After a disagreement between lower courts as to whether individuals accused of evading goods and services tax can be denied bail, India’s Supreme Court said it will take up the issue.
On May 29 a two-judge “vacation bench” of the Court said, “At this stage, we are not inclined to interfere” with an order by the High Court of Bombay granting pre-arrest bail to individuals accused of evading GST.
The Times of India reported May 29 that the central government had appealed the Bombay High Court's decision, asserting that tax authorities are not police and are therefore not required to follow provisions of the Code of Criminal Procedure that require the filing of a first information report before making an arrest. The newspaper said Solicitor General Tushar Mehta told the court that Parliament had made a distinction between the criminal procedure code and the GST law by providing a separate procedure that does not involve the filing of a first information report when dealing with those accused of violating the latter.
In its brief ruling, the Supreme Court appeared to indicate that it might not be so tolerant of similar lower court rulings in the future. "We make it clear that the high courts, [when] entertaining such request in future, will keep in mind that this Court, by order dated [May 27, 2019] . . . dismissed the special leave petition filed against the judgment and order of the Telangana High Court in a similar matter, wherein the High Court of Telangana had taken a view contrary to what has been held by the high court in the present case,” the Supreme Court said. “As different high courts of the country have taken divergent views in the matter, we are of the view that the position in law should be clarified by this Court.”
The April 18 decision by the Telangana High Court involved petitions by several individuals who were either summoned or detained by government authorities for their alleged roles in a scheme to claim an estimated INR 2.24 billion (around $32 million) of GST input tax credits (ITCs) on only INR 1,289 of GST invoices.
The nationwide GST, which went into effect in 2017, replaced a patchwork of central and state consumption taxes that many economists said caused cascading tax liabilities and curtailed domestic commerce. “The GST regime is at its nascent stage,” the Telangana High Court said in its ruling. “The law is yet to reach its second anniversary. There were a lot of technical glitches in the matter of furnishing of returns, making ITC claims, etc. Any number of circulars had to be issued by the government of India for removing these technical glitches.”
In upholding the government’s position that pretrial detention is permissible, the Telangana High Court highlighted the vulnerability of the new, but flawed, law to abuse. “If, even before the GST regime is put on [the right track], someone can exploit the law without the actual purchase or sale of goods or hiring or rendering of services, projecting a huge turnover that remained only on paper, giving rise to a claim for input tax credit to the tune of about [INR 2.24 billion], there is nothing wrong in the respondent's thinking that persons involved should be arrested,” the court said.
Other tax fraud cases generally involve the evasion of liability, the court said. “In such cases, the government is only deprived of what is due to them,” it said. “But in fraudulent ITC claims of the nature allegedly made by the petitioners, a huge liability is created for the government. Therefore, the acts complained of against the petitioners constitute a threat to the very implementation of a law within a short duration of its inception.”
Kunal Gohil, a chartered accountant with Nanubhai Desai & Co., said the Supreme Court gave the government four weeks to reply. “The argument will revolve around the powers under the GST law vis-à-vis the Code of Criminal Procedure as to which legislation shall apply over the other, the interplay between the provisions of the two statutes, and their harmonious construction,” Gohil said.
Abhishek A. Rastogi, a partner at Khaitan & Co. who represented the petitioners in the Bombay High Court case, told Tax Notes there might not be any tax “leakage” in some cases. “The moot point remains that there is no leakage of tax in various cases and, hence, whether such provisions can be invoked when the offense has not even been proved,” he said. “The favorable interim relief granted by the Bombay High Court will continue to protect the taxpayers until the matter is finally decided by the three-judge bench of the Supreme Court. However, the [Supreme] Court order means that the problem will continue in case there is a negative order of the High Court.”