“It is hard enough to understand how a tax structure is supposed to work

when all taxpayers comply with law, it is all more difficult to understand how it functions when

taxpayer cheats”

Introduction

The tax structures and enforcement thereunder are believed to be of complex nature. Goods and Service Tax in India has the same fate, its complex nature have led to numerous incidents of tax evasion and the most common method of doing so is claiming fake Input Tax Credits (ITC). Over the years there have been many instances where taxpayers have claimed fake ITC. In January 2022 it was reported by Business Standard, that certain firms claimed fake ITC to the tune of 22cr[1]., Moreover, on April 14^th, 2022, it was reported by Times of India that a businessman, was arrested State GST unit for claiming fake ITC of Rs. 115cr[2]. These knowingly or unknowingly done incidents have become a recurring phenomenon and are viewed as “economic offences” thereby making it necessary for every taxpayer to have an understanding about –

1. What is Input Tax Credit?
2. How are ITC claims scrutinized by the Assessing?
3. What is the process in case of any discrepancy is found?
4. Recovery Process
5. How and When Criminal Prosecution is initiated?
6. How and When arrest is made?
7. Pre-Arrest Bail and Bail in such cases

What is Input Tax Credit?

The GST Act 2017 (“GST Act”) imposes a multi-staged taxation scheme in which each point of the supply chain is taxed, and the registered entity is liable to pay that tax on said purchase of raw materials and levy tax while sale of goods and services. It was obvious to the government that this multi-stage tax scheme would again prompt cascading effect, hence, the concept of Input Tax Credit was introduced in the GST Act itself. The term “Input” means “any goods or services used or intended to be used by a supplier in course or in furtherance of his business” therefore, any tax paid by such registered person while acquiring such goods or services is termed as “Input Tax”. As per the provision of CGST Act 2017, the Input Tax includes –

1. Tax charged on import of goods
2. Tax paid under reverse charge mechanism

The flow chart mentioned below clearly describes the concept of “Input Tax Credit” –  

How are ITC claims scrutinized?   

It must be noted that there is no provision within the GST framework which lays down the guidelines for scrutinizing the ITC claims. The Policy Wing of the GST Department publishes a notification every financial year stating the guidelines of scrutiny. On March 2022, a notification titled “Standard Operating Procedure (SOP) for Scrutiny” was published by the department which provided the process for selection of returns for scrutiny and included an indicative list of parameters which are to be followed for scrutiny of claims.

First is the selection process i.e. selecting a pool of claims for scrutiny. The Directorate of Analytics and Risk Management is responsible to select the GSTINs whose returns would be scrutinized and same is communicated to the “field formation”. Subsequent, to the receipt of the information the “proper officer”[3] with the approval of Divisional Assistant/Deputy Commissioner will prepare a scrutiny schedule. After the required approval and creation of schedule the proper officer commences the scrutiny in accordance to the parameters mentioned in Annexure B of the said notification. The relevant parameters regarding the scrutiny of ITC claims are stated below-

1. When reverse charge mechanism supplies declared in FORM GSTR-3B( self -declaration return )  are less that the inward supplies attracting reverse charge as declared in FORM GSTR-2A(system generated statement of inward supply), it may indicate short payment of tax or liability on account of reverse charge mechanism supplies.[4]
2.  Whenever there is retrospective cancellation of registration of the supplier, the recipient is not entitled to claim ITC in respect of those debit notes/invoices issued after the effective date of cancellation. If he claims the same will be examined by proper officer. [5]
3. The ITC availed in respect of “inward supplies from ISD” mentioned in FORM GSTR-3B is verified from the FORM GSTR 2A. if there is any discrepancy the proper office may take appropriate steps[6]
4. ITC availed under the head of “all other ITC” in FORM GSTR -3B may be verified from the FORM GSTR-2A.[7]
5. ITC availed in respect of “Import of goods” in FORM GSTR-3B may be verified with corresponding details in Form GSTR-2A.[8]

What is the process in case of any Discrepancy is found?

