GST Investigations and Summons: Rights and Obligations of Taxpayers During DGGI Proceedings

Indian indirect tax system has been considerably strengthened due to a unified taxation system aided by smart technology, and intelligent use of data analytics for compliance and verification. To further tackle issues like tax evasion, fake invoicing, bogus ITC, and other offences committed under GST, the Government also strengthened its enforcement mechanism. The premier intelligence and enforcement agency of indirect taxation, Directorate General of GST Intelligence (DGGI) under the aegis of CBIC is mandated to unearth cases of GST frauds and see to it that Central Goods and Services Tax Act, 2017 (“CGST Act”) are followed in letter and spirit.

Perhaps the most frequently exercised power by the DGGI in any investigation is issuing a summons under Section 70 of the CGST Act. Although most of us feel alarmed on receiving a summons, it is just an investigative measure and is not indicative of having committed an offence, until proven otherwise. That said, we taxpayers also need to co-operate with the authorities during investigations while remembering that there are certain rights that are protected by the law as well as the Constitution.

As per section 70 of the CGST Act, an officer can summon any person, whose attendance is thought necessary for giving evidence or producing documents for an inquiry. These proceedings shall be considered a judicial proceeding under section 229 and 267 of Bharatiya Nyaya Sanhita, 2023 (Section 193 and 228 of IPC, 1860). Therefore, one should not give any false information or make a false statement or even not produce documents in compliance to a valid summon. It is not only registered taxpayers to whom a summon can be issued, but even the Directors, Partners, key managerial person, their accountant, transporter, supplier, customer, or any person the evidence of whom the investigation requires may also be issued a summon.

While this extends to the ability of DGGI to issue a summon to call for any person. In the same regard, the powers of search and seizure are provided to the officer under section 67 CGST Act for a tax evasion has been committed and/or goods and/or document are liable to be confiscated; he “may have” reasons to believe that there may have been evaded and search of a business, a place of business, warehouse, conveyance, or any other place where books of account and/or documents or goods are kept. An examination/seizure of any electronic record (including laptops, computers, hard drives and other such portable storage devices) may take place if it is required for any of the purposes of this chapter. In case of serious offences of fake invoicing or fraud in ITC availed, Commissioner may also sanction for an arrest of such person under section 69 or prosecution under section 132 for defined offences on the value of the tax evaded.

While these are powers of investigation, the law also makes it clear that the tax authorities are duty bound to conduct their investigations fairly and justly. The CBIC has on different occasions provided detailed instructions on the subject not to resort to issuing of summons mechanically and automatically. These instructions clearly state that in so far as it may be feasible, information may first be obtained through correspondence (letters, emails etc) rather than calling the individual in person. Senior functionaries, for instance, Managing Directors, CEOs etc should not, generally, be called upon to attend in person unless, in view of the specific facts, their presence is essential for investigation purposes.

In case of ongoing investigations, it is also critical to consider mechanisms of tax recovery. While it is common in practice for taxpayers to be asked to pay off what the revenue believes to be their tax dues even before the issuance of a Show Cause Notice, the CBIC has made it clear from time to time that any payment during an ongoing probe must be completely voluntary, and the revenue authorities should neither apply any force, pressure nor intimidation for its collection. In cases where a taxpayer voluntarily offers to pay off the liability even before a notice is issued, it usually takes the shape of an offer to pay the amount through a Form GST DRC-03. In certain situations, the department also serves an ascertained liability notice to the taxpayer through Form GST DRC-01A, and it is left to the latter to decide to pay off the liability without adjudication or dispute it at the adjudication stage.

There are many responsibilities on the taxpayers under the proceedings conducted by DGGI. On receipt of the valid summons, the person who has been summoned is supposed to be present before the Investigating officer on the stipulated date along with all the documents as specified in the summons, for instance GST returns including GSTR-1, GSTR-3B, annual returns GSTR-9, reconciliation statements GSTR-9C, purchase and sales register, e-invoices, e-way bill, bank statements, ledger accounts, stock register, agreements, transport documents etc. It is mandatory under Section 36 of CGST Act to maintain books of account and records for the stipulated time period.

Statements made during the course of a DGGI investigation often serve as evidence in adjudication proceedings and prosecutions and therefore it is prudent for a taxpayer to act with circumspection while making statements to DGGI. The same must be supported by verified facts and documentary evidence and should not be based on estimations or assumptions. Before signing a statement, which has been recorded, the deponent must read the same, satisfy that his answers have been faithfully recorded and point out any factual inaccuracy in it without any delay, for immediate correction. Though there is no explicit provision in the CGST Act to claim a right to have a legal practitioner present during examination, the taxpayers are allowed to seek legal advice before appearing and have the right to set aside the statement if it is proved that it was obtained under duress or influence.

In Radha Krishan Industries v. State of Himachal Pradesh, AIR 2021 SC 2114, while adjudicating upon the issue, the Apex Court held that powers conferred including the powers of provisional attachment, (e.g. Section 83 of CGST Act 2017), were not administrative in character but were of an extraordinary character, and had to be exercised within the limits prescribed by law, cautiously, prudently and in accordance with the provisions of the law and power is to be exercised not in an arbitrary manner, but reasonably and proportionately within the test of constitutionalism, as well as, principles of good governance. The pronouncement though was concerning provisional attachment; it carries far-reaching implications with regard to any investigation undertaken by tax authorities under CGST Act.

Similarly, in Poolpandi v. Superintendent, Central Excise, 1992 AIR 1795 the court held that proceedings of the tax department are not a police inquiry and the person summoned during such proceedings cannot claim all the protection to a person accused of a criminal offence. However, it stressed that powers would not be beyond the limit prescribed by the law.

From a business view, a DGGI Summons is a notice of investigation rather than a reason to be hysterical, but is a legal issue that must be tackled head-on. Internally, conducting investigations in a timely manner regarding the questioned transactions, preserving documents in question, engaging in internal discussions with finance and compliance and seeking legal advice will result in fewer conflicting views or inadvertent concessions being made. Similarly, an upfront tax payment by the taxpayer to just get the issue resolved without obtaining clarity on the tax liability and without the taxpayer accepting the tax liability will serve no useful purpose and in fact be averse to the taxpayer, except if the liability assessed is more or less agreed upon by the taxpayer post detailed analysis. Pro- active participation in the investigation while preserving the legal rights will lead to closure in a speedy and satisfactory manner.

Data analytics, AI and information exchange amongst departments would be the foundation for the future of GST enforcement, the investigations to be carried out by DGGI are going to become more data-driven and targeted. The organizations will be required to establish a strong in-house control environment and have regular GST health check ups, reconciliation of returns and documentary evidence for all transactions so as to minimize their possibility of being under investigation and being ready if they do get to be under investigation.

Finally, the powers of the DGGI under CGST Act is wide, broad, extensive and crucial for ensuring evasion of tax and safeguarding government’s revenue interests. But on the flip side, these powers are circumscribed by certain statutory constraints, guidelines of CBIC’s instructions, pronouncements of higher judiciary which aim at making such investigation more transparent, unbiased and in line with the principles of natural justice. Therefore, both the taxpayer rights and duties in the event of investigation by DGGI need to be known for the concerned taxpayer. The businesses that can combine proactive compliance along with intelligent use of legal advice is best equipped to handle the entire process.