Interplay between GST Act and Prevention of Money Laundering Act, 2002

Introduction

The Indian legal system is dense and layered. This legal system should not be viewed as a dispersed set of statutes, but as a big web of inter-dependent and inter-connected statutes.  Most statutes don’t stand alone; they overlap, borrow from or directly link with each other and extend beyond the normal sphere of operation. The consequential ramifications of one statute often lead to other statutory provisions and this makes it hard to study them in isolation. A deep drive into the provisions of both the CGST Act, 2017 and Prevention of Money Laundering Act, 2002 (PMLA) will definitely endorse this fact, though the surface reading of the statutes seems to have no apparent connection between the two statutes.

General discussion

(A) While GST Act is an Act to make a provision for levy and collection of tax on intra-State and inter-state supply of goods or services or both by the different Governments (central, and states ) , the PMLA is an Act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering, a direct outcome of the Political Declaration adopted by the Special Session of the United Nations General Assembly held on 8th to 10th June, 1998 calls upon the Member States to adopt national money-laundering legislation and programme. But how do these two apparently non-connected statutes link to each other? To understand this, we have to look some of the essential components of PMLA.

The offence of money laundering, as commonly understood is “the act of transferring illegally obtained money through legitimate people or accounts so that its original source cannot be traced”. From this definition, it follows naturally that the money, if illegally obtained, must be obtained in relation to the commission of an underlying criminal offence. The commission and prerequisite of this underlying offence, commonly known as predicate offence has been a bone of contention since inception of the PMLA that provides a list of offences in the Schedule appended thereto as ‘scheduled offences’.

(B) But the way the offence of money laundering has been defined in the Act is hyper- technical and exceptionally legal. For ready reference the definition is given below

The concepts of money laundering and predicate offence cannot be better explained than the speech delivered by the then Finance Minister, Mr. P. Chidambaram, while introducing the Prevention of Money Laundering (Amendment) Bill, 2012 in the Rajya Sabha on December 17, 2012. It read:

“…firstly, we must remember that money-laundering is a very technically-defined offence. It is not the way we understand ‘money-laundering’ in a colloquial sense. It is a technically-defined offence. It postulates that there must be a predicate offence and it is dealing with the proceeds of a crime. That is the offence of money-laundering. It is more than simply converting black-money into white or white money into black. That is an offence under the Income Tax Act. There must be a crime as defined in the Schedule. As a result of that crime, there must be certain proceeds — it could be cash; it could be property. And anyone who directly or indirectly indulges or assists or is involved in any process or activity connected with the proceeds of crime and projects it as untainted property is guilty of offence of money-laundering. So, it is a very technical offence. The predicate offences are all listed in the Schedule. Unless there is a predicate offence, there cannot be an offence of money-laundering.”

(C) Before moving further, just revisit some of the important terms/definitions, enshrined in the PMLA.

(D) A list of offences (definitely not all the offences) under different legislations have been specified in the “schedule” appended in the Act itself like –

(i) in part A of the schedule

Paragraph 1- Offences under Indian Penal Code (IPC), 1860;
Paragraph 2-Narcotic Drugs and Psychotropic Substances Act, 1985;
Paragraph 3-Explosives Substances Act, 1908;
Paragraph 4- Unlawful Activities (Prevention) Act (UAPA), 1967;
Paragraph 5-Arms Act, 1959;
Paragraph 6- Wildlife Protection Act, 1972;
Paragraph 7-Immoral Traffic (Prevention) Act, 1956;
Paragraph 8- Prevention of Corruption Act, 1988;
Paragraph 9- The Explosives Act, 1884;
Paragraph 10-The Antiquates and Arts Treasures Act, 1972;
Paragraph 11-Securities and Exchange Board of India, 1992;
Paragraph 12-Customs Act, 1962;
Paragraph 13- The Bonded Labour System (Abolition) Act, 1976;
Paragraph 14- Child Labour (Prohibition and Regulation) Act, 1986;
Paragraph 15- Transplantation of Human Organ Act, 1994;
Paragraph 16- Juvenile Justice (Care and Protection of Children) Act, 2000;
Paragraph 17- Emigration Act, 1983;
Paragraph 18- The Passport Act, 1967;
Paragraph 19- The Foreigners Act, 1946;
Paragraph 20- The Copyright Act, 1957;
Paragraph 21- The Trade Marks Act, 1999;
Paragraph 22-Information Technology Act (IT Act), 2000;
Paragraph 23- The Biological Diversity Act, 2002;
Paragraph 24- Protection of Plants Varieties and Farmers Rights Act, 2001;
Paragraph 25- The Environment Protection Act, 1986;
Paragraph 26- Water (Prevention and Control of Pollution) Act, 1974;
Paragraph 27- Air (Prevention and Control of Pollution) Act, 1981;
Paragraph 28- The Suppression of Unlawful Acts against Safety of Maritime Navigation and

