In any tax administration, the provisions for inspection, search, and seizure are essential to protect the interests of genuine taxpayers. Tax evaders, by avoiding their liabilities, gain an unfair advantage over honest taxpayers. These provisions also help safeguard the interests of revenue authorities. However, such actions should be exercised with restraint, applied only in exceptional circumstances, and used as a last resort.
To ensure proper and effective use of these powers and simultaneously protect taxpayers’ rights, the law mandates that inspection, search, or seizure can only be undertaken by a proper officer as defined under the GST law. This officer must be of the rank of Joint Commissioner or above and must have reasons to believe that exceptional circumstances exist that justify the invocation of such powers.
The law is well-settled that search and seizure operations intrude upon the fundamental rights of individuals. Such operations may damage a person’s reputation and disrupt business activities. Therefore, the authorities must be cautious and ensure that the powers are exercised only under clear legal authority.
Distinction Between Inspection and Search
Inspection is a less intrusive measure compared to a search. It allows the officer to access the business premises of a taxable person, a transporter, or a warehouse operator to check for compliance. A search, on the other hand, involves a more detailed and forceful examination of a place, person, or item to uncover something hidden or obtain evidence of wrongdoing.
Under the GST regime, both inspection and search are allowed only after receiving authorization from a proper officer, not below the rank of Joint Commissioner. The officer must have reasons to believe that exceptional circumstances exist to justify such action. Sections 67 to 72 of the Central Goods and Services Tax Act, along with Rules 139 to 141 of the CGST Rules, govern the procedures and powers relating to inspection, search, and seizure.
It is important to note that the provisions of the Code of Criminal Procedure become relevant only when a search is conducted, not merely during an inspection.
Legal Provisions Regarding Initiation of Inspection Under GST
Sub-section (1) of Section 67 of the CGST Act empowers a proper officer to initiate inspection at the business premises of a taxpayer. According to Section 67(1), an officer not below the rank of Joint Commissioner may authorize another officer in writing to inspect any place of business if there is reason to believe that:
A taxable person has suppressed any transaction related to the supply of goods or services, or stock in hand
A taxable person has claimed excess input tax credit
A person has violated provisions of the Act or Rules with the intention of evading tax
A person engaged in transporting goods, or a warehouse or godown operator, is holding goods that have escaped payment of tax or is maintaining accounts in a manner likely to cause tax evasion.
The essential points under this provision include that the authorization must be given by an officer of Joint Commissioner rank or above, and the authorization must be based on a reason to believe any of the above violations. The authorization must be issued in writing and the prescribed format.
Rule 139 of the CGST Rules outlines the procedural aspects of inspection, search, and seizure. It mandates that:
Where the officer believes that a place must be visited for inspection, search, or seizure under Section 67, they must issue an authorization in Form GST INS-01 authorizing a subordinate officer
If goods or documents are liable for seizure under Section 67(2), an order of seizure must be issued in Form GST INS-02
The proper officer may entrust the seized goods to the custody of the owner or custodian, who must not deal with the goods without prior permission
Where it is not practical to seize the goods, an order of prohibition in Form GST INS-03 must be served, forbidding the removal or disposal of the goods
The officer conducting the seizure must prepare an inventory of all seized goods and have the inventory signed by the person from whom the goods were seized
Section 67(1) allows inspection at the business place of the assessee. The CGST Act under Section 2(85) defines the term “place of business” to include:
A place where the business is ordinarily conducted, including warehouses and godowns
A location where books of account are maintained
A place where business is conducted through an agent
This inclusive definition means that if a business maintains records at a director’s residence, such a location can also be subject to inspection.
Powers to Initiate Search and Seizure Proceedings
Sub-section (2) of Section 67 of the CGST Act grants the power to conduct a search and seizure to a proper officer of the rank of Joint Commissioner or above. This power can be exercised either following an inspection or independently, provided the officer has reason to believe that:
Goods liable for confiscation are secreted in a particular place
Books, documents, or things useful or relevant for proceedings under the Act are concealed
If such a belief exists, the officer may issue a written authorization in Form GST INS-01 to a subordinate officer to conduct the search and seizure. If goods or documents are found, the authorized officer may seize them and issue an order in Form GST INS-02. Where seizure is not feasible, a prohibition order must be issued using Form GST INS-03.
