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Understanding GST Enforcement: Inspection, Search, and Seizure Procedures

The Goods and Services Tax (GST) framework in India includes stringent provisions for inspection, search, and seizure to combat tax evasion. This article details when and how tax authorities can conduct such operations, outlining the legal basis, officer powers, and procedural steps involved in detaining or seizing goods and documents. It clarifies the differences between inspection, search, and seizure, and explains recent updates to these enforcement mechanisms.

📖 3 min read read🏷️ GST Enforcement

The Goods and Services Tax (GST) framework in India includes rigorous measures to combat tax evasion, featuring specific provisions for inspecting and searching business premises of suspected offenders. Recent legislative amendments have further strengthened these enforcement powers, allowing for broader application of penalties and distinct proceedings for various compliance infractions.

Recent Updates on Seizure Provisions December 21, 2021 Officers are now empowered to issue notices under Section 74 to multiple individuals for tax underpayment or fraudulent Input Tax Credit (ITC) claims. Effective January 1, 2022, officers can confiscate and seize goods or vehicles even after concluding proceedings against all persons liable for penalties.

February 1, 2021 (Union Budget 2021 Outcomes)

  1. For orders concerning the detention and seizure of goods and conveyances, a 25% penalty payment is required to file an appeal application under Section 107 of the CGST Act. The effective date for this change is yet to be announced.
  2. Proceedings related to the seizure and confiscation of goods and conveyances in transit are now distinct from tax recovery under Section 74.
  3. Section 129 has been separated from Section 130. This means that procedures for detention, seizure, and release of goods and conveyances in transit will be independent of penalty levies for confiscation.

GST Inspection Powers

When Do GST Inspections Occur?

A Joint Commissioner, or a higher-ranking officer, may authorize an inspection using Form GST INS-01 if they possess "reasons to believe" that an individual is evading tax by:

  • Concealing any supply transactions.
  • Hiding existing stock.
  • Claiming excessive Input Tax Credit.
  • Violating any GST regulations.
  • A transporter, warehouse owner, or operator is holding goods that have not paid tax or is maintaining records and goods in a manner designed to evade tax.

The inspection can be conducted at the business premises of:

  • The taxable person.
  • The transporter.
  • The owner or operator of a warehouse.

The officer may also inspect any other location deemed necessary.

Understanding ‘Reasons to Believe’

The term 'reasons to believe' implies knowledge of facts that would lead any rational person, given the same information, to arrive at a similar conclusion. According to the Indian Penal Code, 1860, a person has 'reason to believe' something if there is sufficient justification, not merely a subjective opinion. This determination must be based on an intelligent assessment of facts, rather than just an interpretation.

Requirement to Document ‘Reasons to Believe’ Before Inspection/Search/Seizure Order

The GST Act does not mandate recording the 'reasons to believe' in writing. Notably, the Finance Act 2017 retrospectively amended Section 132(1) & (1A) of the Income Tax Act to state that these reasons should not be disclosed to any person, authority, or the Appellate Tribunal.

GST Search Operations

Distinguishing Between Search and Inspection

Search involves efforts to locate concealed items. In a legal context, a search refers to a government official's (e.g., tax or police officer) action to thoroughly examine a place, person, or object to find hidden items or evidence of an offense. Searches must only be conducted under proper legal authority.

Inspection is the act of examining something closely. Legally, it is a less intrusive provision than a search, allowing officers to access any business premises of a taxable person, or those involved in transporting goods, or who own/operate warehouses or godowns.

Who Can Authorize a GST Search and Under What Conditions?

Based on inspection findings or other factors, a Joint Commissioner of SGST/CGST or a higher officer can issue a search order if they have "reasons to believe" that:

  • Goods subject to confiscation are present.
  • Documents, books, or other materials useful for proceedings are hidden.

The officer can then personally, or through an authorized subordinate, conduct the search and seize relevant goods and documents.

