SC introduces safeguards against arrest under GST and Customs Act

The Supreme Court on Thursday introduced necessary safeguards against coercive measures, including arrests, under the Central Goods and Services Tax (CGST) Act and the Customs Act, adding that authorities require to establish “reasons to believe” before initiating proceedings.

The ruling by a three-judge bench, led by Chief Justice of India Sanjiv Khanna, affirmed that individuals have the right to approach courts for pre-arrest bail, even in cases where no first information report (FIR) has been registered and that provisions of criminal procedure code would be applicable in cases under the GST and Custom laws.

The court also disapproved of enforcement officers using “threat and coercion” during search and seizure operations under the GST framework, holding that such officers should be made to face departmental proceedings.

Delivering the verdict, the bench, also comprising justices MM Sundresh and Bela M Trivedi, made several key determinations, including an authoritative pronouncement that customs officers do not have the status of police officers and, therefore, cannot exercise unrestricted policing powers.

The court ruled that safeguards applicable to arrests under other statutes, including the Prevention of Money Laundering Act (PMLA), will now apply in cases of arrests under GST and Customs laws. This means that reasons to believe that an offence has been committed must be clearly recorded before taking coercive action.

Acknowledging concerns that “threats and coercion” may be used for recoveries under the GST Act, the Supreme Court unequivocally stated that such practices are impermissible, directing that officers engaging in them be dealt with departmentally.

The judgment follows extensive scrutiny by the Supreme Court on the scope of arrest powers granted under the central and state GST laws and Customs Act. The petitioners had challenged provisions empowering tax authorities to arrest individuals for alleged tax evasion and fraud, arguing that such powers exceed the legislative intent and violate constitutional protections under Articles 20(3) (right against self-incrimination) and 21 (liberty).

Additionally, the proceedings before the Directorate of Revenue Intelligence (DRI) under the Customs Act were challenged on the grounds that they do not comply with the Criminal Procedure Code (CrPC) and previous Supreme Court rulings that regulatory statutes cannot confer policing powers on enforcement officers. The petitioners argued that the Customs Act’s enforcement provisions failed to uphold principles of natural justice and due process.

The government had defended the provisions, arguing that arrests under the CGST Act were based on an officer’s assessment of “more than suspicion but less than grave suspicion.” However, the court rejected any justification for arbitrary arrests, emphasising that the right to arrest cannot be equated with the framing of charges and must be exercised sparingly.

The Supreme Court’s verdict is expected to bring significant changes to the enforcement of GST and Customs laws. By reinforcing judicial oversight and safeguards, the ruling aims to prevent harassment of businesses and traders while ensuring that tax enforcement remains within constitutional and procedural limits.

The court did not examine Section 135 of the GST Act, which deals with presumptions of culpable mental state. It has, however, referred pending matters back to the regular benches for further deliberation, with the cases listed for hearing on March 15.

The CGST Act contains multiple provisions governing tax evasion and fraudulent activities, including Section 67(1) (empowering inspection, search, and seizure), Section 69 (granting authority for arrest), Section 70(1) (pertaining to summoning individuals for testimony and evidence, Section 132 (defining punishments, including imprisonment), Section 135 (addressing presumptions of culpable mental state) and Section 170 (defining offences by companies).