In case of cognizable offences (magistrate’s warrant not required) under central excise and service tax laws, competent officers were empowered to cause arrest, while in the state VAT laws, the offences were non-cognizable (magistrate’s warrant required). In a giant leap for the tax administration, GST laws empowered both central and state officers, in case of cognizable offences, to effect arrest when they have “reasons to believe (the law does not specify whether it is “beyond reasonable doubt” or just “circumstantial”)” that tax has been evaded. Increasing GST litigation before the apex and high courts, by way of writ petitions, brings the focus back on the arrest provisions and the need for a policy review.
First, the philosophy behind the arrest provisions in GST remains mysterious, especially when all offences under the direct tax laws are non-cognizable. For every argument justifying the need for arrest wherein GST is collected but not deposited, there is a counter-argument as to why a different logic has been adopted for TDS (income tax) deducted but not deposited with the exchequer? This inherent disparity, especially at a time when the Tax Administration Reforms Commission (TARC), not long ago, recommended the merger of the two tax administrations, is odd.
While state administrations, for decades, have implemented VAT laws, offences under which were non-cognizable, there is no study by the government or otherwise indicating the central model (excise/service tax) categorising offences as cognizable as superior to the state model. The minutes of the GST council meetings neither indicate the basis on which this prosecution model has been premised upon, nor the idea as to why certain offences under GST have been made cognizable.
Service tax regime, in the last six years, witnessed two amnesty schemes, which in many cases granted immunity from prosecution and even partial waiver of tax. Amnesty schemes defeat the very concept for the arrest and prosecution provisions. Central excise law, which authorised arrest in cases of misclassification or other technically subjective issues, was legislated in the pre-1991 socialist era. Should those indices that determined tax edifices more than seven decades back, especially in the context of arrests and prosecution, be made applicable today?
There is no open-source data available on the number of arrests under central excise/service tax laws, and specifics of compounding or prosecution launched in those cases. No audit appears to have been carried out to verify if the prosecution was launched in “every” case of arrest and if not, why.
Central excise and service tax laws offered offending taxpayers an option to avail the in-built statutory alternate dispute resolution mechanism, wherein on payment of tax, interest and stipulated penalty, “all” proceedings under the respective laws stand concluded. Strangely, the GST regime tweaks this provision to keep open the option to prosecute the taxpayer even after he/she pays the tax, interest and penalty. The Settlement Commission, a statutory body enabling settlement of direct and indirect tax disputes, including prosecution, has been kept out of the GST purview. Surprisingly, the other indirect tax, customs, continues with many of these liberal provisions, currently being denied under the GST establishment. What could be the intent behind these stringent measures, especially when the largest tax transformation warrants a soft landing?
Many petitions have been filed before various high courts and the apex court challenging the GST investigations on the premise that the provisions of the criminal procedure code are currently not being followed. Unmindful of the fact that GST is a special code, many high courts have granted interim stay, complicating the chaos. Conflicting high court decisions do no good for the evolution of this law. The Madras High Court has declared the constitution of the GST tribunal unconstitutional, adding to the existing litigation woes in GST.
Certain fundamental questions merit attention: Can arrests precede assessment, especially in a technical matter? Can there be any arrest if there is no hindrance to the investigation? Can revenue implications be the only reason for legislating arrest provisions? Should such legislation not be based on data and facts from the erstwhile tax regime? In the absence of any provision for an anticipatory bail in the GST law, can writ petitions become a substitute? What is the rate of conviction in central indirect taxes in the past 30 years? Should the social stigma associated with arrests be factored in at the time of legislation? In the many GST arrests pertaining to fake invoicing, illegal credits and fraudulent refunds, have there been any recoveries? When the GST law provides for compounding of offences, should a taxpayer be arrested at all, if he intends to make an application in this regard?
The weapon of arrest could potentially degenerate into a malignant vehicle of extortion, breeding frenzied corruption institutionalising arbitrary tax governance. What GST urgently deserves is a re-orientation, for which a leaf out of the ‘nudge theory’ in behavioural economics may definitely help.
The writer is a Delhi-based independent advocate and previously worked for the Government of India. Views are personal