GST Law Permits Arrest Without FIR Or Anticipatory Bail, Says Supreme Court
There’s no denying that the Central GST law gives commissioners wide powers to arrest without registering a FIR or police complaint. But does the Constitution permit this? That’s the debate that will soon play out in the Supreme Court determining the balance between a government’s right to crack down on economic offences and the constitutional right to natural justice for citizens.
On May 30, a three-judge bench headed by the Chief Justice of India Justice Ranjan Gogoi issued notices after Solicitor General for India Tushar Mehta approached the apex court seeking clarification over the power to arrest under the GST law.
Arrest powers in indirect tax laws are not a new development, Mekhla Anand, partner, Indirect Tax at Cyril Amarchand Mangaldas pointed out. The Central Excise and Service Tax legislations also had arrest provisions, introduced in 2013; and the abuse of these provisions first came to the limelight when the director of Makemytrip was arrested in 2016,’’ she added.
In 2016, the central excise authorities had arrested Makemytrip official on charges of alleged failure to deposit service tax of around Rs 667 crore. The Delhi High Court had struck down the arrest on grounds that the company was not even served a show-cause notice. The high court order was subsequently upheld by the Supreme Court.
But the Central GST Act does away with the need for show cause notices and first information reports.
Central GST: Power To Arrest
Section 69 of the CGST Act empowers a tax commissioner to authorise an arrest if he “has reasons to believe” that certain specified offences have been committed.
Such an arrest can be made for any of these four offenses specified under section 132:
- Supplying goods without invoice to evade taxes
- Wrongful utilisation of tax refund by issuing invoice without supply of goods and services
- Wrongful availment of tax credit or
- Failure to deposit tax beyond three months of the due date
BMR Legal Advisor’s managing partner Mukesh Butani explained the extent of power to arrest for these offences.
He explained that section 69 read with section 132, envisages the following situations as regards to arrest. Firstly, where the quantum involved is above Rs 5 crores and it falls under the above mentioned four offences, power to arrest is unparalleled with no provision for bail, unless the court grants it. In situations where the quantum involved is above Rs 2 crores but less than Rs 5 crores, and it pertains to the four specified offences, arrest is subject to bail as per Code of Criminal Procedure. In case of repeat offenders, no matter what the quantum is, if it falls under the four specified categories, arrest shall be made. For all other offences, there is no power to arrest.
High Courts On Power To Arrest
In April this year, the Telangana High Court had upheld the commissioner’s power to order an arrest if a cognisable and non-bailable offence has been committed. The court said there was no need for a FIR to be filed and also denied pre-arrest bail to the assessees.
To reiterate, for any of the four offences specified in section 132, if the amount involved is more than Rs 5 crores, the offence becomes cognisable (arrest without warrant) and non-bailable.
The Telangana High Court had pointed out that section 69(1), CGST Act empowers the commissioner to order the arrest of a person, when such a person is believed to have committed a cognisable and non-bailable offence. And in making this arrest, it is not necessary to record the reasons for authorisation of arrest as long as the commissioner has reasons to believe that a person has committed any offence.
“If reasons to believe are recorded in the files, we do not think it is necessary to record those reasons in the authorization for arrest under Section69(1) of the CGST Act. Since Section 69(1) of the CGST Act, 2017 specifically uses the words “reasons to believe”, in contrast to the words “reasons to be recorded” appearing in Section 41A(3) of Cr.P.C., we think that it is enough if the reasons are found in the file, though not disclosed in the order authorizing the arrest.” - Telangana High Court
In saying so, the high court had dismissed the petitioners’ argument that the power to arrest under section 69 is subject to the provisions of Code of Criminal Procedure, and that the phrase ‘reason to believe’ must be understood how it’s defined under the Indian Penal Code.
But recently, the Bombay High Court had granted an interim stay on the arrest proceedings against an assessee. The court didn’t go into the merits of the case - the facts of which aren’t available in the public domain.
