Indirect tax laws: A civil statute or Criminal statute and need for amendments in sections dealing with criminal liability.

[Mr. Pramod Kumar Rai]

1. The provisions creating criminal liability in Central Excise Act 1944, Customs Act 1962 and Finance Act 1994(Service Tax Act) are by and large pari materia. For the sake of simplicity in this article provisions contained in Central Excise Act 1944 alone are referred. Though tax laws are called civil laws because they fasten civil liabilities, but the way criminal liability portion in indirect tax statutes of India are drafted, they can be very well treated as a criminal statute. In the taxation laws of India irrespective of the quantum of tax evasion, law prescribes a criminal liability. It does not give a threshold of tax evasion below which liabilities will be purely civil. Technically for even a one paisa tax evasion civil as well as criminal prosecution can be launched.  This criminal part of tax statute is major source of corruption and is abused left and right. In every tax investigation, the threat of arrest and criminal prosecution is used. Tax payers are being treated as criminals. This situation is creating mistrust between government and tax payer and is not good for healthy growth of economy.

2. Further the provisions related with criminal liability and prosecution in Central Excise Act 1944 as well as other indirect tax laws has gone major change on account of amendments done by Finance Act 2013 w.e.f. 10.5.2013.

3. Prior to Finance act 2013 all the offences under central Excise Act as well as Customs Act were non cognizable and bailable. However by Finance Act 2013 a major chunk of the offences are made cognizable and non bailable.

Position Prior to 10.5.2013

4. Under Section 9 of Central Excise Act 1944, during this period, the punishment prescribed was as under.
   1. Up to seven years of imprisonments along with fine in case duty involved is more than rupees thirty lakhs
   2. Any other case, with imprisonment for a term which may extend to three years or with fine or with both. [So technically there can be criminal prosecution and imprisonment for every penny of tax evasion also. Since every penny of tax evasion attracts criminal liability, it will not be a exaggeration to say that CEA 1944 is a criminal legislation as well]
   3. If any person convicted of an offence under this section is again convicted of an offence under this section, then, he shall be punishable for the second and for every subsequent offence with imprisonment for a term which may extend to seven years and with fine.

5. Further as per the Hon’ble Supreme Court decision dated 30.9.2011 in the case of Om Prakash & Anr Vs. Union of India & Anr 2011 (9) TMI 65 - SUPREME COURT OF INDIA, offences under Central Excise Act 1944 were held to be non cognizable and bailable meaning thereby
   1. That criminal investigation in a tax evasion case needs to be done only after taking approval of criminal trial court.
   2. Arrest if any during investigation is to be done only after taking approval of criminal trial court.
   3. The person so arrested shall be released on bail as a matter of right provided they execute bail bond and provide security.

6. As per Section 9 of Central Excise Act 1944, during this period, the tax evaders can be convicted and sentenced to imprisonments for a period up to seven years. The apex court decision touches the procedural aspects of criminal investigation and does not change the quantum of punishment prescribed.

Position after 10.5.2013

7. Under amended Section 9 of Central Excise Act 1944, now, the punishment prescribed is as under.
   1. Up to seven years of imprisonments along with fine in case duty involved is more than rupees fifty lakhs
   2. Any other case, with imprisonment for a term which may extend to three years or with fine or with both. [So as on today there can be criminal prosecution and imprisonment for every penny of tax evasion also. Since every penny of tax evasion attracts criminal liability, it will not be a exaggeration to say that CEA 1944 is a criminal legislation as well]
   3. If any person convicted of an offence under this section is again convicted of an offence under this section, then, he shall be punishable for the second and for every subsequent offence with imprisonment for a term which may extend to seven years and with fine. [So a previous conviction in a small tax evasion case, will bring the person in the category of habitual offender and in second prosecution irrespective of the amount involved he can be convicted for a period up to seven years.]

8. By clause 89 of Finance Act 2013, the effect of Supreme Court judgment in the case of Om Prakash & Anr Vs. Union of India & Anr 2011 (9) TMI 65 - SUPREME COURT OF INDIA, was annulled and offences where duty involved is more than rupees fifty lakhs were declared as cognizable and non-bailable. With today’s price level every investigation crosses 50 lakhs. Further even if the case is lesser than 50 lakhs, the authorities on some pretext or other drag it in the category of non bailable by stretching the case to above 50 lakh category. By the amendments Finance Act 2013, departmental officers has got following abusive powers in case tax involved as per their estimate exceeds 50 lakhs.
   1. Apart from civil investigation, Criminal investigation can be done suo moto by department without seeking permission of a trial court.
   2. Department can arrest the person on its own without taking approval of trial court during investigation, merely on allegation of evasion of more than 50 lakhs without any evidence as it is not required to convince a criminal court before arrest that it is a fit case for arrest.
   3. The person so arrested does not have right of bail and bail becomes discretion of court.

