GST Act Provisions on Offences and Arrests

The GST law has two kinds of punishment for people who break it. The first kind is money punishment: tax demand, interest and penalty, decided by tax officers. The second kind is criminal punishment: jail, decided only by a criminal court after a trial, which is called prosecution. Jail is kept for the most serious frauds, such as fake invoices and large tax evasion. For such frauds, the law also lets senior tax officers arrest a person even before the trial.

Why does the law have jail terms at all?

Most GST cases are honest mistakes or disputes about how much tax is due, and money penalties are enough for them. But some people run deliberate frauds. A common example is a "fake invoice racket": a shell firm issues bills for goods it never supplied, so that another firm can claim tax credit and pay less tax. This is like stealing directly from the government's treasury. Jail terms are meant to scare away such planned frauds, which money penalties alone may not stop.

Where do these rules come from?

GST was introduced through the 101st Constitutional Amendment Act, 2016, and came into force on 1 July 2017. The detailed law for the Centre is the Central Goods and Services Tax (CGST) Act, 2017. Each state has its own State GST Act with almost the same wording. Offences and penalties are in Chapter XIX of the CGST Act (Sections 122 to 138). The power to arrest is in Section 69, in the chapter on inspection, search and seizure.

Which acts are crimes? (Section 132(1)) The law lists specific fraud actions. The most important are:

• (a) Supplying goods or services without issuing an invoice, with the intention of evading tax
• (b) Issuing an invoice without any actual supply (a fake invoice) to help someone wrongly claim input tax credit or a refund
• (c) Claiming input tax credit using such fake invoices, or without any invoice at all
• (d) Collecting GST from customers but not paying it to the government for more than three months
• Others: evading tax or taking a refund by fraud, falsifying financial records, and knowingly dealing in goods liable to be confiscated

How big must the fraud be for jail? (the money slabs)

The jail term depends on how much tax was evaded, or how much credit or refund was wrongly taken:

• More than ₹5 crore: up to 5 years in jail, and a fine
• More than ₹2 crore, up to ₹5 crore: up to 3 years in jail, and a fine
• More than ₹1 crore, up to ₹2 crore (only for fake invoices, clause (b)): up to 1 year in jail, and a fine
• Falsifying records (clause (f)): up to 6 months in jail, or a fine, or both

A person convicted a second time can get up to 5 years and a fine (Section 132(2)). For the first three slabs, the law also sets a minimum of six months' jail, unless the court records special reasons for giving less (Section 132(3)). Notice the word "and" in this list. For most slabs, the court must give both jail and a fine. This is the "limited judicial discretion" that reformers want to change.

Cognizable or not? Bailable or not?

These two ideas decide how hard an arrest is on the accused person.

• Offences in clauses (a) to (d) involving more than ₹5 crore are cognizable and non-bailable (Section 132(5)).
• All other GST offences are non-cognizable and bailable (Section 132(4)). A person arrested for these must be released on bail, usually by a Deputy or Assistant Commissioner.

How does a GST arrest work? (Section 69)

1. The Commissioner must have "reasons to believe" that a person committed an offence under clauses (a) to (d) that falls in the ₹2 crore-plus slabs, or is a repeat offence.
2. The Commissioner gives a written order authorising an officer to arrest.
3. The officer must tell the person the grounds of arrest. Since January 2025, CBIC (Central Board of Indirect Taxes and Customs) instructions require these grounds to be given in writing, with an acknowledgement.
4. In a cognizable case, the person must be produced before a Magistrate within 24 hours.

So the arrest power is narrow. It covers only the biggest and most deliberate frauds, not ordinary tax disputes.

Other key safeguards

• Section 134: No court can take up a GST offence without the previous sanction (permission) of the Commissioner. Only a Magistrate of the First Class or a higher court can try it.
• Section 135: The court will presume a guilty mind (intention, knowledge) in the accused. The accused can prove they had no such intention. This shifts the burden of proof onto the accused.
• Section 138 (compounding): Most offences can be settled by paying a sum instead of facing trial. But compounding is not allowed for fake invoicing (clause (b)), for repeat offenders, or where the act is also a crime under another law.
• CBIC's Instruction No. 02/2022-23 (17 August 2022) says arrest must not be routine. It should be used only when necessary, for example when the person may tamper with evidence, influence witnesses or run away.

