Pros & Cons Of Laws Dealing With Indirect Tax Offences

Amendments to the provisions dealing with offences under Indirect tax laws are directed at deterring wilful tax evasion but are open to misuse...

One of the key areas where amendments have been made vide the last two Finance Acts has been the provisions dealing with 'offences' under Indirect tax laws. These amendments are clearly directed towards creating harsh deterrents against wilful evasion of taxes. With high dependence of revenue on tax collections which can at times create increased pressures on tax administrators for incremental tax collections, there is a potential risk of such provisions being misused, which has really caught the attention of the industry.

This article analyses the key amendments to the provisions dealing with offences under indirect tax laws and discusses some critical questions that arise in the exercise by tax authorities of their powers to arrest.

Key Changes In The Provisions

Under the Customs, Central Excise and Service tax laws, certain offences have been defined for which a person is punishable with imprisonment or fine, or both. Under the Customs law, the offences include fraudulent evasion of duty or of any prohibition, knowingly dealing with goods liable for confiscation and fraudulently availing drawback or any exemption1. Under, the Central Excise law, offences include in addition to evading payment of duty and dealing with goods liable for confiscation, clandestine removal of goods and wrongful utilisation of CENVAT Credit2. Whereas, under the Service tax law, the offences include knowingly evading payment of Service tax, availing and utilising credit without actual receipt of taxable input services or excisable inputs, maintaining false books of account and failure to make payment to the Government of the tax amount which has been collected3.

Although, in respect of the offences under the Customs and Central Excise laws, the tax officers who have been empowered in this regard by the respective Commissioners have always had the power to arrest, in respect of the offences under the Service Tax law, such power to arrest has been given to the tax authorities only vide the Finance Act 2013 (w.e.f. 10.05.2013).

Prior to the Finance Act 2012, these offences were stated under the law to be 'non-cognizable' (i.e. the tax officers had no authority to arrest without a warrant issued by the Magistrate). However, there was no prescription as to whether such offences were 'bailable'. When a person is arrested, he is required to be produced before the Magistrate. Where an offence is 'bailable', the tax officers who have arrested the person can release him on bail and require him to appear before a Magistrate.

Where an offence is 'non-bailable', the tax officers are not entitled to release the arrested person on bail and are required to keep the person in custody and forward him to the Magistrate who can then decide upon releasing the person on bail. In this regard, a controversy which arose was whether the said offences under the Customs and Central Excise law be considered to be 'bailable'.

As regards this controversy, the Supreme Court has, in Om Prakash v. Union of India4 considering that these tax laws are aimed at recovery of duties which the State was being wrongly deprived of and not for punishment of any person for infringement of the provisions, held that the said offences are 'bailable' and if the person who has been arrested has offered bail, the tax authorities are required to release such a person.

However, the Finance Acts of 2012 and 2013 have introduced several amendments to provisions relating to these offences, making them more onerous. These amendments make certain offences specifically 'cognizable' whereby the tax authorities can proceed to arrest any person responsible for the offence, without a warrant, and, certain offences have specifically been stated to be 'non-bailable' whereby overturning the decision of the Supreme Court in the Om Prakash case (Supra).

The present position as regards whether the offences under these Indirect tax laws are 'cognizable' and / or 'bailable', is set out below:

Arrests During Investigations

Investigation is the initial stage in the life of any tax disputes where the tax authorities are primarily engaged in gathering of evidence based on which they would go on to form their case. Only post investigation, the show cause notice is issued which is the first document which sets out the tax authority's case and marks the commencement of the adjudication proceedings. The tax authorities can exercise their power to arrest even at the investigation stage. Past experience has indicated that with increasing pressure for incremental revenue collections, these powers could potentially be used as a tool to coerce the company to deposit duty amounts at the investigation stage even though the tax authorities have not completely formed their case.

As discussed above, the tax authorities have the powers to arrest (and in certain cases, even without a warrant) merely on the basis of a belief on their part that a person has committed an offence. Further, in addition to cases of smuggling or clandestine removal where the goods are cleared without necessary declarations where an intent to defraud the revenue could be apparent, offence has also been defined to include - knowingly evading payment of duty. This can bring in an element of subjectivity in the exercise of arrest powers. These powers can therefore create a serious threat for a company even in an otherwise bonafide case but where the tax authorities view it to be a deliberate attempt to evade taxes. With the threshold for the quantum of tax evasion for an offence to be considered 'cognizable' being kept at '50 lakhs, it could potentially impact a large faction of assessees.

A case in point has been the proceedings in relation to an Indian bottling unit of a global beverage major. In 2007, the Central Excise authorities had at the investigation stage arrested two senior officers of the company on charges in relation to alleged contraventions under the CENVAT Credit scheme. However, subsequently in the proceedings initiated for demanding differential duty and seeking imposition of penalties based on such alleged contraventions, in 2013, at the appellate stage, the issues on merits were held in favour of the company and the differential duties and penalties were set aside.

Under Service tax provisions, in cases where the Service tax is collected but not paid in excess of '50 lakhs, it is to constitute an offence which is cognizable (and presumably non-bailable, till orders of bail are obtained from the Magistrate). This could potentially impact contracts where the consideration is recovered on an inclusive of tax / cum-duty basis but where the assessee believes that the activities are not subject to Service tax and therefore no Service tax payment is made to the Government.

In view of the potential for misuse of these provisions and in recognition that these provisions can affect the liberty of an individual, the Central Board of Excise and Customs (CBEC) has recently issued two circulars setting out the guidelines for arrest and bail in relation to offences punishable under the Customs law and the Service tax law, respectively.5 The issuance of such guidelines is a welcome step, but it now remains to be seen whether strong discipline is exercised in terms of such guidelines while administering these provisions.

From a company's perspective, the persons that would be impacted by these provisions are generally the persons who are in charge of conduct of business of the company and the directors or managers of the company. To mitigate any risk under the above provisions, it becomes important for the directors or managers to strengthen internal processes, undertake periodic reviews in relation to tax positions and to make necessary disclosures to tax authorities to establish their bonafides.

Final Thoughts

Admittedly, hard measures are required to deal with wilful tax offenders, these provisions in relation to arrest for offences which could have serious ramifications in relation to the "life and liberty" issues and need to be carefully implemented in its right earnest and only in cases of gross evasion and non-compliance.

Footnote:
1 Section 135 of the Customs Act, 1962.

2 Section 9 of the Central Excise Act, 1944.

3 Section 89 of the Finance Act, 1994. This provision in relation to offences has been re- introduced vide the Finance Act, 2011 w.e.f. 8.4.2011. These provisions were earlier omitted in 1998.

4 2011 (272) ELT 321 (SC); 5 Circular 38/2013 –Cus. and Circular 171/6/2013 - Service Tax, both dated 17.09.2013.

Disclaimer - This article has been authored by Nishant Shah, who is a Partner and Anay Banhatti, who is a Senior Associate at Economic Laws Practice (ELP), Advocates & Solicitors. They can be reached at nishantshah@elp-in.com or anaybanhatti@elp-in.com for any comment or query. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.