Prosecution Under GST: Offences That Can Lead to Arrest

Prosecution Under GST: Offences That Can Lead to Arrest

Under Sections 132 and 69 of the CGST Act 2017, a taxpayer, director, partner, or even an advisor can be arrested — without a court order in the most serious cases — when the tax amount involved crosses prescribed thresholds. Fake invoices, ITC availed without actual receipt of goods, and collected-but-undeposited GST are the three most common triggers. This post maps exactly which conduct crosses the criminal line, how the arrest process unfolds step by step, when bail is a right versus when it is discretionary, and the specific systemic controls that separate a defensible tax dispute from a prosecution case.

The Legal Architecture: Sections 132 and 69 Working Together

Section 132 creates the offences and fixes the imprisonment periods. Section 69 gives the Commissioner the power to authorise arrest. The two provisions work in tandem: Section 132 defines what is criminal; Section 69 is the enforcement switch.

Both provisions were in the original CGST Act 2017. The Finance Act 2023 tightened compounding norms and removed certain offences from the compoundable list. As of FY 2026-27, the core criminal thresholds under Section 132 are:

The threshold is the tax amount involved in the offence, not your aggregate turnover. If a business avails ₹6 crore of ITC from shell suppliers, the ₹6 crore is the "tax" metric — and the offence is immediately cognizable and non-bailable. You do not get to average it against your total compliance history.

One structural defence that courts have consistently recognised: Section 132 requires intent to evade. A genuine classification dispute, an inadvertent coding error in the HSN, or a supplier who turns fraudulent after you transacted in good faith are not Section 132 cases on their own. The problem is that DGGI's arrest decision precedes any judicial finding of intent, which is why procedural safeguards matter so much.

The Specific Offences Under Section 132(1)

Not every GST violation is criminal. Section 132(1) lists eleven specific clauses. Here are the six that account for the vast majority of prosecutions.

Clause (a) — Supply without invoice or invoice without supply

This is the fake invoice offence in both directions. Moving goods without raising an invoice evades tax at the point of supply. Raising an invoice without moving goods manufactures ITC for the recipient. Both are criminal. "Invoice mills" — entities that do nothing except generate paper credit — operate under this clause.

Clause (b) — ITC availed without actual receipt of goods or services

If your GSTR-2B shows ₹4 crore of credit from a supplier who has no employees on EPFO rolls, no vehicle-linked transport entries in AIS, and a registered premises that is a two-room tenement, you have availed ITC without actual receipt. The evidentiary burden of proving genuine supply shifts to you once DGGI raises the objection.

Clause (c) — Collected GST not deposited within three months of the due date

This clause catches cash-flow-strained businesses that treat GST collections as working capital. If you raised invoices charging CGST + SGST, your customers paid you (including the tax), you declared the liability in GSTR-1, but you did not clear GSTR-3B for more than three months after the payment due date — every rupee of that collection falls under Section 132(1)(c). This is the one offence where intent to evade is harder to argue, because the money was in your hands.

Clause (d) — Falsifying books or producing fake documents

Submitting fabricated purchase invoices, doctored e-way bills, or fraudulent bank statements during a search, audit, or summons response is an independent criminal act under this clause — regardless of whether the underlying tax demand is contested.

Clause (e) — Obstructing an officer

Refusing entry to authorised officers, locking the premises at the time of inspection, threatening staff, or deliberately delaying access to records are each punishable independently under this clause. The tax quantum threshold does not apply here.

Clause (k) — Abetting any of the above

This is the clause that has resulted in the arrest of chartered accountants, advocates, transport brokers, and printing operators. You do not need to be the registered taxpayer to be prosecuted. If you knowingly facilitate a fake invoice network — by designing it, by certifying false accounts, by printing blank invoices — you are exposed under abetment.

How the Arrest Machinery Works: Section 69 Step by Step

Section 69(1) authorises the Commissioner — not an Additional Commissioner, Superintendent, or Inspector — to order arrest. The Commissioner must form a belief that the person "appears to have committed" a qualifying offence. This subjective satisfaction is reviewable by courts but cannot be challenged until after arrest.

The practical sequence:

1. Analytics or audit identifies the pattern. GSTN's ADVAIT data analytics system flags ITC mismatches, sudden credit surges, and supplier-recipient inconsistencies. DGGI intelligence units also receive tip-offs and conduct independent surveillance.

1. Pre-arrest investigation. Typically, summons under Section 70 are issued first to record statements and gather documents. A search under Section 67 may follow, with a panchnama documenting seized records.

1. Reasons recorded in writing. The Commissioner documents reasons to believe. These reasons are not served on the arrested person immediately but must be shown to a court if the arrest is challenged.

