Synopsis–Given the fact that arrest under tax laws has become a fairly regular affair, it is necessary that GoI comes out with detailed guidelines on situations where arrests can be resorted to. Such a safeguard is necessary, so that the honest taxpayers do not end up worrying whenever there is a knock on the door.
A knock on the door by tax authorities carrying out a search — or, worse, to arrest a person for an alleged tax evasion — is a concern for any taxpayer. Such actions by the tax authorities are on the rise. On December 18, former Wipro Chairman Azim Premji had to obtain a stay from the Supreme Court against prosecution proceedings arising from corporate restructuring.
Indeed, there is no reason that a white-collar crime like tax evasion should be treated any differently from any other crime. In fact, the damage that tax evasion or fraud committed by a taxpayer does to the economy is far worse than a petty criminal offence. The question, however, is what constitutes a tax evasion, and whether a genuine difference in the interpretation of a taxing statute, or an inadvertent tax violation, which ultimately is revenue-neutral, should subject the taxpayer to an arrest.
More importantly, should the possibility of an arrest be used as a tool by tax authorities to flex their muscles that otherwise should follow the due process of law and could be genuinely contested by a taxpayer? Clearly, there are no easy answers here.
The introduction of the goods and services tax (GST) has seen an increasing number of arrests for a wide range of issues, ranging from who would be the person liable to tax to interpretation of issues and fake invoicing. Similarly, under the I-T Act, prosecution proceedings are routinely launched for deduction of tax at source issues, claims for deduction of expenses, claims for deductions and exemptions, etc, many of which are purely issues of legal interpretation and not issues of tax evasion.
The provisions of GST confer wide powers of arrest on the tax authorities: ‘Where the commissioner has reasons to believe that a person has committed any offence specified… he may order any officer of central tax to arrest such a person.’ The ambit of these provisions has come up for consideration before several courts. Some, such as the Telangana High Court and the Gujarat High Court, have held that there was no need for an FIR (first information report) to be filed before such an arrest was made.
The Gujarat High Court held that the commissioner must have ‘reason to believe’, backed by material proof and credible information, that there was tax evasion. It held that constitutional safeguards laid down by the Supreme Court with respect to arrest and procedure should equally be followed under GST laws.
While some high courts, such as Bombay High Court, have granted bail where adjudication is pending, others have held that an adjudication was not a prerequisite. The matter is now pending before the three-judge bench of the Supreme Court.
The Central Board of Excise and Customs (CBEC) has time and again issued circulars clarifying that the powers of arrest must be exercised after careful consideration of the facts of each case. The ‘reason to believe’ that a person has wilfully committed an offence should be capable of standing up judicial scrutiny, and should not merely be on the basis of surmise of a commissioner.
Circulars apart, it is important that an arrest is made only to ensure proper investigation, and precaution of the possibility of tampering the evidence or influencing witnesses. Arrests should not be made in matters relating to technical nature.
Similar is the case under direct tax laws. Subjecting a person to loss of personal liberty merely on account of interpretation issues, or on the basis of surmises, has resulted in immense trust deficit between the revenue and taxpayers. It also goes against easing business in India.
GoI has done well to recently decriminalise several offences under the Companies Act. Similarly, the Central Board of Indirect Taxes and Customs (CBIC) has constituted a group of advisers to hold consultation with stakeholders on the use of power to arrest. This is a welcome step.
Given the fact that arrest under tax laws has become a fairly regular affair, it is necessary that GoI comes out with detailed guidelines on situations where arrests can be resorted to. Such a safeguard is necessary, so that the honest taxpayers do not end up worrying whenever there is a knock on the door.
Kanabar and Kanodia are CEO and partner, respectively, Dhruva Advisors