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The goods and services tax (GST) acts of 2017 unified and improved the indirect tax regime in India. However, an overzealous tax administration has been using the legislation’s arrest provisions in an oppressive way, causing much anxiety.

In the recent case of , the Supreme Court examined the balance between tax officers enforcing the law effectively and abusing their powers. The court considered three issues: the basis of the powers of arrest enjoyed by customs and GST officers; the rights of the person arrested; and the standards in judicial review of seemingly arbitrary arrests.

Taxpayers challenged the constitutional validity of sections 69 and 70 of the Central Goods and Services Tax Act, 2017. Section 69 allows GST officers to arrest those suspected of offences under section 132(1); section 70 empowers them to summon individuals for inquiries. The taxpayers argued that such powers transcended taxation matters and infringed their fundamental rights. Dismissing the challenges, the court held that GST and customs powers of arrest were consonant with those constitutional rights.

Article 246A, inserted into the constitution in 2016, allows parliament to enact GST laws. By implication, it can pass measures against tax evasion. The legislature’s competence to make laws must be read in the widest possible sense. The power to levy and collect GST under article 246A includes incidental and ancillary powers to summon, arrest and prosecute.

The taxpayers also alleged widespread misuse of these provisions and arbitrary detentions. The court’s Om Prakash decision required a magistrate’s order before arrest and held customs offences to be bailable. The customs legislation was amended to implement the decision, but allowed arrest without a warrant in specific cases. The unchecked exercise of the power to arrest without a warrant led to arbitrariness and coercion.

In Radhika Agarwal, the court recognised the possible arbitrary exercise of power, holding there must be strict compliance with existing safeguards. These include maintaining records and allowing the arrested person a lawyer during interrogation. However, the court followed earlier interpretations of “reason to believe” and “grounds of arrest”. In , the Supreme Court held that the validity of “reasons to believe” went to the basis of the power of arrest and must have a rational connection with material available to the officers at the time of arrest. Approving that decision, the court in the present case adopted the ruling. It also held that written grounds of arrest must be provided, enabling the detainee to challenge the arrest and apply to a court for bail. However, tax officers will have reason to believe if they have sufficient cause not to believe otherwise. The court considered these tests to be more stringent than the “mere suspicion” threshold under the Code of Criminal Procedure and cannot be satisfied in a casual manner.

Taxpayers have long been coerced by threats of arrest, whether or not there has been tax assessments or an adjudication. In , Delhi High Court held that arrests must be based on credible evidence supported by a formal assessment. However, Radhika Agarwal has resiled from this decision, holding that finalising the amount of tax due is not necessary before arresting a taxpayer. This will allow customs and GST officers to make arrests for reasons such as “sufficient material” and “adequate grounds”, raising the spectre of abuse of power and illegal arrest.

Although the decision appears to require strict adherence to arrest safeguards, it actually diminishes their effect. Sufficiency of the material or the correctness of the facts on which the arrest is based is not a matter for the courts. The accused must now satisfy the tests of manifest arbitrariness or a gross violation of or non-compliance with statutory safeguards, the rules for which are unclear.

The court did hold that anticipatory bail can now be filed when an arrest is foreseen. However, this will not negate the verdict’s unintended result. Businesses must be more vigilant in the face of overzealous enforcement. The tax administration must issue guidelines to prevent arbitrary arrests in the guise of tax investigations.

Harsh Shukla is a managing associate, Lopamudra Mahapatra and Pratha Khanna are associates at BMR Legal