Section 67(3) of the Act mandates that any books or documents that are not used for issuing a notice must be returned within thirty days. The law ensures that the power of seizure is not abused and that irrelevant materials are returned to the person from whom they were taken.
Key takeaways from these provisions include that authorization must come from a Joint Commissioner or above, the officer must believe that goods or relevant documents are concealed, and the search and seizure must follow proper procedural forms.
Legal Understanding of Reason to Believe
The CGST Act does not define the term “reason to believe.” However, Section 26 of the Indian Penal Code defines it as having sufficient cause to believe something but not otherwise. Judicial precedents have provided clarity on this phrase.
In Barium Chemicals Ltd. v. Company Law Board, the Supreme Court of India held that phrases like “is satisfied,” “thinks,” and “has reason to believe” indicate a subjective satisfaction. However, such satisfaction must be based on relevant material and circumstances.
In ITO v. Lakhmani Mewal Das, the Supreme Court emphasized that the belief must have a rational connection to the material facts. It cannot be based on vague or distant information. The officer must form the belief in good faith, not as a mere formality.
The phrase “reason to believe” as used in Section 67 of the CGST Act implies that the officer must base their belief on material that leads an honest and reasonable person to that conclusion. The belief should not be arbitrary or unsupported.
In Pukhraj v. D. R. Kohli, the Supreme Court explained that courts do not sit in appeal over the officer’s decision to search. Instead, courts examine whether the officer had a prima facie reasonable belief based on the circumstances. If such a ground exists, the search is legally justified.
Although the officer is not required to state the reasons for their belief explicitly, if challenged, they must disclose the basis of their belief. Courts may then assess whether such materials justify a reasonable belief, even though the sufficiency of reasons cannot be questioned by the court.
In Patran Steel Rolling Mill v. Assistant Commissioner of State Tax, the Gujarat High Court held that the provisions of Section 67 should not be invoked routinely but only after careful consideration of all relevant facts.
Forms GST INS-01 and GST INS-02 must be used when authorizing searches and seizures. Rule 139 mandates that the authorization must be issued by a Joint Commissioner or higher authority, and any seizure must be documented with a detailed inventory signed by the relevant person.
Section 157 of the CGST Act provides immunity to officers for actions taken in good faith under the law. However, if an officer conducts a search or seizure without proper authorization, such immunity does not apply. Unauthorized or highhanded action by an officer can result in legal liability, including compensation for the affected party.
The term “good faith” is crucial in this context. An officer acting beyond the scope of the law, even with good intentions, cannot claim immunity if the action was unauthorized. The law demands accountability and adherence to procedure when exercising powers that affect the rights of citizens.
Powers of Inspection under Section 67(1) of the CGST Act
Section 67(1) empowers a proper officer, not below the rank of Joint Commissioner, to authorize inspection of any place of business of a taxable person. This is done via written authorization if he has reasons to believe that the person:
- Has suppressed any transaction of supply or stock in hand,
- Has claimed input tax credit (ITC) over entitlement,
- Has contravened any provisions of the GST Act or rules made thereunder to evade tax.
Inspection may also be initiated if a person transporting goods or an owner/operator of a warehouse or godown (whether registered or not) is suspected of storing goods without accounting for them properly or keeping books/documents that are useful for proceedings under the Act.
Powers of Search and Seizure under Section 67(2)
Section 67(2) provides that if the Joint Commissioner has reasons to believe that any goods liable for confiscation or any documents/books/things relevant to any proceedings are secreted in any place, then he may authorize any officer (in writing) to search and seize them.
The proper officer may:
- Enter and search any premises,
- Break open any premises or receptacle in which goods or documents are suspected to be concealed, if access is denied.
- Seize goods, documents, or books or things useful for the proceedings under the Act,
- Take possession of or make a record of the seized documents.
It is important to note that reasons for the belief must be recorded in writing, and authorization must be granted specifically by the Joint Commissioner or an officer of higher rank.
Provisions for Retention and Return of Seized Goods/Documents
Under Section 67(3), goods seized shall be released if the person from whom they were seized pays the applicable tax, interest, and penalty.
Under Section 67(5), the officer must prepare an inventory of seized goods, document them, and allow the taxpayer to get a copy.