Fixed Platforms of Continental Shelf Act, 2002
Paragraph 29- The Companies Act, 2013.

(ii) In  Part Bof the Schedule:

                   The Customs Act, 1962

The offence of representing false documents, false declaration, etc

(iii) In PART Cof the schedule

An offence which is the offence of cross border implications and is specified in,—

(a) Part A; or

(b) the offences against property under Chapter XVII of the Indian Penal Code (45 of  1860).

(c )  The offence of wilful attempt to evade any tax, penalty or interest referred to in section 51 of  the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (22 of 2015).

(E) Therefore a conjoint reading of sub-section (u) of section 2 and sub-section (y) of section 2 and section 3 and the list of offences under different statutes, it emerges that there is an intrinsic linkage of the scheduled offence with the offence of money laundering. While the offence of money laundering is an independent offence, it is still dependent on the underlying predicate offence to the extent of the proceeds of crime having been derived or obtained as a result of criminal activity relating to or in relation to the scheduled offence. Further, while the whole quantum of a tainted property need not be regarded as proceeds of crime, the property qualifying under the definition clause of Section 2(u) of the Act will necessarily be treated as crime property, or laundered property. If the predicate offence fails, then the prosecution under the PMLA cannot be continued.

Money laundering is the process of making unlawfully obtained money appears legitimate by blending them with legal transactions. However, money laundering cannot occur without a predicate offence. The illicit money generated from crimes need to be washed through various transactions, often in different jurisdictions, to obscure their origin. The predicate crime itself is distinct from the subsequent act of money laundering, which involves disguising the origin of the illicit funds.

By focusing on the underlying criminal activity rather than the proceeds themselves, authorities can target both the predicate offense and the subsequent act of money laundering. This approach is crucial for effective law enforcement and the prevention of financial crimes.

Relation with GST offences

According to the Schedule to Sec. 2(1) (y) of the PMLA, the offences relating to Goods & Services Tax (GST) have not been notified as scheduled offence. Therefore, GST related offences are not brought directly under PMLA net currently. But there are certain legal nuances in the statutory provisions of both the GST Act and PMLA.

Firstly, the parent Notification No. under GSR 381(E) dated 27th June 2006 under Section 66 of the PMLA has been amended vide Notification No. G.S.R. 491(E) dated 07-07-2023 to include Goods and Services Tax Network (GSTN) at Sl. No.26, , as one more authority or body to furnish any information received or obtained. Say, GSTN is brought in as an information sharing body under PMLA 2002.

GSTN manages the entire digital ecosystem of GST Acts that enables seamless tax administration, starting from registration to returns to generation of e-waybills, processing billions of invoices etc, whilst maintaining comprehensive taxpayer databases. The designation of GSTN as a reporting entity under PMLA essentially alters India’s financial surveillance landscape. This integration means GSTN must now comply with anti-money laundering obligations, including customer due diligence, suspicious transaction reporting, and record maintenance. GSTN now share information with enforcement authorities, including the Financial Intelligence Unit-India (FIU-IND). Suspicious GST transactions will undergo deeper scrutiny through automated monitoring and risk profiling. GST frauds like Sham Company, fake invoicing etc may fall under money laundering provisions, attracting severe penalties. GSTN, holding and managing vast GST data, will surely empower PMLA- authorities to examine and detect money laundering activities linked to tax evasion and trade-based financial crimes.

