Inspection, Search, and Seizure under GST: Who Can Conduct It and Why?

The Goods and Services Tax ( GST ) Act permits the authorities to conduct inspection, search, and seizure operations to ensure compliance and control tax evasion.

These are governed by Section 67 of the CGST Act, 2017, and come into play when authorities suspect violations such as tax evasion, wrongful claim of input tax credit ( ITC ), or non-payment of taxes. Here’s a detailed overview of the process and safeguards for taxpayers.

Authorization for Inspection and Search

Only a proper officer, not below the rank of Joint Commissioner, can authorize inspection or search operations. This authorization must be in writing and is granted when there is a "reason to believe" that a taxable person or a business operator has suppressed transactions, mismanaged accounts, or engaged in activities likely to cause tax evasion.

Conditions Triggering Inspection Authority

As per Section 67(1)(a), (b) and (c)  of the GST Act deals with the conditions on which the proper officer can initiate the inspection proceedings.

(a) Suppression or Evasion by a Taxable Person

A proper officer, not below the rank of Joint Commissioner, can initiate an inspection if they have credible reasons to believe that a taxable person is involved in any of the following

1. Suppression of Transactions:

• Concealing transactions related to the supply of goods or services.
• Failing to disclose the stock of goods in hand to avoid paying taxes.

2. Excess Input Tax Credit (ITC) Claims:

• Claiming ITC beyond the entitlement allowed under the GST law.
• Manipulating invoices or documents to inflate ITC claims.

3. Violation of GST Provisions:

• Engaging in actions that contravene the provisions of the GST Act or its rules, leading to tax evasion.

(b) Non-Compliance by Transporters, Warehouse Operators, or Custodians of Goods

Inspection powers also extend to individuals or entities involved in the storage or transportation of goods, including:

1. Transporters of Goods:

• If goods are being transported without proper documentation or in a manner that indicates an attempt to evade taxes.

2. Warehouse or Godown Operators:

• If the operator is found to be storing goods that have escaped tax liability.
• If accounts or goods are maintained in a way that facilitates tax evasion.

Why Search is Conducted

Search operations are initiated to detect hidden goods, documents, or evidence relevant to tax evasion or other contraventions under GST. This may involve inspecting warehouses, business premises, or transport vehicles where non-compliance is suspected.

Authority to Search and Seize

• If the proper officer, either following an inspection under subsection (1) or independently, has reasons to believe that:
  • Goods liable for confiscation are concealed.
  • Documents, books, or other items relevant to any proceedings under the Act are hidden.
• The officer may:
  • Authorize another central tax officer in writing to conduct the search and seizure.
  • Conduct the search and seizure himself.

Safeguards for Goods That Cannot Be Seized:

• If it is not practical to seize goods, the proper officer or the authorized officer can issue an order to the owner or custodian of the goods.
• This order restricts the owner or custodian from:
  • Removing the goods.
  • Transferring ownership.
  • Dealing with the goods in any manner without prior permission from the officer.

Retention of Seized Items:

• Documents, books, or other seized items can only be retained for as long as necessary for:
  • Examination.
  • Conducting inquiries.
  • Proceedings under the Act.
• This ensures that seizure is not indefinite and aligns with principles of fairness and natural justice.

Return of Documents

The Sub- section 3 of the section 67 of the GST Act states about the return of documents. According to the section, Documents, books, or things not relied upon for issuing a notice under the Act must be returned to the person from whom they were seized within 30 days of issuing such notice.

Power to Break Open

If access to premises, almirahs, electronic devices, or receptacles is denied, the authorized officer may seal or break them open to search for concealed goods or records. This is mentioned under Section 67(4) of the GST Act.

Copying Seized Documents

According to Section 67(5), Persons whose documents are seized can:

• Make copies or take extracts in the presence of an authorized officer.
• This right is restricted if it may prejudicially affect the investigation, as determined by the proper officer.

Provisional Release of Goods

Provisional release of goods is a frequent issue before the court. The Section 67(6) clearly explains how the release of goods should be made provisionally. Seized goods can be released provisionally upon:

• Execution of a bond.
• Furnishing security as prescribed.
• Payment of applicable tax, interest, and penalty, if applicable.

Time Limit for Notice

If no notice is issued within six months of seizure, the goods must be returned to the person from whom they were seized. This period can be extended by another six months on sufficient cause being shown, states Section 67(7) of the GST Act.

Disposal of Perishable or Hazardous Goods

Seizing goods is not enough, if it is hazardous or perishable, it should be disposed of by the department as soon as they can. As per Section 67(8), the Government may notify certain goods that, due to their perishable or hazardous nature, depreciation, or storage constraints, should be disposed of promptly after seizure. The proper officer must follow prescribed procedures for such disposal.

Inventory Preparation

For goods specified under subsection (8), that is the goods which are perishable or hazardous nature, depreciation or storage constraints, the proper officer must prepare an inventory as prescribed before disposal.

Application of Criminal Procedure Code (CrPC)

The Section 67(10) of the GST Act states that the provisions of the Code of Criminal Procedure, 1973 ( now BNSS), relating to search and seizure apply to GST proceedings, with the modification that the word “Magistrate” is substituted by “Commissioner.”

Seizure of Accounts and Documents

With regards to the seizure of the accounts and documents, the Section 67(11) states that, if the proper officer believes that a person has evaded or is attempting to evade tax, they may:

• Seize accounts, registers, or documents produced before them.
• Grant a receipt for the same.
• Retain the seized items as long as necessary for proceedings under the Act.

Test Purchase of Goods or Services

The final subsection 12 of the Section 67 deals with the test purchase of the Goods or Services by the commissioner. It states that The Commissioner or an authorized officer may:

• Conduct a test purchase of goods or services from a taxable person to verify compliance with invoice issuance requirements.
• On return of goods, the taxable person must refund the amount paid after canceling the invoice or bill of supply.

Businesses must ensure proper record-keeping and compliance with GST provisions to avoid inspections and penalties. Non-disclosure of transactions, suppression of stock details, or improper claims of Input Tax Credit (ITC) can attract scrutiny from GST authorities, resulting in inspections and punitive actions.

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