The power of arrest is in a fiscal statute such as GST laws and is provided as a mechanism for investigation of tax evasion and enforcement of the law. The CGST Act1 provides for powers for conducting inspection, search, and arrest. While fiscal offenses are typically resolved through fines and penalties, the question arises as to whether arrest provisions are necessary in specific offences of tax evasion with clear intention to de-fraud the government exchequer. It is absolutely clear that intention of the legislature while enacting the GST laws which includes powers of arrest, was not to focus on provisions that were punitive in nature, but the emphasis has always been on preventive provisions.
Section 132 of the CGST Act provides for specific criminal offences, both bailable and non-bailable thereunder, for which prosecution can be launched and the offender is punishable with imprisonment which may extend upto five years in specified cases subject to reasonable discretion of the authorities.
Section 69 of the CGST Act outlines the power of the Commissioner to order arrest of a person whom he has reasons to believe, to have committed an offence, which is cognizable and non bailable. It is important to note here that the term "reason to believe" which forms basis of powers conferred under Section 69 of the CGST Act has not been defined. Thus, it is always debatable whether or not such power of arrest is arbitrary in nature in violation of Article 21 of the Constitution.
In this regard, the Apex Court in the case of N Nagendra Rao & Co. v. State Of AP2emphasized that the expression 'reason to believe' has to be interpreted by the Court to mean that even though formation of opinion may be subjective but it must be based on material on the record. It cannot be arbitrary, capricious or whimsical. Further, the High Court in Vimal Yashwantgiri Goswami v. State of Gujarat3 has held that the words 'reason to believe' contemplate an objective determination based on intelligence, care and deliberation involving judicial review as distinguished from a purely subjective consideration. Thus, 'Reasons to Believe' cannot be wielded arbitrarily; it must not rest solely on the officer's subjective satisfaction. Furthermore, these reasons must be documented when issuing notices or forming opinion so as to ensure that decisions are fair and based on substantiated grounds, especially on matters as grievous as "arrest".
In recent years we have witnessed a surge in high profile investigations led by the investigative wing of the GST department, there has been concerning trend of prosecution and arrests being initiated under GST laws even before the issuance of a show cause notice or the completion of the adjudication. While there may not be an express bar in law, this practice has been questioned by the judiciary quiet often. The alleged offenders during investigations are often made to deposit huge part or all of the contended tax involved at the investigation stage itself just to avoid the chances of arrest. The Hon'ble Supreme Court in the case of Radhika Agarwal vs Union of India4 while hearing a bunch of matters orally instructed the authorities from employing "threat and coercion" tactics during search and seizure operations aimed at recovering GST. The bench emphasised that the law does not grant authorities the power to use force to collect outstanding dues.
The judiciary has consistently held that arrest is an exception to the rule and needs to be reserved strictly for the culprits or person attempting to abscond or flee the country. In this regard, the Hon'ble Punjab and Haryana High Court in the case of Akhil Krishan Maggu v. DGGI5, has emphasized that arrests should only be made in specific circumstances during an investigation, such as when there is evidence of significant tax evasion, non-compliance with summons, or a risk of the individual fleeing the country. It has been held that no arrest should be made without assessment or adjudication The Hon'ble court further prescribed the exceptional circumstances for arrest stating 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, such as:
The alleged offender is involved in evasion of huge amount of tax and is having no permanent place of business.
The alleged offender is not appearing before the investigative authorities inspite of repeated summons and is involved in huge amount of evasion of tax.
The alleged offender is a habitual offender and has been prosecuted or convicted on earlier occasion.
The alleged offender is originator of fake invoices i.e. invoices without payment of tax
Direct evidence is available of active involvement of a person in tax evasion.
Similar position has been affirmed by the Apex court in Sidhharam Satlingappa Mhetre v. State of Maharashtra6, Delhi High Court in Make my Trip v. UOI7 , Bombay High Court in Mahesh Devchand Gala v. Union of India8 wherein it has been emphasized that arrest is a
serious matter and cannot be made in a routine manner on a mere allegation of commission of an offence, inasmuch as, an arrest can cause incalculable harm to the reputation of a person.
Pursuant to decision of the Hon'ble Supreme Court in the case of Siddharth v State of UP9, the CBIC10 vide Instruction dated August 18, 202211 regarding arrest and bail for offences under the CGST Act. The instruction provided guidelines and criteria required to be followed by the Commissioner before issuing order for arresting someone. This includes considering of evidence or reliable information to classify the offense as non-bailable, if the arrest is necessary for investigation, and if there is a risk of evidence tampering or witness interference. Arrest should only be made when the intention behind the actions is clear and should not be used as a solution in technical tax interpretation disputes. Further even the procedure of arrest has been specified including the compliance while issuing arrest memo as stipulated in D.K. Basu v the State of West Bengal12.
It would not be wrong to state that the provision for power of arrest has been a matter of controversy especially in a fiscal statute such as GST laws. While it is expected that departmental officers should strictly adhere to the laws and guidelines set forth, there have been instances where these provisions have been disregarded in the field inspite of clear guidelines by the CBIC, which needs to have reasonable checks.
Arrest as an action has grievous ramifications directly affecting the liberty and freedom of a person. The judiciary has always played a crucial role in balancing the integrity of law and liberty of an individual. However the judicial precedents and the principles set therein must be followed diligently. It is also clear that the provisions under the GST laws regarding arrest are certainly not absolute, and accordingly the CBIC must ensure that the provisions and the legal principles are fairly followed so that confidence of the assessee regarding protection of his/ her liberty in re-enforced.
Disclaimer: This article was first published in the S&A Law Offices - 'Indian Legal Impetus' newsletter in June 2024.
Footnotes
1 The Central Goods and Services Tax Act, 2017.
2 1994 AIR 2663.
3 [2021] 84 G S.T.R. 347.
4 Writ Petition(s)(Criminal) No(s). 336/2018.
5 2019-VIL-565-P&H.
6 (2011) 1 SCC 694.
7 (2016) 73 Taxman 31.
8 2024 (5) TMI 607.
9 (2022) 1 SCC 676.
10 The Central Board of Indirect Taxes and Customs.
11 Instruction No. 2/2022-23dated August 18, 2022.
12 (1997) 1 SCC 416.