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GST prosecution: Whether assessment is a must before prosecution?

The GST Acts lay down provisions for criminally prosecuting a person in case there are certain contraventions of the tax law. However, GST being a tax law, ultimately has as its primary objective the determination, levy and collection of tax, which is done only after the procedure of assessment. A legal question thus arises as to whether criminal prosecution proceedings under GST law can proceed without assessment or determination of the tax amount payable by the person.

I. Legal provisions

Goods and Services Tax (‘GST’) is a tax on supply of goods or services. This tax is levied concurrently by both the Central Government and the State Governments/Union territories under the powers conferred by Article 246A of the Constitution of India, 1950.

The Central Goods and Services Tax Act ('CGST Act') is the law enacted by the Parliament for imposition and collection of GST by the Central Government. Section 9 is the charging section which levies GST on the supply of goods or services. Section 9 states that the GST shall be paid by the taxable person. Thus, the charge of tax is on the taxable person who is required to discharge the GST liability under the CGST Act.

Section 73 inter alia provides for determination of tax not paid or short paid for any reason other than fraud or wilful statements or suppression of facts.

Section 74, in contrast to Section 73, provides for determination of tax not paid or short paid on account of fraud or wilful statements or suppression of facts. Cases where the present query (i.e., the chronology / interrelationship between assessment and prosecution) mostly arises, involve graver allegations and Section 74 becomes the relevant provision. Section 74 lays down a detailed procedure for collection of tax, interest, and penalty as follows:

  • The section provides for the proper officer to issue a show-cause notice for the payment of tax, interest, and penalty.

  • Prior to the issuance of such notice, the person may suo-moto make payment of tax with fifteen per cent penalty. The proper officer may accept such payment and not proceed further, or if he feels that the payment is still short of the amount actually payable, he may still issue the show-cause notice.

  • Upon the receipt of the show-cause notice, the person has two options: firstly, he may make the payment of tax and interest as quantified in the notice, along with twenty-five percent penalty. In this case, the proceedings are concluded (except the proceedings relating to Section 132 i.e., criminal offences). Secondly, he may contest the said notice and make his submissions against the same. In this case, the proper officer shall pass an order determining the tax, interest, and penalty amount.

Section 132 provides for punishment for certain offences. The relevant portion of Section 132 is reproduced below for ready reference:

132(1) Whoever commits, or causes to commit and retain the benefits arising out of, any of the following offences], namely: -

(a) supplies any goods or services or both without issue of any invoice, in violation of the provisions of this Act or the rules made thereunder, with the intention to evade tax;

(b) issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act, or the rules made thereunder leading to wrongful availment or utilisation of input tax credit or refund of tax;

(c) avails input tax credit using the invoice or bill referred to in clause (b) or fraudulently avails input tax credit without any invoice or bill;

(d) collects any amount as tax but fails to pay the same to the Government beyond a period of three months from the date on which such payment becomes due;

shall be punishable—

(i) in cases where the amount of tax evaded or the amount of input tax credit wrongly availed or utilised or the amount of refund wrongly taken exceeds five hundred lakh rupees, with imprisonment for a term which may extend to five years and with fine;

Section 138 states that all the offences under the CGST Act shall be compoundable subject to certain exceptions. Further, the section makes it clear that the compounding can be done even after the institution of criminal proceedings. However, one of the important requirements for compounding of offence is that the accused person should have first paid the tax, interest and penalty. This determination of tax, interest and penalty has not been done in the present case till date since no notice under Section 74(1) of the CGST Act has been issued. Further, the form i.e., Form GST CPD-01 which has been prescribed for making the application for compounding of offences under the CGST Act requires the accused person to submit details of the notice or assessment order quantifying the tax, interest and penalty due from the accused person.

II. Analysis and case law

(a) Bare reading of the provisions

Section 132(1)(a) of the CGST Act inter alia states that supply of goods without issuance of an invoice “with an intention to evade tax” is an offence. Further, Section 132(1)(i) of the CGST Act prescribes the punishment of up to 5 years in cases where the “amount of tax evaded” exceeds Rs. 5 crores. In other words:

  • In order to constitute a criminal offence, where there are supplies made without issue of invoices, it must be proved that this was done with an ‘intention to evade tax’; and

  • In order to determine the penal consequence arising from such offence (i.e., term of imprisonment and fine), the ‘amount of tax evaded or ITC availed or amount refunded’ must be computed.