How have these rules changed? (decriminalisation)

In 2017, the prosecution threshold for most offences was ₹1 crore. On the recommendation of the 48th GST Council meeting (December 2022), the Finance Act, 2023 made these changes, effective from 1 October 2023:

• The minimum amount for prosecution rose from ₹1 crore to ₹2 crore, except for fake invoicing, which stayed at ₹1 crore.
• Three offences were removed from the crime list: obstructing an officer, tampering with evidence, and failing to supply information.
• The compounding amount was cut from 50%-150% of the tax involved to 25%-100%.

This fits a wider government push to decriminalise minor business offences, seen also in the Jan Vishwas (Amendment of Provisions) Act, 2023, which changed 183 provisions across 42 central laws.

What have the courts said?

In Radhika Agarwal v. Union of India (decided 27 February 2025), a three-judge bench of the Supreme Court upheld the arrest powers under Section 69 of the CGST Act and Section 104 of the Customs Act. The Court held:

• A final tax demand is not required before an arrest, but "reasons to believe" is a high bar. It must rest on solid material, not suspicion.
• The safeguards of the criminal procedure law (now the Bharatiya Nagarik Suraksha Sanhita, 2023) apply to GST arrests too, such as the right to know grounds of arrest and to a lawyer.
• Officers must not use the threat of arrest to force people to pay tax. Any such payment must be voluntary.

Commonly confused concepts

• Penalty vs prosecution: A penalty is a money punishment imposed by a tax officer (Section 122 onwards). Prosecution is a criminal case in court that can lead to jail (Section 132). A person can face both.
• Arrest vs conviction: Arrest happens during investigation; it does not mean the person is guilty. Conviction comes only after a court trial.
• Cognizable vs non-cognizable: In a cognizable offence, police (or authorised officers) can arrest without a warrant from a court. In a non-cognizable offence, they generally cannot.
• Bailable vs non-bailable: In a bailable offence, bail is a right. In a non-bailable offence, bail is up to the court.
• Compounding vs settlement of tax: Compounding ends the criminal case by paying a fee. It does not remove the duty to pay the tax, interest and penalty.

Issues, criticism and the way forward

• Fear and harassment: Businesses and tax experts say the threat of arrest is sometimes used to push people to pay disputed amounts. The Supreme Court in 2025 warned against this.
• Old thresholds: The ₹1 crore to ₹5 crore slabs were fixed in 2017. With inflation and growth in business size, the same rupee amount now catches smaller firms. Raising thresholds keeps jail focused on big frauds.
• Fake invoice rackets are real: Tax officials point out that shell-company frauds cause large revenue losses. They argue that arrest is sometimes the only way to stop the main operators before they destroy evidence or vanish.
• Technology as a substitute: Better systems, such as matching of invoices in returns, e-invoicing and e-way bills, can catch fake credits early. Supporters of removing arrest say this reduces the need for harsh powers.
• Way forward suggested by experts: keep jail for deliberate, large frauds; give judges more choice between jail and fines; review money thresholds regularly; and follow clear arrest guidelines with written reasons and oversight.

Concepts to Know

• Input Tax Credit (ITC): The GST a business has already paid on its purchases, which it can subtract from the GST it owes on its sales. Fake invoices are used to claim ITC that was never really paid.
• Prosecution: Starting a criminal case against a person in a court, which can end in jail or a fine.
• Cognizable offence: A serious offence where the person can be arrested without a court warrant.
• Bail: Temporary release of an arrested person while the case goes on, usually with conditions.
• Compounding: Settling a criminal case by paying a set amount, so the person is not tried in court.
• Magistrate: A judge in the lower criminal courts who checks arrests and tries smaller criminal cases.
• Decriminalisation: Changing the law so that an act is punished with money penalties instead of jail.
• CBIC (Central Board of Indirect Taxes and Customs): The body under the Finance Ministry that runs the central GST and customs systems.