If the “Proper Officer” finds any discrepancy with the claim, he will issue a notice to the concerned person in FORM GST ASMT-10(notice for intimating discrepancies) putting it/him on notice about the discrepancies in the return after scrutiny and seeking explanation against such discrepancies. In furtherance to which the concerned person is liable to furnish an explanation in respect of the discrepancy in FORM GST ASMT-11 (reply to the notice issued intimidating discrepancies)  within 30 days from receipt of notice. If the explanation furnished by the registered person are found acceptable the proceeding is concluded (closed) but if the explanation is found unsatisfactory the proper officer will take appropriate action as mentioned in section 61(3) which includes-

1. Audit [9]
2. Special Audit[10]
3. Search, Seizure and Inspection[11]
4. Assessment of Claims[12]
5. Cancellation of GST Registration[13]

Audit

If any discrepancy is found one of the steps which can be taken is initiating an audit of the registered person. The Commissioner or any officer authorized by him has the power to such order. A notice in FORM GST ADT-01(notice for conducting audit) must be issued to the registered person at least 15 days before the audit is conducted and the audit must be conducted within 3 months. The proper officer after observing the discrepancy will inform the registered person and seek explanation for the same. Further, after the conclusion of audit the registered person may be informed of the finding within 30 days if he is found guilty of acts such as Short paid tax, Unpaid tax, Excess/Fraudulent availment of ITC then assessment of claim as per section 73 and section 74 of the act is done.

Special Audit

At any stage of scrutiny, inquiry or investigation if the Assistant Commissioner in regard to the complexity of case and in interest of revenue is of the opinion that the ITC availed is not within the normal range, he may with the approval of commissioner may initiate a special audit. In special audit the commissioner order’s the registered person to submit all his books of account and other records to a Chartered Accountant or Cost Accountant nominated by the commissioner himself. The special audit must be completed within a period of 90 days. It must be noted that in such case the registered person must be given an opportunity of being heard in respect of all the documents gather against him. If the registered person is found guilty of Short paid tax, Unpaid tax ,Excess/Fraudulent availment of ITC then action is taken under section 73 and section 74 of the act.

Search, Seizure and Inspection

The provision related to search, seizure and inspection are clearly mentioned in the Act itself. The power to issue such orders lies with Joint Commissioner or any office above the rank of Joint Commissioner. As per the provision when Joint Commissioner or any officer above the rank of Joint Commissioner has a reasons to believe –

1. That a taxable person has suppressed any transaction relating to supply of goods or services or both or the stock of goods in hand
2.  Has claimed input tax credit in excess of his entitlement Or;
3. any person engaged in the business of transporting goods or an owner or operator of a warehouse or a godown or any other place is keeping goods which have escaped payment of tax or has kept his accounts or goods in such a manner as is likely to cause evasion of tax payable under this Act Or;
4. Has indulged in contravention of any of the provisions of this Act or the rules made thereunder to evade tax under this Act

He may authorize any other officer to inspect any place of business of the registered entity. The term which needs to be understood here is “Reason to Believe” which clearly shows that the Joint Commissioner or any person above his rank cannot excise this power as per their whims and fancies. They must has a Reason to Believe before issuing such order.

The term “reason to believe” is found in various statutes concerned with revenue laws, and therefore, has undergone a forensic analysis by courts in several cases. It is well-established that the expression “reason to believe” does not carry the same connotation as say reason to suspect; the standard of belief is that of a reasonable and honest person and not one based on surmises and conjectures, or mere suspicion.. It is open to the concerned authority to form a prima facia view based on evidence that may be direct or circumstantial. In other words, the belief of the concerned authority should be based on some actionable material that he had an opportunity to peruse. Furthermore, the material placed on record before the concerned authority i.e. the proper officer should have nexus with the formation of the belief.[14] Under section 67 of CGST Act, the proper officer not below the rank of Joint Commissioner has the power to carry out search seizure and inspection only if he has reason to believe. Therefore, in absence of basic jurisdictional facts the powers cannot be exercised.

Assessment Of Claims

If the proper officer after audit, special audit or search, seizure or inspection is of the opinion that the registered person has not paid tax, short paid tax, erroneously claimed refund or has wrongfully availed ITC with or without malafide intention then-

Proper Officer will first issue a notice to the registered person along with the summary of the same published on GST poral in FORM GST DRC-01(intimation of tax ascertained which is payable) then he will communicate the details of the ascertained amount in FORM GST DRC-01A. Further, the proper office after sending the notice may serve a statement of claim laying all the details of tax (claim) in FORM GST DRC-02 (statement of claim) as per rule 142 (b) of CGST rules, 2017. It must be noted that the registered person is provide an opportunity of pay the amount with interest as calculated by the authority or furnish his reply in FORM GST DRC-06 stating the reasons/justification for non-payment, short payment, or wrongful claim of ITC. The whole process of the Assessment is regulated under section 73 and 74 of the CGST Act, 2017. The only difference between both the provision is of mala fide intention of registered person i.e. if it is found that the registered person did not intentionally commit such offence the assessment is conducted under section 73 whereas, if it is found the same was done with knowingly and with mala fide intention the proceeding will be initiated under section 74 of the act. After the conclusion of the proceeding if proper office is of the opinion that the registered person is guilty, he may pass the order for recovery.