Regarding ‘intention to evade tax’ (as provided in Section 132(1)(a) of the CGST Act), the following points are noteworthy:

  • If in any given scenario, generally speaking, the amount of tax evaded computes to Nil after duly applying the law, a natural conclusion would be that there was no intention to evade tax. Any person who has not evaded tax (since the amount of such evaded tax is Nil), cannot be attributed with the intention of having done so and hence having committed a criminal offence in that regard.

  • In any other scenario, where the amount of tax evaded is not Nil, the inquiry would go further as to whether the act of supplying goods without invoice was done with any other intention than evading tax, or whether evading tax was the real intention behind such act.

  • It is clear, from a bare reading of the provision, that the first inquiry regarding ‘intention to evade tax’ is to inquire into the amount of tax evaded. Thus, computing the amount of tax evaded becomes a sine qua non for establishing whether there was an intention to evade tax at all.

Regarding ‘amount of tax evaded or ITC availed or amount refunded’ (as provided in Section 132(1)(i) of the CGST Act) which is to be computed for determining the criminal consequence (i.e., the term of imprisonment and fine), the phrase is self-explanatory, and it mandatorily requires that the amount of tax evaded has to be computed before arriving at and applying the criminal consequence.

Considering the bare section itself, it appears that the statutory scheme presupposes that the amount of tax would be quantified before prosecution is initiated because such quantification would be necessary to establish the intent to evade tax (mens rea) as well as to determine the quantum of punishment. Till the time such determination of tax amount is not carried out, any criminal proceeding with respect to invocation and identification of the criminal offence u/s 132 of the CGST Act would be premature and would not be able to arrive at the correct outcome.

(b) Decisions holding that prosecution / arrest cannot precede assessment

The Hon’ble Delhi High Court in the case of MakeMyTrip (India) Private Limited vs Union of India 2016 SCC OnLine Del 4951 held that the arrest by Directorate General of Central Excise Intelligence (the predecessor agency of DGGI) without issuance of show cause notice and quantification of the service tax demand was bad in law. The Hon’ble Delhi High Court held that the scheme of the service tax law was such that it mandated that inquiry be made by the officers of department whether evasion of service tax has taken place and thereafter proceed with the coercive step of arrest. The Hon’ble Delhi High Court also held that the only exception to the above scheme is in case of habitual offenders. An SLP against this decision was subsequently also dismissed by the Hon’ble Supreme Court and therefore the decision has attained finality.

The Hon’ble Madras High Court in Jayachandran Alloys Pvt. Ltd. vs. Superintendent of GST and Central Excise 2019 SCC OnLine Mad 31224 followed the aforesaid decision of the Hon’ble Delhi High Court in case MakeMyTrip (supra) and observed that the prosecution proceedings under Section 132 of the CGST Act should be done only after the tax liability is quantified upon due assessment. The relevant portion of the decision is extracted below for ready reference:

“42. In the present case, the Department does not dispute that action was intended or envisaged in the light of Section 132 of the CGST Act, the counter fairly stating that the provisions of Section 132 of the CGST Act were ‘shown’ to the Assessee. There is thus no doubt in my mind that the Department intended to intimidate the petitioner with the possibility of punishment under 132 and this action is contrary to the scheme of the Act. While the activities of an assessee contrary to the scheme of the Act are liable to be addressed swiftly and effectively by the Department, (the statute in question being a revenue statute where strict interpretation is the norm), officials cannot be seen to be acting in excess of the authority vested in them under the statute. I am of the considered view that the power to punish set out in Section 132 of the Act would stand triggered only once it is established that an assessee has ‘committed’ an offence that has to necessarily be post-determination of the demand due from an assessee, that itself has to necessarily follow the process of an assessment.”

The Hon’ble Madras High Court in the case of M. Jayachandran Alloys (supra) also held that even though the decision in the case of MakeMyTrip pertains to a period prior to the GST regime (i.e., it pertains to service tax regime under Chapter V of the Finance Act, 1994), the ratio of the decision would continue to apply in the GST regime as well.

