Supreme Court: GST Arrests Can Precede Final Tax Determination if Offence is Clearly Established
In a significant ruling on the powers of arrest under the Goods and Services Tax (GST) Act and the Customs Act, the Supreme Court has clarified that the final determination of tax liability is not a prerequisite for making an arrest. The Court held that in cases where there is a sufficient degree of certainty regarding tax evasion, the Commissioner is authorized to order an arrest after recording explicit reasons based on material and evidence.
2/28/20252 min read
The bench, comprising Chief Justice of India Sanjiv Khanna and Justices MM Sundresh and Bela M Trivedi, made this observation while delivering a verdict in a batch of 279 petitions. These petitions challenged the penal provisions of the Customs Act, CGST/SGST Act, and similar laws, arguing that they were inconsistent with the Code of Criminal Procedure (CrPC) and unconstitutional. The primary contention raised by the petitioners was that an arrest under Section 132(5) of the GST Act, which makes certain offences cognizable and non-bailable, should not be allowed unless the tax liability is first determined through assessment proceedings under Section 73.
The petitioners relied on the Delhi High Court’s judgment in MakemyTrip (India) Pvt Ltd v. Union of India, which dealt with a similar issue under the Finance Act, 1994. In that case, the High Court had ruled that before making an arrest under Sections 90 and 91 of the Finance Act, the authorities must follow the procedure prescribed under Section 73A(3) and (4). This procedure involved serving a notice to the person liable for tax and providing them an opportunity to respond before determining the final tax liability. The High Court had emphasized that bypassing this process would be legally untenable and that the power of arrest should be exercised with great caution, not casually or based on mere suspicion.
The Supreme Court acknowledged the principle laid down in MakemyTrip regarding the cautious use of arrest powers but refused to accept the argument that tax liability must always be quantified before an arrest. The Court observed that while assessment proceedings typically establish the amount of tax evaded and determine whether an offence under Section 132(1)(a) to (d) of the GST Act has been committed, there can be exceptional cases where the authorities possess a sufficient degree of certainty about the offence even before a formal assessment order is passed. In such instances, the Commissioner has the discretion to authorize an arrest, provided he records explicit reasons to believe that the offence has been committed based on concrete material and evidence.
The Court reiterated that the requirement of “explicit reasons to believe” is crucial and that these reasons must be backed by tangible evidence. There should be a clear degree of certainty to establish that the offence is non-bailable under clause (i) of Section 132(1) of the GST Act. This ruling affirms that enforcement authorities cannot make arrests solely based on suspicion or for investigative purposes unless the conditions of Section 132(5) are met.
The judgment effectively balances the need for preventing tax evasion with safeguards against arbitrary arrests. It ensures that while authorities have the power to act against serious tax offences without waiting for lengthy assessment proceedings, such powers must be exercised judiciously and only when supported by explicit, well-documented reasons. The Supreme Court’s ruling strengthens the enforcement of tax laws while upholding due process, preventing any potential misuse of arrest powers under the GST and Customs Acts.