Nearly a decade since its introduction in July 2017, the Goods and Services Tax (GST) framework is poised for significant reform, particularly concerning the elimination of arrest powers.
In an effort to enhance investor confidence and address worries regarding the potential overreach of tax authorities, the GST Council is scheduled to discuss the proposal for decriminalizing certain offences associated with the indirect tax system during its meeting on October 7, as reported by sources familiar with the matter.
Over the past eight to nine months, discussions between the central and state governments have taken place, involving high-ranking officials, to achieve a consensus on the removal of arrest provisions under the GST framework. These provisions have been viewed as a considerable barrier for traders and businesses. Recent incidents involving the arrest of senior officials under GST regulations have raised concerns among industry representatives, who have labeled these actions as excessive.
For cases involving intentional fraud and deception under the GST regime, prosecutions will proceed under the country’s criminal code, the Bharatiya Nyaya Sanhita, according to insider information.
“Consultations have been ongoing for the past eight to nine months, with business feedback regarding arrests being a key consideration in this discussion. The GST Council will address this issue, and a final decision will be made thereafter, leading to legislative changes to facilitate the removal of arrest provisions under GST laws,” a source indicated.
Since the GST’s implementation in July 2017, authorities have faced numerous instances of fraud, often characterized by similar tactics. These cases generally involve the use of fake identities or shell accounts to carry out fraudulent GST transactions in order to claim input tax credits, or the issuance of false invoices without actual goods being supplied. Additionally, some suppliers have been known to undervalue their products or provide taxable goods and services without paying the required GST to both central and state governments.
Between 2021 and 2024, 887 arrests were made by central GST authorities in connection with 72,393 GST-related offences, with additional arrests likely from state authorities.
The Central GST Act outlines penalties under Section 122 for non-compliance, as well as interest under Section 50 and tax recovery measures. However, deliberate efforts to evade taxes can result in arrest and prosecution under the criminal provisions of the CGST Act.
According to Section 69 of the CGST Act, arrest powers are granted following the Commissioner’s approval. Sub-section (1) states that if the Commissioner has “reasons to believe” that a person has committed an offence related to fake invoices or fraudulent input tax credit claims, they may authorize a central tax officer to arrest that individual. Such “reasons to believe” must be substantiated by credible evidence, and mere suspicion is insufficient; all reasoning must be documented in writing.
Following the GST Council’s discussion during its upcoming 57th meeting, it is anticipated that the Centre will introduce an amendment during the Winter Session of Parliament to facilitate the removal of arrest powers.
Industry experts have noted that arrests have frequently been used as a tool for harassment, particularly within the services sector, including banking and insurance. This has often led to businesses being pressured to pay penalties to avoid lengthy legal disputes. An official remarked that eliminating arrest powers would foster a more taxpayer-friendly environment by alleviating fears of harassment.
The concerns surrounding the arrest powers under GST laws are longstanding, having been raised by various states during early GST Council meetings prior to the 2017 rollout of the tax system.
During the fifth GST Council meeting in December 2016, the Additional Chief Secretary of Maharashtra commented that the powers of arrest and confiscation were inconsistent with the principles of facilitating business. A minister from West Bengal pointed out that under the VAT law, there was no provision for arrest, and FIRs could only be lodged with the police, suggesting it may not be wise to grant such powers to tax authorities.
The Commissioner of the GST Council noted that the arrest provisions under GST were highly restricted and could only be exercised in cases of substantial duty evasion, specifically when the evasion amount exceeded Rs 2 crore or involved severe offences such as supplying goods without invoices or collecting taxes without remitting them to the government.
A document from the Central Board of Indirect Taxes and Customs (CBIC) stated that provisions allowing for arrests are intended to address situations caused by certain unscrupulous tax evaders. While these measures may seem harsh to some, they are deemed necessary for effective tax administration and serve as a deterrent to maintain discipline. The GST law includes safeguards to ensure that arrest powers are used only with the Commissioner’s authorization and only in cases involving specified offences exceeding a certain tax threshold.
The government has also been moving towards decriminalizing offences related to direct taxes. In September, the Central Board of Direct Taxes (CBDT) removed provisions for arrest and detention from tax recovery rules with retroactive effect from April 1, 2026, preventing tax officials from making arrests in cases of tax defaults.