1. Arrest. For cognizable offences above ₹5 crore, the authorised officer can arrest without a magistrate's warrant. For non-cognizable offences, additional procedural safeguards under the Bharatiya Nagarik Suraksha Sanhita 2023 (BNSS) — which replaced the CrPC from 1 July 2024 — apply. Where the maximum punishment does not exceed seven years, BNSS Section 35 (equivalent to former CrPC Section 41A) requires an advance notice to the arrested person. All GST offences carry maximum sentences of five years or less, so this notice requirement technically applies across the board, though enforcement agencies interpret this variably.

1. Grounds communicated at the moment of arrest. Article 22 of the Constitution makes this mandatory. Failure to inform grounds vitiates the arrest.

1. Produced before a magistrate within 24 hours (excluding travel time). Failure to comply renders custody illegal and is a ground for immediate release.

1. Bail or remand determined by the magistrate.

CBIC has issued administrative guidelines on arrest — including the requirement that arrest not be the first resort and that it be preceded by meaningful investigation — but these are instructions, not law. Courts have struck down arrests on procedural grounds, but only after the arrested person endures the arrest itself. Prevention is the only reliable protection.

Cognizable vs Non-Cognizable: The Distinction That Controls Your First 48 Hours

For a bailable offence (₹1 crore – ₹5 crore), the magistrate must release on bail once the surety formalities are met. The investigating officer cannot withhold bail. For a non-bailable offence above ₹5 crore, bail is at the court's discretion and requires demonstrating that the accused is not a flight risk, is cooperating with investigation, and that there is no risk of evidence tampering. Several High Courts — Delhi, Bombay, Allahabad, Calcutta — have granted bail in high-value GST cases where the accused participated in proceedings and the evidence was largely documentary. However, these are case-specific outcomes.

Anticipatory bail under BNSS Section 482 is available and should be the first action once a summons is received in a case where the quantum exceeds ₹5 crore. Do not wait for the arrest.

Worked Example: A ₹8.2 Crore ITC Fraud Case and Its Financial Consequences

Consider a manufacturing company in Pune — say, Firm P — with a FY 2023-24 turnover of ₹22 crore. DGGI's analytics flag the following pattern:

• Firm P claims ₹8.2 crore ITC from three suppliers — S1, S2, S3.
• S1, S2, and S3 are newly registered entities with aggregate turnover under ₹1 crore; no EPFO-linked employees; vehicle numbers on e-way bills belonging to two-wheelers; no toll records in AIS data.
• Firm P's declared purchases, when reconciled against its product cost structure, cannot absorb ₹8.2 crore of goods-based credit.

DGGI escalation timeline (approximate):

• Month 1: Section 70 summons issued to the managing director.
• Month 2: Firm P submits reconciliation. DGGI conducts a search under Section 67, seizes electronic records.
• Month 3: Commissioner records reasons. Managing director arrested for a cognizable, non-bailable offence — ₹8.2 crore exceeds ₹5 crore threshold.

Full financial exposure:

• ITC reversal demand: ₹8.2 crore
• Interest at 18% per annum on ₹8.2 crore for 24 months: approximately ₹2.95 crore
• Penalty under Section 122(2)(a): up to 100% of tax = ₹8.2 crore
• Total civil liability: approximately ₹19.35 crore
• Criminal liability: prosecution, up to 5 years imprisonment for the director personally

Monthly cost of delay after summons: ₹8.2 crore × 18% ÷ 12 = ₹1,23,000 per day in interest, approximately ₹12.3 lakh per month. Every month of inaction after the summons letter arrives adds ₹12.3 lakh to an already ₹19 crore exposure. Acting at the summons stage — with documentation, legal counsel, and a proactive departmental response — is not merely prudent. It is financially rational.

Compounding Under Section 138: Can You Close the Prosecution?

Section 138 of the CGST Act allows compounding of offences under Section 132 — essentially, a settlement under which the prosecution is withdrawn in exchange for a compounding fee.

Eligibility conditions:

• Not convicted previously for a GST offence.
• Not compounded under the CGST Act within the preceding three years.
• Full tax, interest, and penalty must be paid at or before compounding.
• Offences involving supply without invoice above thresholds notified by the Board have been excluded from compounding scope under Finance Act 2023 amendments — check the current exclusion notification before proceeding.

Compounding fee: The Act specifies a minimum of the higher of ₹10,000 or 50% of the tax involved, and a maximum of the higher of ₹30,000 or 150% of the tax involved — as may be amended by notification. In practice, for a ₹2 crore demand, the compounding fee range is ₹1 crore (50%) to ₹3 crore (150%), in addition to the underlying tax, interest, and penalty already paid.

Compounding is applied for before the Chief Commissioner or Commissioner. Once accepted and fees paid, the court proceedings are closed. Critically, compounding does NOT extinguish the underlying tax demand — adjudication under Section 73/74 continues in parallel.

Common Mistakes That Escalate a Tax Dispute into a Criminal Case

Ignoring or mishandling a Section 70 summons

Non-appearance is treated as non-cooperation and strengthens the case for arrest. Send a written response to every summons, even if that response is a request for adjournment. Silence is not a neutral act in a Section 70 proceeding.