9. Similar amendments have been done in Customs Act 1962 as well as in Finance Act 1994 i.e Service Tax law. 

10. The provisions in tax laws attracting criminal liability for every penny of tax evasion and further making offences where allegation of evasion exceeds 50 lakh as cognizable and non bailable are against the government’s promise of tax payor friendly tax administration based on mutual trust. Therefore these need to be changed.

Rationale for creating a thresh hold below which there will be no criminal liability at all

11. Since tax laws are basically civil laws, they should create civil liabilities and only in exceptional cases they should create additional criminal liabilities. Criminal liabilities should not be created in routine.  Tax payers must be dealt with self respect. They should not be treated like criminals, because taxpayers contribute to nation building and cross subsidize the services to poor and deprived classes. Business cannot be run with constant threat of criminal case. Irrespective of the care taken, there are bound to be mistakes attracting civil tax liabilities. Now this civil tax liability should not be coupled with criminal liability. It is true that criminal liability is prescribed only for intentional tax evasion, but whether the tax evasion is intentional or not will be decided only in long drawn litigation. Tax authorities are very fond of alleging intentional tax evasion in every case of short levy.

12. Therefore this problem must be addressed in a more holistic way. As a matter of fact government never launches prosecution in smaller cases. But if this is the case why to retain provision for prosecution in every case of short levy. This criminal part of tax statute is major source of corruption and is abused left and right. In every tax investigation, the threat of arrest and criminal prosecution is used. Therefore to make the system more transparent and objective and to reduce the scope of discretion there must be threshold limit below which there shall be no criminal liability. What should be that limit may be a subject matter of debate, but in my opinion at current price level it should be at least one crore for indirect taxes.

Rationale for making all the offences under Indirect Tax laws non cognizable and bailable

13. The manufacturers who have got good establishment are not going to run away and there is no need for arrest on the spot by officers without approaching trial court. If they actually evade taxes the officers can always arrest them by satisfying the trial court and they can be prosecuted where imprisonment up to 7 years can be awarded even if these offences are made non cognizable and bailable. Making the offences non cognizable and bailable will not affect the civil investigation, civil adjudication & litigation, recovery of civil liability etc at all because cognizable and bailable issues are relevant only for criminal prosecution in criminal court attracting criminal liability.

14. Further when the offences are made non cognizable and bailable, it’s not that arrests cannot be done and person cannot be imprisoned.  Arrests still can be done and person can still be imprisoned even if the offences are made non cognizable and bailable. The only change is that tax department has to convince a trail court that it is a fit case supported by evidence where criminal investigation should be done and person should be arrested.  The involvement of trial court before arrest and investigation will imbibe objectivity and fairness as the departmental officer has to convince the trial court the grounds of arrest etc. This will reduce corruption and harassment of tax payor because tax officer will not be able to do whatever he wants to do, as criminal court will work as a watch dog and he need to convince criminal court.

15. Cognizable and non bailable provisions are relevant for those categories of offences where if action is not taken on spot the criminal will run away and investigating agency will not be able to find him thereafter. The manufacturers who have got good establishment are not going to run away and thus in their case involvement of criminal court before criminal investigation and arrest can be afforded.    Further since the tax evasion is primarily a civil offence, to seek additional criminal liabilities, criminal court must be involved in advance and from this perspective also these offences must be made non cognizable and bailable.

CONCLUSION

16. In view of the above discussions, in my opinion, in order to ensure a healthy business environment in the country and to reduce corruption, its high time that following amendments be carried out in indirect tax laws.  
    1. A threshold limit of tax evasion be prescribed below which there shall be no criminal liability in respect of offences under Central Excise Act 1944, offences under Customs Act 1962 and offences under Finance Act 1994 (Service Tax) to make the system more transparent and objective and to reduce the scope of discretion

Offences under Central Excise Act 1944, offences under Customs Act 1962 and offences under Finance Act 1994 (Service Tax) wherever they attract criminal liability be made non-cognizable and bailable for the purposes of criminal investigation.