GST Seizure Powers

Defining Seizure in GST

While the term 'seizure' is not specifically defined in GST law, it legally refers to the act of taking control of something or someone by force through a legal process, such as seizing evidence. It generally signifies the forceful taking of possession, even against the owner's wishes, though ownership often remains with the original party.

Seizure vs. Detention: Key Differences

Detention occurs when an owner is denied access to goods by a legal order or notice, typically when goods are suspected of being liable for confiscation. During detention, ownership and possession technically remain with the owner.

Seizure involves the department taking actual physical possession of the goods. Similar to detention, ownership generally stays with the original owner. Seizure is only permissible after an inquiry or investigation confirms that the goods are liable for confiscation.

Seizure Procedure

The authorized officer will issue a seizure order using FORM GST INS-02.

Powers of the Officer During a Search

An officer authorized to conduct a search possesses the authority to seal the premises' door. If access is refused, they can forcibly open the door of any premises. They may also break open cupboards or boxes suspected of concealing goods, books, or documents.

What if Seizing Goods is Impractical?

If physical seizure of goods is not feasible, the proper officer will issue a prohibition order in FORM GST INS-03, instructing the owner not to remove the goods without official permission.

Duration of Retention for Books and Documents

The officer will retain books and documents for the necessary duration of examination and inquiry. Other irrelevant books must be returned within 30 days of the notice date. Seized goods can be provisionally released against a bond for their value (FORM GST INS-04) and a bank guarantee for the applicable tax, interest, and penalty. If the owner fails to present the provisionally released goods at the specified time and place, the security will be encashed to cover the outstanding amount.

Actions Following Seizure

  1. The individual whose documents are seized is permitted to make copies only when an officer is present.
  2. If a notice is not issued within six months (which can be extended by another six months) from the date of seizure, the goods must be returned.
  3. The government may publish a list of hazardous or perishable goods that can be disposed of immediately upon seizure.
  4. The officer is required to properly list all seized goods.

Applicability of the Code of Criminal Procedure

The provisions of the Code of Criminal Procedure are applicable to cases involving search and seizure under GST.

Alternative Inspection Methods

The Commissioner or an authorized officer can purchase goods and/or services from a taxable person. This is done to verify the issuance of tax invoices, ensure their accuracy, and confirm that the GST amount is clearly displayed. Upon returning the goods, the taxable person must issue a refund, and the original sales invoice will be canceled.

Arrest under GST

If the Commissioner has grounds to believe that a person has committed an offense under Section 132, that individual may face arrest under GST. Further details are available regarding arrest under GST. Additionally, GST includes provisions for the interception and inspection of goods in transit.

Frequently Asked Questions

What are the primary objectives behind GST inspection, search, and seizure provisions?
The main objectives are to detect and prevent tax evasion, ensure compliance with GST laws, recover unpaid taxes, and maintain the integrity of the tax system by holding offenders accountable.
How does the concept of 'reasons to believe' guide GST enforcement officers?
'Reasons to believe' serves as a legal threshold, requiring officers to have sufficient factual grounds, not mere suspicion or opinion, to justify initiating inspection, search, or seizure actions against a taxpayer.
Can a taxpayer challenge a GST seizure order, and what is the process?
Yes, a taxpayer can challenge a seizure order. They may seek provisional release of goods by furnishing a bond and security, or appeal the order to higher authorities, often requiring a percentage of the penalty to be paid upfront for appeals.
What are a taxpayer's rights during a GST inspection or search?
During an inspection or search, taxpayers generally have the right to be present, to have witnesses, to receive a copy of the seizure memo, and to ensure that only relevant documents and goods are seized. They can also make copies of seized documents in the presence of an officer.
What penalties can be imposed for non-compliance during GST enforcement actions?
Non-compliance can lead to various penalties, including financial fines, interest on unpaid taxes, and potentially confiscation of goods or vehicles. The specific penalty depends on the nature and severity of the offense, such as fraudulent ITC claims or suppression of transactions.