Section 67(6) specifies that documents or books can be retained only for the period necessary for examination or inquiry. If such materials are not relied upon for issuing notice within a period of 30 days from seizure, they must be returned.
Prohibition on Confiscation without Notice
Under Section 67(7), the seized goods cannot be confiscated unless a proper notice is issued under the provisions of the Act (such as Section 130 for confiscation).
If no notice is issued within 6 months of the seizure, the goods must be returned to the taxpayer. The time can be extended by another 6 months by the Commissioner upon sufficient cause.
Access to Premises and Use of Force
Officers authorized for search can access business premises, vehicles, warehouses, or any other place. If entry is denied, they may break open the doors or containers with due notice. However, the officer must adhere strictly to the procedures laid down under the Code of Criminal Procedure (CrPC), 1973.
Under Rule 139 of the CGST Rules, 2017, such inspection or search must be authorized in Form GST INS-01 and Form GST INS-02,, respectively.
Search and Seizure Procedure under CrPC
According to Section 67(10), provisions of the Code of Criminal Procedure, 1973 relating to search and seizure shall apply to GST proceedings. This includes:
- The requirement of a valid search warrant (except in urgent cases),
- The presence of independent witnesses during the search,
- Preparation and signing of a panchnama or seizure memo,
- Giving a copy of the search report and seizure record to the person searched.
These ensure procedural fairness and safeguard against arbitrary searches.
Seizure of Accounts, Records, and Devices
Officers may seize records maintained electronically, including data from computers, pen drives, emails, or cloud storage. The taxpayer can request to retain copies or extracts of such data.
Accessing and copying electronic records must be done with appropriate safeguards, and any digital evidence collected must be preserved by the Evidence Act and the IT Act, 2000.
Inventory and Safe Custody of Seized Goods
Seized goods must be listed in an inventory with detailed descriptions including type, quantity, value, and identifying marks. These are to be kept in safe custody, often sealed and labeled.
The taxpayer or representative is typically required to sign the inventory and seizure memo. Refusal to sign does not invalidate the seizure but may be recorded.
Temporary Release of Seized Goods
The proper officer may release the goods provisionally upon execution of a bond and furnishing of a security (in the form of a bank guarantee or cash deposit) equivalent to the estimated amount of tax, interest, and penalty.
This helps avoid unnecessary loss of business while ensuring protection of revenue. The bond is typically executed in Form GST INS-04.
Procedures for Search under GST
A search under GST is a more serious action compared to an inspection. It is conducted when there is a reason to believe that the taxpayer has hidden goods, documents, or other items that are important for tax proceedings. According to Section 67(2) of the CGST Act, 2017, a search can be conducted by an officer not below the rank of Joint Commissioner, only if he has reasons to believe that a taxable person has suppressed transactions or kept goods or documents in a way that violates the law. Before the search is conducted, proper authorization must be obtained. The search must be authorized by a warrant in Form GST INS-01, which clearly states the name of the premises to be searched and the reasons for searching. The search operation must be conducted transparently, with proper documentation of all actions taken during the search. During the search, officers may break open a door, box, locker, or safe if access is denied. They may also seize goods or documents they believe are relevant to proceedings under the GST law. Officers must prepare a panchnama or search report that records the details of the search, including the names of witnesses, items seized, and other relevant information. A copy of the panchnama must be given to the person in charge of the premises. The search must be conducted by the provisions of the Code of Criminal Procedure, 1973, as applicable to searches under GST.
Procedure for Seizure under GST
Seizure follows the search procedure if the officer finds goods, documents, or books which are believed to be useful or relevant to any proceedings under the Act. Seizure is governed by Section 67(2) of the CGST Act, 2017. When an officer believes that it is necessary to seize goods or documents, he must issue an order of seizure in Form GST INS-02. The officer must make a list of items seized and give a copy of the list to the person from whom the goods or documents are seized. However, in cases where it is not practicable to remove the seized goods, the officer may serve an order of prohibition in Form GST INS-03 on the owner or custodian of the goods, directing him not to remove, part with, or otherwise deal with the goods without prior permission. Seized documents must be returned within 30 days of issuance of the notice under Section 73 or 74, whichever is applicable. If the notice is not issued within this period, the documents must be returned. In the case of seized goods, if the taxpayer pays the tax, interest, and penalty as applicable under Section 73 or 74, the goods may be released. However, if the goods are perishable or hazardous, the officer may release them immediately on payment of tax or upon furnishing of a security equivalent to the value of the goods.
