In a significant move aimed at fostering a more business-friendly environment, the Goods and Services Tax (GST) Council is poised to consider a proposal to eliminate the power of tax officials to make arrests. This highly anticipated reform will be discussed during the 57th GST Council meeting, scheduled for October 7.
Decriminalizing Tax Offences
The proposed change seeks to decriminalize certain tax offences under the GST regime, a framework implemented in July 2017. If approved, the Union government is expected to introduce legislative amendments during the upcoming Winter Session of Parliament to formalize the removal of these arrest provisions.
This initiative follows eight to nine months of extensive consultations between the central and state governments. It responds to growing discontent among business leaders regarding the arrest of corporate executives under provisions widely perceived as excessive. The reform intends to restore investor confidence and alleviate fears of regulatory overreach by tax authorities.
Shift from Administrative Arrests
Currently, Section 69 of the Central GST (CGST) Act grants Commissioners the authority to authorize arrests for severe violations, such as fake invoicing or fraudulent input tax credit (ITC) claims, based on documented “reasons to believe.” However, under the new proposal, intentional fraud and deceit within the GST system would be handled through formal prosecution under India's criminal code, the Bharatiya Nyaya Sanhita, rather than administrative arrests by tax inspectors.
This shift would effectively align the GST system with the pre-2017 Value Added Tax (VAT) regime, which did not include provisions for administrative arrests by tax officials.
Concerns Over Enforcement Powers
Since the inception of the unified tax regime, enforcement agencies have grappled with widespread fraudulent practices, including the use of fake identities for artificial ITC generation, fake invoices without actual goods supply, undervaluation, and tax evasion on services. Data from central GST formations between FY 2021-22 and FY 2024-25 indicates 72,393 registered GST violation cases and 887 arrests by central formations alone.
Industry experts have frequently argued that arrest provisions were often weaponized as harassment tools, particularly in service sectors like banking and insurance. These powers were reportedly used to pressure firms into paying disputed penalties rather than engaging in lengthy legal battles.
Concerns about these powers are not new. During the 5th GST Council meeting in December 2016, officials from Maharashtra and West Bengal highlighted that such arrest powers conflicted with the objective of improving the ease of doing business. West Bengal officials specifically noted that VAT laws mandated FIRs through police channels, not direct detention powers for tax officers.
This move also echoes a recent decision by the Central Board of Direct Taxes (CBDT), which, in September, retrospectively stripped direct tax officers of “arrest and detention” powers from April 1, 2026, prohibiting them from detaining individuals over tax defaults.