The Supreme Court, on Thursday, upheld the constitutional validity of arrest provisions under GST and Custom laws. However, it has also prescribed certain conditions for action, based on such provisions.
“The challenge to the constitutional validity as also the right of the authorised officers under the Customs Act and the GST Act to arrest are rejected and dismissed with elucidation and clarification on the pre-conditions and when and how the power of arrest is to be exercised,” said a division Bench comprising Chief Justice Sanjeev Khanna and Justices MM Sundresh and Bela Trivedi while hearing over 400 petitions clubbed together. It also directed the matter to be listed before an appropriate Bench in the week commencing March 17 for final hearing and disposal.
The Bench further held that Customs officers are not police officers. At the same time, rights will be available to the accused, who are arrested under both Customs and GST legislations. The Bench also held that that right to apply for anticipatory bail shall be available even where FIR is not filed but threat of arrest is imminent. The Bench clarified that arrests cannot be used for recovery and that remedies under Article 226 are available in such cases.
Checks and balances
Sudipta Bhattacharjee, Partner, Khaitan & Co, opined that the Supreme Court has provided for critical checks and balances, which should go a long way in curbing instances of tax-terrorism and providing some level of protection for taxpayers. For example, the Court emphasised the requirement for authorities to document their “reasons to believe” before initiating an arrest, in line with principles laid down in Arvind Kejriwal’s case. The Supreme Court has also held that people facing arrest under GST or Customs law will be entitled to safeguards available under the Code of Criminal Procedure and that anticipatory bail can be allowed in cases of imminent arrest under GST law, overruling a contrary judgment.
“While the Court overruled the earlier judgment in the case of MakeMyTrip and clarified that arrest under GST can happen even before a formal quantification of tax demand, it has been very clearly laid down that arrest cannot be misused as a tool for tax recovery and any such coercive action for recovery can be challenged before a High Court under Article 226,” he said.
Striking a balance
According to Amit Maheshwari, Tax Partner at AKM Global, the Apex Court considered arrest power intrinsic to the machinery of the government and necessary for tax enforcement. The Court also held that sufficient safeguards are inbuilt into the relevant provisions under both laws. While it empowers authorities to take strict action against serious tax fraud, it also ensures legal safeguards for businesses and individuals, including the right to anticipatory bail even before an FIR is filed.
“The decision underscores the need for businesses to strengthen GST compliance, as arrests can occur even if the exact tax liability is not fully determined. This ruling strikes a balance between preventing tax evasion and protecting taxpayer rights, making it crucial for industry stakeholders to adopt a proactive approach towards regulatory compliance,” he said.