. Minor and major injuries if any should be recorded. The “Inspection Memo” should be signed by the person arrested as well as the arresting police officer.
- The person arrested must have a medical examination by a qualified doctor every 48 hours during detention.
- The person arrested has a right to meet a lawyer during the interrogation, although not for the whole time.
15. Is it mandatory to have audio-video inquiry during investigation?
Section 67 (10) of the CGST Act, 2017 states that the provisions of CrPC, 1973 with respect to search and seizure shall be applicable to search / seizure under the GST Act. Section 161 of CrPC, 1973 provides for recording of statement through audio-video means.
Further, the Hon’ble Supreme Court of India (SPECIAL LEAVE PETITION (CRIMINAL) NO.3543 of 2020) has directed Government to install CCTV cameras and recording equipment more specifically in the office of Department of Revenue Agency or any other agency who carry out interrogation and has power to arrest.
Based on the above, the taxpayer can insist that the inquiry should be recorded by audio-video equipment. In case the officer do not agree for this then the taxpayer can approach High Court for this.
16. Whether arrest can be made on the interpretation issues.
No arrest can be made merely on difference of opinion between Department and Taxpayer.
Hon’ble Madras High Court in case of WP 5501/2019 and 6251/2019 held that Arrest can be made only when office committed is proved by following adjudication process. However, contrary view is taken in case of Chaya Devi Vs. UOI, 2021 (52) G.S.T.L. 390 (All.)
Further, Hon’ble Punjab & Haryana High Court, in case of AKHIL KRISHAN MAGGU, 2020 (32) G.S.T.L. 516 (P&H) held that power of arrest should not be exercised at the whims and caprices of any officer or for the sake of recovery or terrorising any businessman or create an atmosphere of fear, whereas it should be exercised in exceptional circumstances during investigation, which illustratively may be:
i. a person is involved in evasion of huge amount of tax and is having no permanent place of business,
ii. a person is not appearing despite repeated summons and is involved in huge amount of evasion of tax,
iii. a person is a habitual offender, and he has been prosecuted or convicted on earlier occasion,
iv. a person is likely to flee from country,
v. a person is originator of fake invoices i.e. invoices without payment of tax,
vi. when direct documentary or otherwise concrete evidence is available on file/record of active involvement of a person in tax evasion.
17. Whether investigation can be carried out overnight and during holiday.
Though there are no clear provisions in the statute with respect to time for investigation. Hon’ble Telangana High Court vide its judgement (Writ Petition No. 28268 of 2019) dated 06.11.2020 directed that investigation to be carried out during 10:30 AM to 5:00 PM on weekdays.
18. Whether ad-hoc tax is required to be paid during search/inspection of premises.
It came to notice that the GST officers ask to pay ad-hoc amount voluntarily during investigation by using pressure tactics without recording any reason in writing for demand of tax. CBIC vide Instructions No. 01/2020-21/GST-Investigation, dated 2-2-2021 has laid down the procedure for search operation nowhere it is contemplated to pay tax on ad-hoc basis without ascertaining the same based on evidence. Further the Instruction No 01/2022 dated 25th May 2022 clearly states that there should not be insistence about making voluntary payment during the investigations and the taxpayer can anytime deposit the tax voluntarily.
19. Whether action to be taken if tax is deposited voluntarily under force.
In case proper officer has asked to deposit the tax voluntarily and no demand letter or show cause notice is issued, the taxpayer can seek refund of such excess paid tax which is otherwise not payable in accordance with the law.
It can be seen from the above discussions that law provides ample power to the GST officials for search / inquiry / arrest. It is famous saying that “the power comes with the responsibility”, therefore the investigating officers needs to ensure that these powers are used responsibly and not be recklessly. On the other hand, the taxpayer also needs to be aware about his rights and obligations. It is not expected that a businessman will be aware about the nitty gritty of the provisions of the laws and his rights. Therefore, he should reach out to the right person in such situations. At Bizsolindia, we have experienced team who can assist the taxpayers during search & investigation matters or any litigations arising after the search / investigation. We are just a phone call away!
Author – CA Manoj Malpani & Adv. Kiran Sawale
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