Recovery Procedure

It must be noted that, “recovery proceeding are the final steps towards the realization of any tax or amount, which has been confirmed as payable after following the due process of adjudication” The taxable person is given time of 3 months from the date of service of order if he fails of comply with the said order within 3 months the Recovery Proceeding are initiated.

In furtherance of the recovery order the proper officer can recover the amount by-

1. Deduction of money from any amount payable to such taxpayer
2. By detaining and selling any goods, by directing any other person from whom the money is due to such person
3. Attaching any property belonging to the defaulter.
4. The Proper Officer may prepare a certificate signed by him specifying the amount due by such person and send it to collector of the district in which such person resides or owns any property or carries out his business and the said Collector on receipt of such certificate shall proceed to recover such amount from such person[15].

As per section 80 of the CGST Act, the taxable person can make an application before the Commissioner for extending the time of payment or allow payment of such amount in installments not exceeding a total of 24 months with interest. The Commissioner may accept such application with reasons to be recorded in writing[16].

Compounding of Offence and Criminal Prosecution

Any offence under CGST Act, 2017 is compoundable both before and after institution of prosecution. This provision clearly highlights the fact that the CGST Act is primarily an enactment for collection of revenue which is the primary objective of the said legislation. Therefore, on payment of compounding amount no further proceeding shall be initiated against the said person and if proceeding had been initiated, the same would stand cancelled.

How To Apply for Compounding

A taxable entity can make an application under section 138 (1) in Form GST CPD-01 to the Commissioner for Compounding of the offence. On receipt of such Application, the Commissioner directs the concerned officer to furnish all the relevant documents in relation to the contents of the said application. After going through all the facts and circumstances of the case and reviewing all the documents, he may either accept or reject the said application and inform the same via FORM GST CPD-02 (order for rejection/allowance of compounding of offence). It must be noted that such application cannot be rejected without providing an opportunity of being heard and recording the reasons for rejection. Within 30 days from the receipt of order the taxable entity must make the payment of the compounding amount else the said compounding order shall stand vitiated and void[17]. If the order of compounding is rejected the taxable entity can approach the Appellate Authority under section 107 of CGST Act, 2017.

Criminal Prosecution

As it is a well-established principle of law that arrest and detention in police lock-up of a person can cause incalculable harm to the reputation and self-esteem of a person. No arrest can be made in a routine manner on a mere allegation of commission of an offence made against a person. It would be prudent for the authority in the interest of protection of the constitutional rights of a citizen and perhaps in his own interest that no arrest should be made without a reasonable satisfaction reached after some investigation as to the genuineness and bona fides of a complaint and a reasonable belief both as to the person’s complicity and even so as to the need to effect arrest. Denying a person of his liberty is a serious matter. A person is not liable to arrest merely on the suspicion of complicity in an offence. There must be some reasonable justification in the opinion of the authority effecting the arrest that such arrest is necessary and justified.[18]

As per the provision of the CGST Act, 2017 whenever the Commissioner has a “reason to believe” that a registered person has committed an offence as mentioned in section 132 of the act then he may by order authorize any officer of central tax to carry out the arrest. It must be noted that the provision of Cr.P.C are applicable in cases of arrest under GST.

How Arrest is Made under GST Act, 2017

In many instances the GST officials’ issues summons, requiring the taxable entity to appear before them for presenting evidence and documents but instead of following the procedures they harass that concerned person. In the case of Venkata Satya Dharmavthar Bollina v. Union of India[19],  the petitioner was harassed by the official he was questioned from 6 pm to 3 am without any food or water and he was also coerced to sign some self-implicating statement at 3 am. The court in this matter clearly stated that-

1. The officers under the tax laws are not police officers to whom section 25 of Evidence Act,1872 would apply.
2. That the powers conferred upon the appointed officers under tax enactments for arrest are intended to aid and support function to levy and collection of tax.
3. And the statements made by a person during such enquiries cannot be equated to statements made by a person accused of an offence.

It must be noted that the procedure of arrest under the act was inserted as a deterrent and must be exercised only in exceptional circumstances and only after obtaining prior authorization from the Commissioner. As per section 69 (1) of CGST Act, 2017, if the Commissioner has a reason to believe that the concerned person has committed any offence as specified under section 132 of the CGST Act, he may authorize any officer to make an arrest. Further, as per 69(2) of CGST Act, when a person is arrested, he must be informed of the grounds of such arrest, and he must be produced before a Magistrate within 24 hrs. It must be noted that arrest can be made incases where the amount of tax evasion is more than 2 crores. And the tax evasion of Rupees 5 crore or less is bailable.  

