Constitutional Validity of Arrest Provisions Under Customs Law & GST Law

The power of arrest by the authorised officers under the financial laws has been a widely discussed issue. Recently, in the case of Radhika Agarwal v. Union of India,^[i] the writ petitioners challenged the constitutional validity of arrest provisions under Customs Act, 1962 (“Customs Act”) and the Central Goods and Services Act, 2017 (“GST Act”). The Supreme Court delved into this issue and rejected the challenge to the constitutional validity and upheld the right of the authorized officers to arrest under the Customs Act and the GST Act, however, with various guidelines.

Facts

The legal debate in relation to the power of arrest under the Customs Act and GST Act stemmed from the decision of the Supreme Court (“Court”) in the case of Om Prakash & Anr. v. Union of India & Anr.^[ii] In this case, the Court held that the offence under the Customs Act and Central Excise Act, 1944 (“Excise Act”) were non-cognizable and therefore even if the officers had the power to arrest, they could do so only after obtaining a warrant from the Magistrate. The offence bearing punishment less than 3 years were bailable under both the Customs and Excise Act. 

The reasoning in Om Prakash was based on the principle that the customs officers and excise officers, though conferred the power of arrest under the respective statutes were not vested with powers beyond that of a police officer in charge of the police station. This is because the offences under these statutes have been categorized as non-cognizable. In contrast, Section 132 of the GST Act identifies certain cognizable offences where amounts involved exceed Rs. 5 crores.

The ratio of the Om Prakash case has been questioned on various grounds. Consequently, this writ petition has been filed before the Court challenging the validity of arrest provisions under the Customs Act and GST Act.

Ruling of the Supreme Court 

Customs officers must satisfy the higher threshold of ‘reason to believe’ before arrest 

The petitioners have argued before the Court that that customs officers are police officers. However, the Court was of the view that this argument is unfounded and flaws and cited several cases, including State of Punjab v. Barkat Ram^[iii] and Tofan Singh v. State of Tamil Nadu,^[iv] which affirmed that custom officers are not police officers. The Court also observed that while customs officers do not conduct investigations like police under Chapter XII of CrPC, they possess similar powers such as investigation, arrest, seizure, and interrogation under the Customs Act. Accordingly, the custom officers must provide grounds for arrest and maintain detailed records of their actions.

Further, the Court noted a clear difference between the standards for arrest under the CrPC and the Customs Act. Under Section 41 of the CrPC, a police officer can arrest without a warrant if there is a ‘reasonable complaint’, ‘credible information’, or ‘reasonable suspicion’ that a person has committed a cognizable offence. However, Section 104(1) of the Customs Act requires a higher standard. It allows a customs officer to arrest only if they have ‘reasons to believe’ that a person has committed an offence, which is a more stringent requirement than the ‘mere suspicion’ standard under Section 41 of the CrPC. Accordingly, the Court held that customs officers must satisfy a higher standard of ‘reason to believe’ before making the arrest. 

Arrest provisions under the GST Act 

The Court observed that Sections 4 and 5 of the CrPC apply to Special Laws unless specifically excluded. It was further highlighted that Section 69 of the GST Act, which deals with the power of arrest, includes CrPC provisions when the arrested person is brought before a Magistrate. The Court further clarified that the procedures for investigation, inquiry, and trial under the GST Act must follow the provisions of the CrPC unless stated otherwise. The judgment also stressed that officers must keep detailed records of arrests, including the identity of the informant, the nature of the offense, and the reasons for the arrest. It was emphasized that arrests should not be made routinely but only when necessary for a proper investigation.

The Court referred to the Makemytrip (India) Pvt. Ltd.^[v] case, wherein it was held that arrests under the GST Act should not be made arbitrarily or merely for the purpose of investigation. It was clarified that an assessment order is not always required before an arrest, but there must be a clear, evidence-based ‘reason to believe’ that an offense under Section 132 of the GST Act has occurred. The Court also stressed that the ‘benefit of doubt’ principle should apply, and arrests must be supported by substantial evidence, even though the Special Laws do not specifically require this.