Secondly, a “person carrying on designated business or profession” comes within the ambit of “reporting entity” u/s 2(1) (wa) of PMLA.  The way the “person carrying on designated business or profession” has been defined u/s 2(1) (sa) of PMLA, it includes a wide range of persons, registered under GST. The definition is given below —

Section (2) (1) (sa) “person carrying on designated business or profession” means,—

(i) a person carrying on activities for playing games of chance for cash or kind, and includes such activities associated with casino;

(ii) Inspector-General of Registration appointed under section 3 of the Registration Act, 1908 (16 of 1908) as may be notified by the Central Government;

(iii) real estate agent, as may be notified by the Central Government;

(iv) dealer in precious metals, precious stones and other high value goods, as may be notified by the Central Government

(v) person engaged in safekeeping and administration of cash and liquid securities on behalf of other persons, as may be notified by the Central Government; or

(vi) person carrying on such other activities as the Central Government may, by notification, so designate, from time to time;

A huge legal obligations has been prescribed on the reporting entity vide section 11A (Verification of Identity by Reporting Entity), section 12 (Reporting entity to maintain records), section 12A (Access to information), section 12AA (Enhanced due diligence). section 12A (Access to information). Failing to comply with the obligations, the Director under PMLA has been authorised to impose fine vide section 14 of PMLA.

Sub-section (2) of section 14 of PMLA provides that If the Director, in the course of any inquiry, finds that a reporting entity or its designated director on the Board or any of its employees has failed to comply with the obligations under this Chapter, then, without prejudice to any other action that may be taken under any other provisions of this Act, he may—

(a) issue a warning in writing; or

(b) direct such reporting entity or its designated director on the Board or any of its employees, to comply with specific instructions; or

(c) direct such reporting entity or its designated director on the Board or any of its employees, to send  reports at such interval as may be prescribed on the measures it is taking; or

(d) by an order, impose a monetary penalty on such reporting entity or its designated director on the Board or any of its employees, which shall not be less than ten thousand rupees but may extend to one lakh rupees for each failure.

Thirdly, while committing a GST offence if the offender has committed such offences, that attract Indian Penal Code, 1860 (IPC) and if such offences are listed under Part A, (For example, committing offence under Sec. 120-B, 420, 424, 471 of IPC, 1860) then that particular case may come under the purview of PMLA. So if a GST offence involves an offence under the IPC in the form of a criminal conspiracy or identity theft or fraud, etc. the matter may be investigated by the Directorate of Enforcement(ED).  So parallelly if an investigation is carried out by ED in any one of the GST offences involving a predicate offense as prescribed under IPC or any other law listed in that act, ED can investigate it. Such instance may arise in the case of creating bogus firm, forged invoices and documents, and forged documents to evade GST. A combined reading of Section 131 and section 132 of the GST Act, unambiguously point towards that offences and penalties under the GST law that can attract criminal liability and other punishments. These enactments allow for concurrent proceedings. An individual can face a monetary penalty or confiscation of goods/conveyances imposed by the tax authorities (civil liability), and simultaneously be subject to criminal prosecution (criminal liability) under the provisions of Section 132 of the GST Act or even under other laws like the Indian Penal Code (IPC) for serious economic frauds like circular trading or falsifying documents.

Conclusion

Both the GST Act and PMLA are unique legislation. While GST Act changes the entire indirect taxation system in the country, the PMLA revolutionizes the whole landscape of preventing the money laundering. Mere commission of GST offence per se would not attract provisions of PMLA unless by virtue of filing of Complaint or FIR attracting offence under IPC is made out. Standalone GST offence would not, by default, fall under the ambit of PMLA, just because the same is not a notified offence under Schedule to Sec. 2(1)(y) of PMLA, but offences u/s 132 of GST Act, that attracts criminal liability may come within the purview of PMLA.

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