(c) Decisions holding that prosecution / arrest may precede assessment

It is relevant to consider the Hon’ble Telangana High Court in case of P.V. Ramana Reddy vs Union of India 2019 SCC OnLine TS 3332, which is often lately cited against the above quoted decisions. In such decision, it was held that coercive steps of arrest under the CGST Act and prosecution under Section 132 of the CGST Act can be launched even before the completion of assessment. However, it is to be noted that in such case, the issue before the Hon’ble Court was regarding arrest and protection against arrest, and dealing with a fact scenario involving input tax credit. It is settled law that a judgment is to be considered as a whole in the light of the questions involved in the case and not words or sentences from the judgment divorced from the context should be relied upon (refer, CIT v Sun Engineering Works (P) Ltd (1992) 4 SCC 363). Thus, in P.V. Ramana Reddy (supra), it is to be noted that the said decision holding that prosecution is maintainable and is independent of assessment, is in the context of ss. 132(1)(b) and (c) and it is to be noted that ss. 132(1)(a) and (d) are differently worded than the former provisions.

The SLP challenging the above order of the Telangana High Court has been dismissed by the Supreme Court in P.V. Ramana Reddy v. Union of India (2021) 2 SCC 784.

However, subsequently, the Supreme Court, considering that various High Courts had taken divergent views in the matter, has referred the question to a three (3) member bench of the Supreme Court (in Union of India v. Sapna Jain (2021) 2 SCC 782). The question, thus, awaits a final decision from the Supreme Court.

(d) Preponderance of probabilities vs. beyond reasonable doubt

The Hon’ble Supreme Court in the case of Radheshyam Kejriwal vs State of West Bengal [2011] 12 107 (SC) has dealt with the question as to whether the criminal proceedings under the Foreign Exchange Regulation Act, 1973 can be initiated before the adjudication proceedings under the said Act and the interplay between two sets of proceedings emanating from the same Act. The Hon’ble Supreme Court held that in case of exoneration on merits in case of adjudication proceedings (where the test is that of preponderance of probabilities), criminal prosecution on the same set of facts and circumstances cannot be allowed to continue because of higher standard of proof in criminal cases (i.e., beyond reasonable doubt).

Applying the same logic to the present query, one may immediately conclude that prosecution cannot precede assessment because:

  • Prosecution is conducted based on the test of proving a person's guilt 'beyond reasonable doubt' - this is a strict test.

  • Assessment of tax is carried out based on the test of proving evidence on the basis of 'preponderance of probabilities' - this is a relatively lenient test compared to the above. This means that even if there is probabilistic evidence pointing out towards tax evasion, the person will have to cough up the assessed tax demand.

  • If a person has been found to not have evaded tax in assessment proceedings (i.e., in a proceeding where it is easier to hold him accountable and pay tax), he cannot be subjected to another proceeding which requires the prosecution to produce even greater proof (than what is required in assessment) to hold such person accountable criminally.

(e) Compounding scheme under CGST Act

Besides the above, the legal provisions regarding compounding also hint at the above conclusion i.e., that determination of tax evaded has to necessarily precede criminal prosecution. Form GST CPD-01, which has to be filed for the purpose of compounding any criminal offence, requires the details of notice or order to be provided to state the amount of tax, interest, and penalty. Therefore, if a person makes an application for compounding before the Commissioner for compounding of the alleged offence, it would be mandatory to quote therein the amount of tax, interest, and penalty as provided to such person by the GST authorities vide a show-cause notice or an assessment order. Before this, compounding cannot be initiated, and thus the legal right of the person in this regard also cannot be exercised.

III. Conclusion

On a plain reading of law, it appears quite evidently that the initiation of prosecution under GST law should only be done once the assessment of tax has been completed. This is also supported by the underlying purpose of the law, which is the levy and collection of goods and services tax - and to support such purpose there are punishments provided in law supposed to be meted out by way of prosecution. Once the assessment is done and indeed some amount is quantified and adjudicated as evaded by a person, the criminal prosecution can be initiated, and the person be punished. Also, there is no limitation in initiating criminal proceedings under law and hence there is no hurry that the person be rushed into prosecution.

An immediate need for prosecution may be triggered by an arrest by the GST department, which would require them to complete the investigation qua the arrested person within 60 days (failing which default bail provisions would become applicable), and file the prosecution complaint. One may argue that these steps may be necessary for various purposes (e.g., arrest may be necessary to immediately put an end to an offence or a racket). However, upon the filing of the chargesheet, the trial court could well wait till the completion of assessment and not hasten the process of trial because that would make the entire proceeding premature.

Authored by the Editorial Team, Metalegal Advocates. The views are personal and do not constitute legal opinion on any subject matter.


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