Retention of Seized Goods and Documents
Seized goods and documents must be retained only for as long as they are required for examination, inquiry, or proceedings. The law imposes a limitation on the time frame for which the goods and documents can be held. The taxpayer must be informed about the reasons for retention. If the seized goods are not released within six months, the taxpayer may file an application with the Commissioner for return of goods, and the Commissioner may extend the period of retention by another six months on sufficient cause being shown. The seizure must be properly recorded and documented, and a seizure memo must be prepared at the time of seizure. If the goods are eventually found not to be liable for confiscation, they must be returned to the taxpayer.
Provisional Release of Seized Goods
Section 67(6) provides for the provisional release of seized goods. If a person whose goods have been seized wishes to get them released provisionally, he may do so by executing a bond in Form GST INS-04 for the value of the goods and by furnishing a security in the form of a bank guarantee equivalent to the amount of applicable tax, interest, and penalty. The goods are then released pending the outcome of the proceedings. This provisional release enables businesses to continue operations without suffering long-term business loss due to the seizure.
Search and Seizure by a Proper Officer
A search and seizure can be conducted only by an officer who is duly authorized by the Commissioner and who holds the appropriate rank. The officer must have valid grounds and reason to believe that the taxpayer is evading tax or has goods or documents that may be used to determine tax liability. The authorization for search must be in writing and issued in the prescribed form. The search must be conducted professionally and lawfully, and the rights of the taxpayer must be respected throughout the process. Officers must ensure that the search is not arbitrary or excessive, and must always be guided by principles of reasonableness and proportionality.
Principles Governing Inspection, Search, and Seizure
The principles that guide inspection, search, and seizure under GST are rooted in constitutional and legal safeguards. The right to privacy under Article 21 of the Constitution is an important consideration. Therefore, searches must not be carried out without reasonable cause. The officer must have a clear “reason to believe” and not just suspicion. The term “reason to believe” must be based on objective facts and not merely on a hunch or guess. The entire process must be documented and recorded. Panchnamas must be prepared in the presence of independent witnesses. Seizure must not be excessive. Only those goods or documents that are necessary for the proceedings must be seized. The seized items must be returned if they are not found to be useful or relevant. Proper inventory and safe custody of seized goods and documents are the responsibility of the officer. Non-compliance with procedure may render the search illegal and invite judicial scrutiny.
Searchforr a Person
In cases where the officer believes that a person is concealing goods or documents on their person, the officer may search the person. However, the search of a person must comply with the Code of Criminal Procedure, 1973. The person must be taken to the nearest gazetted officer or magistrate before being searched. If the person so requests, the search must be conducted in the presence of a magistrate. Female individuals must be searched only by female officers. All safeguards of personal dignity and privacy must be followed. A proper record must be kept of the search and items recovered from the person. The person must be provided a copy of the search memo. If any incriminating goods or documents are found, they must be listed and seized in the presence of independent witnesses.
Confiscation of Goods and Conveyances
Confiscation is a more severe consequence and arises only after the adjudication proceedings are completed. Under Section 130 of the CGST Act, 2017, goods or conveyances may be confiscated if the person supplies or receives goods in contravention of the GST provisions to evade tax. Confiscation is accompanied by a penalty and may also result in the seizure of goods and the conveyance used to transport them. Before confiscation, a notice must be issued to the taxpayer, and he must be allowed to be heard. If the taxpayer does not pay the fine and penalty, the confiscated goods or conveyance may be sold to recover the dues. However, if the goods are perishable or hazardous, they may be disposed of earlier. The law provides for an option to pay redemption fia ne instead of confiscation, which allows the taxpayer to retain the goods or conveyance upon payment of a prescribed fine. The amount of fine and penalty is based on the market value of the goods and the nature of the offence.
Offences Relating to Obstruction of Inspection or Search
Obstructing or preventing a proper officer from conducting an inspection, search, or seizure is an offence under Section 122 of the CGST Act. Such obstruction can lead to a penalty of up to Rs. 25,000. If the obstruction involves assault, intimidation, or serious misconduct, it may also be prosecuted under the Indian Penal Code. Taxpayers must cooperate with tax authorities during such operations and must not tamper with or destroy documents or goods. Misleading statements, hiding goods, or falsifying documents are considered serious offences and attract heavy penalties. The law provides for both monetary and criminal consequences in case of non-cooperation during enforcement action.
