The Union Budget is around the corner, and concerns related to the goods and services tax (GST) will be playing on the mind of both policymakers and investors. The GST has under-performed relative to expectations, and some in government have placed the blame on widespread evasion. In particular, there is concern that input tax credit facilities are being misused following the incorrect issue of invoices in the absence of the actual supply or movement of goods and services. This, under the current GST Act, is an offence, and GST commissioners have been provided with powers of arrest under these cases. The problem, though, is that courts have provided conflicting guidance on how this arrest should be carried out procedurally. This is certainly a fit matter for legislative clarification.
A fundamental principle in such cases is that the power of arrest should not be legislated to an officer simply because it may help the government collect more revenue. Questions of justice should also be considered. No arrests should be made before a proper assessment, for example. The Supreme Court held in 2019 that prosecution should normally be launched only after an adjudication is complete. Further, prosecution and arrests should only be considered if other methods fail — such as the payment of interest and penalty or of some other form of recovery. The government’s approach to granting powers of arrest to the taxman has been inconsistent and opaque. For example, if the failure to deposit GST that has been collected is considered grounds for arrest, why is it being treated differently from the failure to deposit tax deducted at source that may also have been collected? Why are offences under the GST being considered differently from those under other forms of indirect taxes?
The power to arrest should only be granted to officers after a clear understanding of the costs and benefits. No such analysis has been the subject of public discussion, in spite of the increase in the frequency of arrests related in particular to input credit fraud. There are insufficient safeguards being provided to the taxpayer under the new GST system — indeed, fewer than what had evolved under the older system. It is hard to see this new process as anything but an outright power grab by the taxman under the pretext of tax reform and anti-evasion mechanisms. The government must re-examine its foundational assumptions on how the GST can and should work. A tax that is being widely evaded — if that is indeed the case — is one that is badly designed, and no amount of greater power to the taxman will correct the situation. This is a lesson that India learned painfully prior to the various tax reforms of the 1990s and 2000s. Unfortunately, it appears to be going backward on that front, spooked by a fear of lost revenue. The first step must be to examine whether the new regime of arrests has indeed aided in the recovery on the scale required. How much has been recovered? Has prosecution been launched in every case of an arrest? Because, if not, then was the arrest justifiable? It is time the government took a step back from a path that leads only to corruption and abuse of the law.