GST Act Arrest Can Be Made Without Final Determination Of Tax Liability If There's Sufficient Degree Of Certainty About Offence : Supreme Court

In its judgment dealing with the powers of arrest under the Goods and Services Tax (GST) Act and the Customs Act, the Supreme Court today held that crystallization of tax liability is not mandatory to carry out an arrest. In some cases, when there is sufficient degree of certainty that the amount of tax evaded constitutes an offence, the Commissioner may authorize arrest after recording "explicit" reasons to believe based on material and evidence.

"We would accept that normally the assessment proceedings would quantify the amount of tax evaded, etc. and go on to show whether there is any violation in terms of clauses (a) to (d) to sub-section (1) of Section 132 of the GST Acts and that clause (i) to sub-section (1) is attracted. But there could be cases where even without a formal order of assessment, the department/Revenue is certain that it is a case of offence under clauses (a) to (d) to sub-section (1) of Section 132 and the amount of tax evaded, etc. falls within clause (i) of sub-section (1) to Section 132 of the GST Acts with sufficient degree of certainty.

In such cases, the Commissioner may authorise arrest when he is able to ascertain and record reasons to believe. As indicated above, the reasons to believe must be explicit and refer to the material and evidence underlying such opinion. There has to be a degree of certainty to establish that the offence is committed and that such offence is non-bailable", the Court said.

A bench of Chief Justice of India Sanjiv Khanna and Justices MM Sundresh, Bela M Trivedi made the observation while delivering the verdict in a batch of 279 petitions challenging the penal provisions in the Customs Act, CGST/SGST Act, etc. as non-compatible with the CrPC and the Constitution.

The issue arose as reliance was placed by the petitioners on Delhi High Court's decision in MakemyTrip (India) Pvt Ltd v. Union of India to urge that the amount of tax liability must be determined prior to arrest. More specifically, they had contended that the power under Section 132(5) of GST Act (making the offence cognizable and non-bailable) cannot be exercised unless the procedure under Section 73 of the Act (determination of tax liability) is completed and an assessment order passed quantifying the tax evaded/erroneously refunded/input tax credit wrongly availed).

In MakemyTrip, the Delhi High Court had dealt with the issue as to whether the power of arrest under Section 91 of the Finance Act, 1994 could be exercised without following the procedure set out in Section 73A(3) and (4) of the said Act.

The High Court had observed that the procedure under Section 73A required notice to be served on the person liable to pay the amount to show cause why the said amount, as specified in the notice, should not be paid by him to the Central Government. Under Section 73A (4), the Central Excise Officer concerned, after considering the representation made by such person, was to determine the amount due from such person, not being in excess of the amount specified in the notice.

Those two steps, the High Court opined, were essential before it could be concluded that a person had collected service tax which was payable to the Central Government and had not paid it. Accordingly, it was held that following the procedure under Section 73A(3) and (4) of the Finance Act was mandatory before a person was arrested under Sections 90 (cognizance of offenses) and 91 (power to arrest). To quote the High Court,

"It is difficult to conceive of the DGCEI or for that matter the ST Department being able to by-pass the procedure as set out in Section 73A (3) and (4) of the FA before going ahead with the arrest of a person under Section 90 and 91 of the FA. The power of arrest is, therefore, to be used with great circumspection and not casually. It is not to be straightway presumed by the DGCEI, without following the procedure under Section 73A (3) and (4) of the FA, that a person has collected service tax and retained such amount without depositing it to the credit of the Central Government."

"It is sought to be suggested by the DGCEI that, for the purposes of arrest, it is not necessary for the adjudication proceedings to have concluded. However, when the scheme of the provisions in the FA is carefully analysed, the said submission appears to be legally untenable."

Insofar as MakemyTrip dealt with service tax, which has been subsumed under GST regime, the Supreme Court found itself in agreement with the observation that power of arrest should be used with great circumspection and not casually. "as in the case of service tax, the power of arrest is not to be used on mere suspicion or doubt, or for even investigation, when the conditions of subsection (5) to Section 132 of the GST Acts are not satisfied", it said.

However, insofar as the petitioners relied on the said judgment to aver that tax liability must be determined prior to arrest, the Court said that the contention shall not be accepted as a general or broad proposition. Rather, in some cases, the Commissioner may authorize arrest when he is able to ascertain and record explicit reasons to believe based on material and evidence.

Also from the judgment - Arrest Under GST Act Cannot Be Made Merely To Investigate If Cognizable & Non-Bailable Offence Has Been Committed : Supreme Court

Case Title: Radhika Agarwal v. Union of India and Ors., W.P.(Crl.) No. 336/2018 (and connected matters)

Citation : 2025 LiveLaw (SC) 255

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