Not a Knock-Knock Joke

Context: Arrest under tax laws on account of interpretation issues has resulted in the loss of personal liberty and trust deficit between revenue and taxpayers and goes against easing business in India.

Provisions of arrest Under Tax Laws, rules and regulations:

• Under Goods and Services Tax (GST) Act: It confers powers of arrest for a wide range of issues, from who would be the person liable to tax to the interpretation of issues and fake invoicing.
  • Tax commissioner can ask for arrest just on the basis of his ‘reason to believe’.
  • The Telangana High Court and the Gujarat High Court have held that there is no need for a First Information Report (FIR) to be filed before such an arrest was made.
• Under I-T Act: prosecution proceedings are routinely launched for issues of legal interpretation (like deduction of tax at source issues, claims for deductions and exemptions) and not issues of tax evasion.

Measures taken to avoid arbitrariness in arrest and Way Forward

• Due process of law must be followed: by tax authorities, and the possibility of an arrest should not be used to flex their muscles.
  • Gujarat HC held that ‘reason to believe’ for tax evasion must be backed by material proof and credible information.
  • The Central Board of Excise and Customs (CBEC) has issued circulars clarifying that the powers of arrest must be exercised after careful consideration of the facts of each case.
• Arrest should be made only to ensure proper investigation: Precautioning tampering evidence or influencing witnesses; There must be clarity over what constitutes tax evasion.
  • Central Board of Indirect Taxes and Customs (CBIC) has constituted a group of advisers to hold consultation with stakeholders on the use of power to arrest.
• Decriminalize offences: Government has done well to recently decriminalize several offences under the Companies Act.

Conclusion: Detailed guidelines on arrest under tax laws is must for ensuring that honest taxpayers do not end up worrying whenever there is a knock on the door.