With reference to the use of arrest threats to collect taxes, the Court took into account the concerns in relation to taxpayers being allegedly forced to pay taxes under the threat of arrest. After reviewing the data presented by the Revenue, the Court found merit in the petitioner’s argument that taxpayers are being coerced into making payments to avoid arrest. The Court noted that the provisions allowing voluntary tax payments in the Special Laws do not give authorities the right to force taxpayers to pay by threatening arrest.

The Court also referred to Circular F.No.GST/INV/Instructions/2022-23, which clarifies that tax payments during searches or investigations should be voluntary. The Court ruled that arrest should not be used as a tool for forced tax recovery and affirmed that if such recoveries are made under threat of arrest, the taxpayer can approach the Court for a refund of the amount paid.

Power to grant anticipatory bail 

The Court referred to the ruling in the case of Shri Gurbaksh Singh Sibbia v. State of Punjab,^[vi] wherein it was ruled that the registration of a case and the entries in the case diary are not mandatory when considering an application for anticipatory bail under Sections 438 and 439 of the Code. Anticipatory bail can be granted if there is a reasonable belief that the person may be arrested for a non-bailable offence.

The Court further observed that the power to grant anticipatory bail arises when there is a genuine apprehension of arrest. This power, which is vested in the courts under CrPC, protects the right to life and liberty under Article 21 of the Constitution, ensuring individuals are not arbitrarily arrested. In Gurbaksh Singh Sibbia, the Court held that when a person fears arrest and seeks protection, the application should be considered by the court, provided the facts are specific and not vague. The court will assess the seriousness and gravity of the apprehension. If the application meets the criteria, anticipatory bail may be granted, and it can include certain conditions.

It is not necessary for an FIR to be filed before seeking anticipatory bail, as long as there are clear facts and a reasonable basis for fearing arrest. This principle was reaffirmed by a Constitution Bench of Five Judges in Sushila Aggarwal v. State (NCT of Delhi).^[vii] Accordingly, the Court held that anticipatory bail applications will be maintainable with respect to offences under the GST Act.

Legislative Competence

Additionally, the Court also rejected the constitutional challenge to the legislative Competence of the Parliament to enact laws in relation to tax evasion. It was held that Article 246A is a special provision that not only defines the power to tax but is also source of power indicating the scope and extent of legislative power to enact laws in relation to GST. The Court observed that the Parliament, under Article 246A has the power to make laws regarding GST and, as a necessary corollary, enact provisions against tax evasion. Applying the doctrine of pith and substance, it was ruled that Article 246A of the Constitution is a comprehensive provision granting comprehensive legislative power to the Parliament regarding tax evasion under GST.

Conclusion

This ruling of the Supreme Court will play a pivotal role in ascertaining the scope of power of arrest under the Customs Act and GST Law, reinforcing constitutional safeguards against arbitrary detention. It emphasizes that enforcement authorities must exercise arrest powers with caution, due process, and strict adherence to statutory procedures, rejecting the notion of unchecked powers. This judgment is a significant step toward balancing enforcement powers with individual liberty, ensuring that arrests under economic laws are an exception rather than a rule.

Furthermore, the use of unwarranted arrests contradicts the policy of the government of promoting ease of doing business in India. The issue that will arise now is the effective implementation of judicial principles at the ground level. Despite various judgments and circulars, arrests are still sometimes misused as a tool for tax recovery, which calls for a reassessment of enforcement practices to align with the true spirit of the law.

While in an ideal situation the above-referred circular and this judgment would be binding on the recovery officers seeking to make an arrest and ensure that such powers are not misused to coerce any recovery. However, in our experience the provisions of arrest still continue to be blatantly misused, and various taxpayers have been forced to deposit amounts and declare such deposits as voluntary payments. In order to counteract such coercion, the taxpayers should ensure to immediately follow-up such declaration with a statement withdrawing the declaration and clearly stating that such deposits were involuntarily made.

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause. 

^[i] W.P. (Crl.) No. 336 of 2018. 

^[ii] (2011) 14 SCC 1.

^[iii] (1962) 3 SCR 338.  

^[iv] (2021) 4 SCC 1. 

^[v] (2016) SCC OnLine Del 4951. 

^[vi] (1980) 2 SCC 565.

^[vii] (2020) 5 SCC 1.