Inspection, Search, and Seizure Under GST

Introduction

The provisions of inspection, search, and seizure are established to protect the interests of the revenue and authentic taxpayers. These provisions are seen as a last resort under any law. The Goods and Service Tax Act covers the powers concerning inspection, search, and seizure in sections 67 to 72, read with rules 139 to 141 of the CGST Act, 2017. This inspection, search, and seizure can be done by competent officers authorized by the legislature (i.e. equivalent to the rank of Joint Commissioner or higher in GST Law), and these provisions are only acted upon when the proper officer has the “reason to believe” that exceptional circumstances exist.

Before diving into the main subject, it is essential to comprehend the fundamental terms.

Definitions

Reason to Believe

Although the term “reason to believe” is not defined by law, it refers to having factual knowledge of some misconduct that would allow a reasonable person to believe that the taxpayer is engaged in fraud.

Identification of Grounds for “Reason to Believe”

• It is necessary for an authority to possess some information before it can form an opinion for “reason to believe”.
• Information must be material based on which opinion is formed.
• The court should rely on rational arguments while forming an opinion.

Before authorizing an inspection, search, or seizure, do you think proper officers are required to list down the justification for their reasons to believe in writing?

Since there is no reference to keeping records of “reasons to believe”, Sections 132(1) and (1A) of the Income Tax Act have been amended retrospectively by the Finance Act,2017 to clarify that the proper officer is not required to disclose a reason for believing to someone, authority or the Appellate Tribunal.

Place of Business

The term “place of business” is defined in Section 2(85) of the CGST Act, 2017 as any location where a taxpayer carries out business activities, keeps accounting records, or does business through an agent. This also includes the homes of taxpayers or other key managerial-level employees where relevant books are stored.

Inspection

As the term suggests, an inspection under the CGST Act,2017 allows officers to enter any business premise owned or operated by a taxable person. This includes persons involved in the transportation of goods or those who own or operate a warehouse or godown.

Under Section 67(1), officers are authorized to conduct an inspection at the business premises of the taxpayer.

Situations when Inspection may be conducted

A joint commissioner or an officer of a higher level may conduct an inspection in accordance with the CGST Act if they have good reason to suspect that the taxpayer has engaged in one of the following actions to escape paying taxes:

• Any concealed transaction of supply.
• Maintenance of concealed inventories
• Availing excessive Input Tax Credit (ITC).
• Contravene the provisions of GST.
• Maintained false books of accounts to evade taxes

•       Any transporter or warehouse owner involved in concealing products without paying the
  applicable GST.

Places and People who can be inspected under GST

According to provisions of the CGST Act, 2017, a proper officer can conduct an inspection of any place of business related to the following people:

•  Taxpayer
•  Warehouse owner
•  Transporter

The power to inspect is limited to inspection of the place of business.

Initiation of Inspection

According to section 67(1) of the CGST Act, 2017, all authorizations for inspection must be given in writing and in the prescribed format. The procedural aspects of inspection, search, and seizure are governed by Rule 139 of the CGST Rules. As per Rule 139 of the CGST Rules, if a proper officer (not below the rank of Joint Commissioner) has reason to believe that an inspection, search, or seizure needs to be carried out at a place of business or any other location, he shall issue an authorization in Form GST INS-01 authorizing a subordinate officer to carry out the required action.

Search

A search, in legal terms, is an inspection undertaken by a government official to find anything hidden or to uncover evidence of a crime. Only a legal authority is allowed to carry out a search under the CGST Act.

When and by whom search can be ordered under GST?

According to section 67(2) and section 67(3) of the CGST Act, the Joint Commissioner or an official of higher rank may order a search in response to an inspection or for any other reason if he has reasons to believe:

• Goods are subject to confiscation 
• Any concealed documents, books, or other items that will be useful during proceedings under GST law, are secreted in any place.

He has the authority to search and seize the goods and papers either on his own or through an authorized official.

Powers of Officers Authorized to Search

 

The GST Act empowers the proper officer to take the following actions in case of a search:

• The Officer may seal the premises if necessary
• The Officer may break open any door of the premises if access is denied.
• The Officer may break open any cupboard or box in which goods, books, documents, etc. 

     are believed to be concealed.

Inspection v/s Search

Inspection and search are both provisions under the Goods and Services Tax (GST) that allow authorities to enter and examine a person’s premises and possessions. However, there are some key distinctions between the two.

Inspection is a milder provision in comparison to search, and seizure, and simply allows authorities to enter any place of business owned or operated by a taxable person, or anyone involved in the transportation or storage of goods. In contrast, a search is an inspection undertaken specifically to uncover evidence of a crime, and can only be conducted by a government official.

Searches also tend to be more disruptive than inspections, as they often involve the seizure of property, whereas an inspection simply entails a visual examination of the premises.

Seizure

The term “seizure” is not defined in the GST, but in legal terms, it refers to the act of taking control of something or someone through the legal process by force. This generally implies taking possession against the owner’s will.

It’s important to note that seizure is different from the term “detention”. Detention is a legal order or notice that prevents the owner from accessing seized goods. However, the owner of seized goods still holds ownership and possession of them. Seizure is when the department actually takes possession of the goods, even though ownership still lies with the owner of the goods.

Procedure

 

• According to Section 67(2) read with rule 139 of the CGST Act, when goods, documents, books, or other items are liable for seizure, the proper officer or an authorized officer shall issue an order in Form GST INS-02. The owner or custodian of the seized property may be given custody of the goods for preservation by the proper officer or an authorized officer; however, the goods may not be removed, parted with, or handled in any other way without the prior consent of that official.
• When it’s impractical to seize goods, the proper officer or authorized officer may provide the owner or custodian of the goods an order of prohibition in Form GST INS-03 prohibiting removal, disposal, or another handling of the goods without the officer’s prior consent.
• The officer seizing the goods, documents, books, or things must create an inventory of those items. This inventory should include a description, the quantity or unit, the make, mark, or model (as appropriate), and must be signed by the owner or custodian of the seized goods/documents/books/things.

How long do books and documents remain with the officer?

 

The proper officer can hold the books and documents for as long as it takes to examine and investigate them. Within 30 days after the notice date, additional books that are unrelated to the issue will be returned. Provisional release of the confiscated items is possible in exchange for a bond equal to the value of the goods in Form GST INS-04. Additionally, the owner is required to provide a bank guarantee as security for the amount owed (applicable tax, interest, and penalty payable). The security will be paid and used against the amount payable if the owner fails to provide the conditionally released items at the designated date and location.

 

Post Seizure

 

After a seizure under GST occurs, then:

• The individual whose documents are seized is only allowed to make copies of them in the presence of an officer.
• Seized goods will be returned if notice for seizure is not issued within six months (extendable by an additional six months) of the seizure.
• The Government shall issue a list of hazardous or perishable goods that can be disposed of as soon as they are seized.
• All seized will be carefully listed by the officer.