The stay by the Bombay High Court prompted the central government to approach the apex court, where it argued that the interim stay is bringing to halt the functioning of the Directorate General of GST Intelligence. And until the arrest provisions aren’t held to be unconstitutional, GST officers must be permitted to use this power.
The precedence in deciding constitutional validity of such provisions- which are validly enacted by the parliament - is that they must be presumed to be constitutional in the interim while the constitutional validity of the provisions is being decided upon, the government has argued before the Supreme Court.
Arrest Under GST Law: Taxpayers’ Rights?
Last month, the Vadodara Commissionerate arrested the managing directors and the chief financial officer of Manpasand Beverages Ltd. for availing illegal credit and committing tax evasion of Rs 40 crores, as per the department’s press release. The company is contesting these allegations in accordance with the due process of law, Manpasand Beverages had stated in the notification to stock exchanges.
Butani pointed out that in cases such as these or others where the offence relates to any of the four categories in section 132, and the amount involved is more than Rs 5 crores, arrest is inevitable. In such cases, anticipatory bail is not an option, he added.
The commissioner has to have reasons to form his opinion. Now whether the commissioner has acted in an arbitrary manner or whether he acted judicially after applying his mind, is for the court to decide. But if he forms an opinion and it is in the four categories of described offences and it is above Rs 5 crores, then question of anticipatory bail does not arise under the law as it stands today.Mukesh Butani, Managing Partner, BMR Legal
But suppose there is an offence which is above Rs 2 crores and less than 5 crores and an assessee is apprehending an arrest, he can apply for anticipatory bail. The principle of - bail is the rule and jail the exception - will apply in such cases, Butani explained.
Supreme Court Dismissed Petition Against Telangana High Court Order
The apex court must lay down the procedure that should be followed by GST officers before making an arrest, Badri Narayan, partner at Lakshmi Kumaran & Sridharan said. Currently, the CGST Act doesn’t lay down any such guidelines and the apex court can look at the outcome in the MakeMyTrip case to frame them, he added.
In the Makemytrip case, the Delhi High Court had laid down that the constitutional safeguards with respect to the powers of the police officers will apply to tax officers making arrest in such cases as well. An inquiry must also be conducted by giving an opportunity to the person sought to be arrested to explain the material against him, the high court had said. This decision was subsequently upheld by the Supreme Court.
But Butani, who was involved in this case, pointed out that the provisions in the Service tax law are not as explicit in the CGST law. Hence the two cases cannot be equated.
Mekhla Anand, an indirect tax partner at Cyril Amarchand Mangaldas, is hopeful that the apex court will see the arrest provisions as a grave constitutional issue.
Nobody can operate a business with a threat that his liberty will be deprived for a mistake and without an opportunity to be heard. Typically principles of natural justice require that you have an opportunity to be heard which does not seem to be present here. The fact that it has a potential to infringe on your liberty is a grave constitutional issue. The reading of the provisions also leave a lot of interpretational issues.Mekhla Anand, Indirect Tax Partner, Cyril Amarchand Mangaldas
For now, the apex court has directed the high courts to keep in mind that the petition challenging the Telangana High Court ruling has been dismissed by it. Not just that, the Supreme Court has explicitly stated that high courts should hereon not grant pre-arrest or anticipatory bail.
As the accused-respondents have been granted the privilege of pre-arrest bail by high courts by the impugned orders, at this stage, we are not inclined to interfere with the same. However, we make it clear that the high courts, while entertaining such requests in future, will keep in mind that the Supreme Court by order dated May 27 had dismissed the special leave petition filed against the judgment and order of the Telangana high court in a similar matter, wherein the high court of Telangana had taken a view contrary to what has been held by the high court (of Bombay) in the present case.Supreme Court Order
In cases where protection from arrest has already been granted by a high court, the Supreme Court declined to interfere with those orders.