Recently in the case of Dhruv Krishan Maggu v. Union of India,[20] wherein the petitioner filed a writ petition seeking “declaration that section 69 and section 132 of CGST Act, 2017 are arbitrary, unreasonable and being beyond the legislative competence of parliament are ulta vires the Constitution” the petitioner also contended that the procedures prescribed under CGST Act are not fair and reasonable. The court in this case upheld the constitutional validity of the abovementioned sections and stated that Section 132(5) of the CGST Act, the said person must be informed of the grounds of arrest and must necessarily be produced before a Magistrate under Section 69 (2) within a period of 24 hours. The above-stated would ensure judicial scrutiny over the acts of executive and it cannot be termed as unreasonable and/or excessive.[21] In such situation, the best remedy against arrested would be, that if any person who has a reason to believe that he may be arrested by the GST authority for any of the offences mentioned in the section 132 of the CGST Act, 2017 must filed for a pre-arrest bail.

Pre-Arrest Bail in case Criminal Prosecution is Initiated

As per section 438 Cr.P.C where any person has a reason to believe that he may be arrested on accusation of having committed a non-bailable offence, he may apply to High Court or the Court of Session for a direction under this section that in the event of such arrest he shall be released on bail. The provision of Pre-Arrest Bail/ Anticipatory bail can be invoked by a person who has a “reason to believe that he may be arrested” by the GST officials for wrongful gains out of GST regime. It is a settled principle that-

For entertaining an application under Section 438 Cr.P.C., there are two requirements as contemplated in its Clause (1), which are as follows: (i) There must be an accusation of the petitioner having committed a nonbailable offence. Obviously, this accusation must be an existing one or in any case stemming from the facts already in existence. (ii) There must be reasonable apprehension or belief in the mind of the petitioner that he would be arrested on the basis of such an accusation. The simultaneous existence of both these conditions is a sine qua non for invoking courts jurisdiction. When the said two requirements are fulfilled, the High Court or the Court of Sessions could entertain an application for anticipatory bail and then consider it on its own merit[22]

Recently, in the case of M/s V.K Traders v. Union of India[23] held that “Granting of anticipatory bail does not arise for an offence which is bailable and a direction for the same can be issued only in respect of non-bailable and cognizable offences”.  Following this decision it has become clear that as per section 132 (5) CGST Act the offences specified under section 132 (1) (a),(b),(c),(d) thereof are cognizable and non-bailable i.e.-

(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

A person could acquire Pre-Arrest Bail in such cases.In 2021, the Delhi High Court in the case of Saurav Gupta v. CGST (New Delhi)[24] also granted Anticipatory Bail to the applicant when he agreed to return to India and corporate with the investigation.

Bail In Case Accused is Already in Custody

There is no hard and fast rule in granting bail, the facts and circumstances of each case will govern the judicial discretion in granting or refusal of bail application.[25]

In the case of Pramod Kumar Sahoo v. State of Orissa, the High Court of Orissa granted bail to the accused, wherein it was alleged that he had availed bogus ITC of Rs. 34.23 crores and was in custody for 66 days because it was found by the court that- ‘determination’ of the excess credit by way of the procedure set out in Section 73 or 74, as the case may be is a prerequisite for the recovery thereof. Sections 73 and 74 deal with assessments and as such it is clear and unambiguous that such recovery can only be initiated once the amount of excess credit has been quantified and determined in an assessment. When recovery is made subject to ‘determination’ in an assessment, the argument of the department that punishment for the offence alleged can be imposed even prior to such assessment, is clearly incorrect and amounts to putting the cart before the horse[26]. And this assessment would take a considerable amount of time. In deciding bail applications, an important factor which is taken into consideration by the court is the delay in concluding the trial. Often this takes several years, and if the accused is denied bail but ultimately acquitted, who will restore so many years of his life spent is custody. But it must be noted that this is not an only factor but certainly one of the important one.[27]

Conclusion

By this article it is quite visible the complexities of the GST law and it effects on a Taxpayer. While there are certain procedures set in place like submitting the form online or compound the offence by payment of penalty amount as directed by the Department. There may be situations when the taxable/registered entity would get caught in the procedural intricacies of the Law. Therefore, through this article one could get a clear picture of the procedural aspect of avaling ITC claims.