Assuming tax payment closes the prosecution

Payment of the demand — even the full amount with interest and penalty — does not automatically withdraw prosecution already filed in a magistrate court. Only compounding under Section 138 or judicial acquittal terminates criminal proceedings. Business owners regularly discover this distinction after paying large sums and expecting the matter to end.

Relying on e-way bills as complete transport proof

E-way bills demonstrate that a consignment was logged in the portal. They do not prove physical movement. DGGI regularly shows that vehicle numbers on e-way bills belong to motorcycles, out-of-service trucks, or vehicles located in a different state on the date of the consignment. Maintain lorry receipts (LR copies), toll receipts, weighment slips, delivery confirmation notes, and transporter payment proofs for every high-value purchase.

Vesting all compliance knowledge in one person

If all tax decisions flow through one director and that director is arrested or incapacitated, the business has no institutional record to construct a defence. Board-level tax position notes — documenting why ITC was availed, why a classification was adopted, who approved the filing — reduce personal escalation risk and create a defensible evidence trail.

Making rushed statements under Section 70 without counsel present

Section 70 statements are admissible evidence in prosecution. Officers sometimes present drafted statements at the summons stage that include admissions of the alleged conduct. Read every word. A retracted statement can still be used against you and must be explained away in court. This is not optional — take legal advice before your first statement.

Using one advisor for both tax adjudication and criminal defence

GST adjudication and criminal prosecution require fundamentally different expertise. The advocate handling your show-cause notice at the Commissioner level may not be equipped for bail applications at the High Court. Retain both specialists from the moment prosecution becomes a real possibility.

Defensive Systems Every Business Should Have in Place Right Now

These are not crisis responses — they are controls that make your business genuinely defensible before any notice arrives.

Supplier KYC protocol. Before availing ITC from any new supplier, verify: (a) GST registration active on the portal, (b) GSTR-3B filing regularity for the last six months, (c) PAN-linked bank account matching your payment remittance, (d) at least one independent indicator of physical existence — a Google Maps listing, an MSME registration, an EPFO employer number. Document this check in a standardised form and file it with the purchase order.

Physical receipt documentation for every invoice above ₹2 lakh. Minimum file: the original goods receipt note (GRN) signed by your receiving department, the transporter's lorry receipt (LR copy), and a bank remittance confirmation matching the invoice value and supplier account.

Monthly ITC reconciliation before GSTR-3B is filed. Never claim ITC that is not yet appearing in GSTR-2B. Where small suppliers are irregular filers, wait for their GSTR-1 to reflect the invoice before claiming. A short delay in claiming legitimate credit is infinitely preferable to a Section 74 notice alleging fraudulent availing.

Board-level quarterly tax position note. A brief resolution or signed note at the finance committee level confirming that the directors have reviewed the quarterly GST liability and approved the amounts filed. This paper creates distance between the entity's compliance decisions and any future allegation of personal knowing evasion.

Three-month deposit discipline for collected GST. Set a standing instruction: the GSTR-3B liability payment must clear each month's due date. If cash flow is genuinely stressed, file the return with a partial payment and acknowledge the interest liability. A filed return with interest acknowledgment is far easier to defend than a non-filed return or a return filed without payment — both of which directly trigger Section 132(1)(c).

Timely response to ASMT-10 and DRC-01A. These pre-show-cause scrutiny communications are the department's early-warning mechanism. A well-documented response at this stage — before the formal show-cause notice — frequently contains the matter within civil proceedings and prevents escalation to prosecution. Many businesses treat these as routine correspondence. They are not.

Key Takeaways

• The ₹5 crore threshold is the bright line: Above it, arrest is possible without a magistrate's warrant, and bail is at the court's discretion. Know where every large ITC claim or tax deposit gap sits relative to this number.
• Three offences drive most prosecutions: Fake invoices, ITC without actual supply, and collected tax not deposited within three months. All three are preventable with documentary discipline.
• For ₹1 crore – ₹5 crore cases, bail is a right. You cannot be held in custody once surety is furnished. For above ₹5 crore, you need the Sessions Court or High Court — and anticipatory bail before arrest is the correct strategy from the moment a summons arrives.
• Paying the full demand does not end prosecution. Only compounding under Section 138 (with conditions) or a court order terminates criminal proceedings. Do not pay and assume the matter is closed.
• Abetment under Section 132(1)(k) has real teeth. CAs, lawyers, transport agents, and printing operators have been prosecuted. Proximity to a fake invoice network — even without being the registered taxpayer — is criminally dangerous.
• E-way bills alone are insufficient proof of genuine supply. Physical transport documentation — LR copies, toll records, weighment slips, delivery confirmation — is what defeats a Section 132(1)(b) allegation in practice.
• The first summons under Section 70 is the trigger, not the arrest. The decision to engage specialist GST criminal counsel must happen at that stage, not after handcuffs are applied.