The story so far: The 48th GST Council meeting was held on December 17. The GST Council chaired by Finance Minister Nirmala Sitharaman recommended to decriminalise certain offences under Section 132 of the Central Goods and Services Tax (CGST) Act, 2017. Some other recommendations, for the facilitation of trade, include an increased threshold of the amount of tax for prosecution, reducing the compounding amount in GST etc.
What was previously criminalised under GST?
Since the implementation of GST, there has been a significant increase in tax evasion, with numerous cases of taxpayers using multiple strategies to avoid indirect tax coming to light. Tax authorities are actively using technology and data from e-way bills and GST returns to check evasion. The GST law establishes stringent penalties and guidelines that taxpayers must abide by in order to ensure smooth intrastate or interstate trade of goods and to combat corruption and maintain an effective tax collection system.
The GST Law provides for two different types of penalties. They may be both concurrent and simultaneous. The department authorities have the authority to impose monetary fines and the seizure of goods as penalties for violating statutory provisions. Criminal penalties include imprisonment and fines, which are also provided by GST Law but which can only be awarded in a criminal court following a prosecution.
Sections 122 to 131 of the CGST Act of 2017 contain provisions relating to penalties, while Sections 132 to 138 contains provisions relating to prosecution and compounding. The amount of tax evaded, the amount of Input Tax Credit (ITC) improperly claimed or used, or the amount of refund improperly claimed determines the length of the prison sentence. The aforementioned section further divides offences into those that are cognisable and bailable and those that are not cognisable and bailable. Additionally, it is observed that many non-compliances fall under both categories of penalties, prosecution, and compounding.
Which are the offences under GST law which attract IPC and CrPC provisions?
Under the CGST Act, if a group of two persons or more agree to commit an illegal act like tax evasion, fraud etc. they are held liable under the act of criminal conspiracy. While Section 120A of the Indian Penal Code (IPC), defines criminal conspiracy, Section 120B deals with punishment for the same and Section 46 of the Code Of Criminal Procedure (CrPC) deals with how the arrest is made.
Section 69 of the CGST Act provides the power to arrest a person by an order of a commissioner when he believes that a person has committed any offence under Section 132. Section 67 of CrPC states that if a summons is issued outside the local authority, a duplicate copy of that summons should be send to the Magistrate of that outside authority to serve the summons. Section 165 of CrPC deals with the search by the police officer while Section 67 of the CGST Act defines that only an officer not below the rank of joint commissioner can authorise in writing an inspection or search.
Why did Parliament include penal provisions in the GST law?
While replying to the queries of the members of the Rajya Sabha on April 6, 2017, then Union Finance Minister Mr. Arun Jaitley laid emphasis on criminal jurisprudence behind the penal provisions in the GST law. He said that “this (arrest provisions) was thoroughly debated by all the Finance Ministers (Union and States), and there were clearly two views at the very outset. The first view was, ‘why arrest’? The second view was, supposing a man defrauds ₹100 crore, is the State government powerless? And he has no assets to recover it from; what do you do? What is the kind of deterrent? And then, the wisdom of the Council itself was that they chose a middle path….So, up to a fraud of two crore rupees [now five crore rupees, after CGST (Amendment) Act, 2018]no arrest….only in the very big fraud cases where a man forges a complete transaction, it is only then that the arrest is made. And this was the actual division — should you have no arrest or should you have arrest only in rare cases and with very stringent conditions”.
He also explained how compounding of offences and arrest co-exist, “Arrest is for the offence and compounding is when the prosecution is filed, which is the next stage. So, after arrest, you are on bail or not on bail; when the prosecution is filed, there is a separate chapter which gives you the option of asking for a compounding on such payment as the rules may themselves prescribe”.
What has been recommended to decriminalise the GST offences?
The 48th GST Council meeting has recommended various measures to decriminalise the GST offences such as raising the minimum threshold of tax amount for launching prosecution under GST from one crore to two crore, except for the offence of issuance of invoices without supply of goods or services or both, reducing the compounding amount from the present range of 50 to 150% of the tax amount to the range of 25 to 100%, and decriminalising certain offences specified under Section 132 of the CGST Act, 2017, such as obstructing or preventing any officer from doing his duties, deliberate tempering of material evidence and failure to supply information.
What will be the impact of decriminalisation?
The GST is a novel taxation system that includes a number of globally unprecedented features. The law is still developing and is in its infancy which makes the same difficult and uncertain to enforce. There are instances of conflict between court decisions and rulings. The government is still working to streamline the laws. In comparison to the pre-GST era, the GST compliance process with granular reporting is noticeably more onerous.
Therefore, it is important to recognise that imposing penal provisions in an ambiguous ecosystem significantly alters how businesses perceive risk and uncertainty, directly impacting their ability to conduct business. The law already contains sufficient penalties that serve as a deterrent against tax evasion. Investors may be discouraged by the fear of criminal sanctions in small, trivial, and petty matters, even before their engagement in any business activity or investment.
What are the other recommended measures to facilitate trade?
Two major recommendations include refunding unregistered persons and facilitating e-commerce for micro enterprises.
There was no procedure for claim of refund of tax borne by unregistered buyers in cases where the contract/agreement for supply of services, like construction of flat/house and long-term insurance policy, is cancelled and the time period of issuance of credit note by the concerned supplier is over. The Council recommended amendment in CGST Rules, 2017, along with issuance of a circular, to prescribe the procedure for filing application of refund by the unregistered buyers in such cases.
The GST Council in its 47th meeting had also granted in-principle approval for allowing unregistered suppliers and composition taxpayers to make intra-state supply of goods through E-Commerce Operators (ECOs), subject to certain conditions. The Council approved the amendments in the GST Act and GST Rules, along with issuance of relevant notifications, to enable the same. Further, considering the time required for development of the requisite functionality on the portal as well as for providing sufficient time for preparedness by the ECOs, the Council has recommended that the scheme may be implemented from October 2023.
If the above decriminalisation of GST offences are implemented with adequate checks, then prosecution, arrest and imprisonment in GST cases would only be in the rarest of rare cases of hard, habitual, deliberate defaulters and blatant specific fraudulent practices. Other minor grievances may be dealt with in other resolution mechanisms such as Alternate Dispute Resolution (ADR) mechanism, private ruling and mediation, faceless adjudication and appeals, etc.
There were speculations that this GST council meeting will also deliberate on issues like the establishment of a GST Appellate Tribunal, Group of Ministers Reports on Pan Masala, Gutka and Group of Ministers Reports on online gaming, casinos and horse racing. However, none of these were discussed.
G. S. Bajpai is Vice Chancellor, Rajiv Gandhi National University of Law, Punjab where Vikram Karuna is an Assistant Professor.