The GST Council has chosen trust over deterrence, easing enforcement despite evidence that fake invoicing and tax evasion remain widespread
Should fiscal legislation have powers of arrest? Or to put it differently, does the evasion of tax warrant the powers of arrest being entrusted with the same officers whose job is to collect taxes? Should these officers also have the powers to ensure that what is due is collected? Should there be such powers in the GST law when there are no similar provisions of arrest in the Income Tax Act? This was the debate which the GST Council had during its 6th and 7th meetings when the law was being finalized.
It must be appreciated that when taxes are evaded, it generates proceeds outside the pale of income tax. This money is unaccounted, “the black money” that is used to fund criminal and other nefarious activities. Furthermore, every such activity leading to evasion means that the goods or services so supplied are bound to be cheaper since it has not been subject to tax.
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This, however, impacts the genuine manufacturer, the supplier of goods and services who is unable to meet the unfair competition. Such a genuine supplier would sooner or later have to shut shop; it means loss of an activity that generates employment. Hence evasion of indirect tax is the very root of all subsequent violations, including income tax; it certainly needs to be handled on a different footing. It needs to be arrested (pun intended) at the first stage.
Three situations for arrest
The Council meetings at that relevant point of time were convinced about the need for such provisions in the law, but were concerned about possible misuse. So, guardrails and safeguards were inbuilt in the law. The power of arrest was to be exercised in only three specific situations: Forgery, meaning generation of forged or fake invoices, cheating, where tax is collected but not deposited in the government treasury, and theft, meaning outright evasion, supplying goods without payment of duty. This power was to be exercised only after due approval at the level of a commissioner, a joint secretary-level officer. Further monetary thresholds were also prescribed. So, after much debate, these provisions became part of the GST Law.
It should be remembered that arrest at the stage of investigation is not punishment; it is to facilitate investigations because there is an apprehension in the minds of the officer that evidence could be tampered with. It should be remembered that even after arrest, the officer must adhere to the provisions of BNSS and BNS. This means the person arrested had to be produced before a magistrate who had the powers to either grant bail or accede to the request for remand—bail here is a matter of right. This is unlike in the other laws like PMLA or UAPA.
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Why then was the need for the complete withdrawal of these powers—not building more safeguards or higher thresholds but to withdraw it completely? Has evasion stopped? Has the taxpayer become more compliant? Has there been such massive misuse of the powers that the GST Council took this extreme step of scrapping the very provision? We do not have the minutes of the meeting, so we can at this point only speculate. Let us try and answer each of these queries.
Has evasion stopped?
I do not think it is anybody’s case that evasion has stopped. From all accounts, it continues to plague the system. According to the reply to a Lok Sabha question on GST, evasion amounting to Rs 7.08 lakh crore was detected in the five-year period from 2020-21 to 2024-25. Of the 30,056 cases, more than half related to fake invoices were used to enjoy illegal benefits. The cases of evasion detected by the various enforcement agencies indicate that such evasion continues.
We pay our taxes reluctantly—and the line between avoidance and evasion is very thin. The tax gap, between money due and money actually collected, is estimated to be at least 40-50 per cent. Several FICCI studies suggest that in sectors like tobacco, FMCG, pharmaceuticals, chemicals and plastics, there is large-scale evasion, leading to loss of revenue, loss of jobs, and licit industry getting severely impacted.
The C-Efficiency (or collection efficiency—a measure of VAT revenue efficiency, or the gap between what ought to be collected and what is actually collected), according to a NIPFP 2023 paper, GST was estimated to be 0.54 or 54 per cent. This means there is a compliance gap, which in effect leads to lesser collection than what should be.
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The policy gap has largely been addressed. Improved compliance should now fill up the remaining gap. This is also borne by the fact that only about 6 per cent of the population files income tax returns. However, of the 7.5 crore who file returns, 63 per cent (4.7 crore) claimed zero liability. The trigger for all subsequent crimes is the unaccounted money which evasion generates.
Was it about misuse?
So, the next query is: Has there been such rampant misuse of arrest powers that the Council thought it best that these powers should be scrapped? We are not aware if any debate took place at all to increase safeguards instead. There are reliable reports to suggest that several states did object to the complete scrapping of arrest powers. And if there had been misuse, there were enough avenues to punish and make examples of such delinquent officers.
It would have been possible to increase the levels of supervision. The power of arrest was certainly a deterrent to ensure taxpayers pay what is due. The Council has also increased the threshold for launching prosecution from Rs 1 crore to Rs 5 crore. Again, it is not known what was discussed in the Council meeting, but this will further weaken the enforcement machinery to that extent. It should be remembered that the threshold for launching prosecution in Income Tax is quite low, and the extant guidelines permit prosecution even for non-filing of returns.
The net result of all the decisions in the 57th Council meeting—freeing the flow of credit, relaxing refund provisions and registrations, increasing thresholds for issuance of notice, scrapping the powers of arrest—are strong signals that the government is reposing trust in the taxpayer to discharge what is due. Let us hope that the taxpayer lives up to the trust.
(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the articles are of the author and do not necessarily reflect the views of The Federal.)