Judicial Scrutiny of Search and Seizure Actions
Courts have repeatedly emphasized that search and seizure must be conducted by the law. The “reason to believe” must be based on tangible material. Courts have struck down searches that were conducted arbitrarily or without proper authorization. The panchnama or search report must be detailed and must mention the reasons for the search, the items found, the witnesses present, and the signature of the person whose premises were searched. If these requirements are not met, the search may be held to be invalid. Taxpayers who feel that the search or seizure was unjustified may approach the High Court through a writ petition. Judicial scrutiny ensures that tax authorities act within the framework of the law and do not misuse their powers.
Seizure under GST
The term “seizure” refers to taking custody of goods or documents by legal authority. Under Section 67(2) of the CGST Act, proper officers have the authority to seize goods, documents, books, or other things that they believe are necessary to protect the interest of revenue. Seizure follows a search and is based on reason to believe that such items are liable for confiscation or are essential for further proceedings. A seizure cannot be arbitrary or unjustified; there must be reasonable grounds for it, which must be recorded in writing. Officers must issue a seizure order in Form GST INS-02.
The seized goods or documents must be retained only for as long as necessary for examination or inquiry. If documents are relied upon for issuing a notice, the taxpayer must be given a copy. Where it is not practicable to seize the goods, the officer may issue an order of prohibition, restricting the taxpayer from removing or dealing with those goods without permission.
Seized goods must be released if no notice is issued within six months from the date of seizure. This time can be extended by another six months if reasons are recorded in writing by the proper officer and approved by a Commissioner.
Provisional Release of Seized Goods
The law also provides for the provisional release of goods seized upon the execution of a bond and the furnishing of security. Rule 140 of the CGST Rules lays down the procedure for provisional release. A bond in Form GST INS-04 must be submitted for the value of goods, along with a bank guarantee for the amount payable. This ensures that the taxpayer can resume business while safeguarding the government’s interest.
Confiscation of Goods or Conveyances
If a taxpayer fails to justify possession or movement of goods or if the goods are being transported in contravention of the law, they may be subject to confiscation under Section 130 of the CGST Act. Confiscation results in the permanent transfer of ownership of goods to the government.
Before confiscation, the taxpayer must be allowed to be heard. A notice must be issued, and the final order for confiscation is to be passed only after considering the taxpayer’s response. Along with confiscation, a penalty may be imposed. In case of vehicles used for illegal transportation, they may also be confiscated.
Appeal against Seizure or Confiscation
Any taxpayer aggrieved by the seizure or confiscation order can file an appeal under Section 107 of the CGST Act. The appeal must be filed within three months from the date of the order, and the taxpayer is required to deposit 10% of the disputed amount as a precondition for filing the appeal. If the case involves confiscation of goods or conveyances, the aggrieved party may also approach higher forums,, including the Appellate Authority, Appellate Tribunal, High Court, and Supreme Court, depending on the facts and issues involved.
Role of Proper Officer and Safeguards
Only designated officers authorized under Section 67 can conduct inspection, search, and seizure. These officers must operate within the legal boundaries laid down in the GST law and constitutional guarantees. All actions must be supported by “reasons to believe,” and recorded in writing. Officers cannot act arbitrarily or exceed their powers. Taxpayers are protected under Article 20(3) and Article 21 of the Constitution of India, which protect against self-incrimination and guarantee the right to life and personal liberty.
The CGST Rules also require officers to prepare a panchnama at the time of search and seizure, listing the items seized and having it signed by independent witnesses. Taxpayers have the right to receive copies of seizure documents, panchnama, and notice of proceedings. Legal remedies and appeal options are also available.
Conclusion
Inspection, search, and seizure are powerful tools available to GST officers to ensure compliance and prevent tax evasion. However, they must be used judiciously, with adherence to legal procedures and constitutional safeguards. Both the tax administration and taxpayers must understand their rights and obligations to ensure that enforcement actions are fair, transparent, and lawful. Legal remedies and appellate mechanisms play a crucial role in maintaining this balance and ensuring justice in the GST regime.