Tax Evasion Leads To Arrest: Knowing Your Rights – By CA Ashu Dalmia

The article “Tax Evasion Leads To Arrest, Knowing The Law Leads To Your Rights”  has been authored by CA Ashu Dalmia, with valuable research and drafting assistance provided by B.A.LL.B. intern Aditi Singh.

In today’s era, offences such as GST fraud, money laundering, and customs evasion are no longer considered minor violations, they pose significant threats to the nation’s economic integrity. These offences are treated as serious criminal acts under various legislations, including the Central Goods and Services Tax (CGST) Act, 2017, the Prevention of Money Laundering Act (PMLA), 2002, the Customs Act, 1962, and the recently enacted Bhartiya Nagarik Suraksha Sanhita (BNSS), 2023. Many of these offences are classified as non-bailable and cognizable, and authorities are empowered to arrest individuals under provisions such as Section 132 and Section 69 of the CGST Act, Section 19(1) of the PMLA, and Section 104 of the Customs Act.

This article explores the legal framework governing arrests, the safeguards provided by the judiciary, and the lawful remedies available to challenge an arrest. Understanding your legal rights is not just beneficial — it is your first line of defence in protecting your personal liberty.

OFFENCE, ARREST AND BAIL 

1. OFFENCE

What is an offence? Offence is defined under Section 2 (1)(q) of the Bhartiya Nagarik Suraksha Sanhita (BNSS), 2023 “offence” means any act or omission made punishable by any law for the time being in force.

Based on severity and Punishment, the offences can be classifies as follows:

• Non-bailable and Cognizable 

Section 2(1)(c) BNSS “Non-Bailable” is an offence in which bail is not a matter of right. We can apply for bail in the Sessions Court or Magistrate. Bail can be granted at the discretion of the court, considering the nature of the offence and facts of the case. 

Section 2(1)(g) BNSS “Cognizable offence” means an offence for which, and “cognizable case” means a case in which, a police officer may, in accordance with the First Schedule or under any other law for the time being in force, arrest without warrant.

In following cases where the amount of tax evaded or the amount of input tax credit wrongly availed or utilised or the amount of refund wrongly taken exceeds five hundred lakh rupees, the offences shall be cognizable and non-bailable.

• Supplying goods/services without issuing invoices with intention to evade tax 
• Issuing fake invoices without using actual supply of goods/services leading to wrongful availment or utilisation of input tax credit or refund of tax
• Fraudulently Input Tax Credit (ITC) claims without any invoice or bill
• Tax collected but not paid to the government for a period of three months from the date on which such payment becomes due.

For above offences, if the amount exceed to 5 Cr. then the punishment will be 5 years imprisonment + fine

• Bailable and Non-cognizable 

Section 2(1)(c) BNSS “Bailable offence” is an offence in which bail is a matter of right. This means the accused can demand bail, and the officer or the court must grant it.

Section 2(1)(o) BNSS “Non-cognizable offence” means an offence for which, and “non-cognizable case” means a case in which, a police officer has no authority to arrest without warrant. 

The bailable offences can be categorised as: 

1. If the tax involved in the offence is between 2 Cr. Upto 5 Cr. and falls under the following categories:

• Supplying goods/services without issuing invoices with intention to evade tax 
• Fraudulently Input Tax Credit (ITC) claims without any invoice or bill
• Tax collected but not paid to the government for a period of three months from the date on which such payment becomes due.
• Evades tax or fraudulently obtains refund 
• Falsifies or substitutes financial records or produces fake accounts or documents or furnishes any false information with an intention to evade payment of tax due
• Acquires possession of, or in any way concerns himself in transporting, removing, depositing, keeping, concealing, supplying, or purchasing or in any other manner deals with, any goods which he knows or has reasons to believe are liable to confiscation
• Receives or in any other manner deals with any supply of services which he knows or has reasons to believe are in contravention of any provisions of the CGST Act. 

The punishment for the above mentioned offences are 3 years imprisonment + fine.

2. If the tax involved in the offence is between 1 Cr. Upto 2 Cr. and falls under the following categories:

• Issuing fake invoices without using actual supply of goods/services leading to wrongful availment or utilisation of input tax credit or refund of tax. 

The punishment for the above mentioned offences are 1 year imprisonment + fine.

3. If the tax involved in offences are without limit:

• If commits or abets the commission of the offences of falsifying or substitutes financial records or produces fake accounts or documents or furnishes any false information with an intention to evade payment of tax due. 

The punishment for this offence is six months imprisonment or with fine or with both. 

ARREST

PROCEDURES AND POWERS OF ARREST

In a country where economic offences are increasingly viewed as threats to national integrity and fiscal discipline, the law comes down heavily on deliberate tax evasion and financial fraud. While many still see tax defaults as civil liabilities, the legal framework has evolved to treat such actions as serious criminal offences – often leading to arrest and in some cases, non-bailable imprisonment.

The procedure and powers relating to arrest are comprehensively provided under Chapter V of the Bharatiya Nagarik Suraksha Sanhita (BNSS), 2023, Section 69 and 132 of the CGST Act, 2017, Section 104 of the Customs Act, 1962 and Section 19 of Prevention of Money Laundering Act (PMLA), 2002. These legal provisions, read with the guidelines issued by the Central Board of Indirect Taxes and Customs (CBIC), establish the legal framework for arresting individuals in GST-related offences.

Section 69 of CGST Act, 2027 also states the power of arrest:

The GST Commissioner has the power to authorize any Central Tax officer to arrest a person.

The commissioner must have “reasons to believe” that the person has committed an offence under Section 132.

The “grounds of arrest” must be informed.

What is the “reasons to believe”?

The phrase “reason to believe” is a crucial legal threshold before an arrest can be made under special laws like CGST Act, 2017 (Section 69) or PMLA, 2002 (Section 19). It means there must be an objective satisfaction, based on tangible, credible, and relevant material, that a person has committed a punishable offence. Mere suspicion, assumption, or departmental opinion is not enough.

In Arvind Kejriwal v. Directorate of Enforcement (2024), the Apex Court emphatically held that “reasons to believe” must be rooted in verified evidence, not political motivations or vague allegations. The court observed that the Directorate of Enforcement failed to produce any cogent material before the arrest to justify their belief that Arvind Kejriwal was guilty of money laundering. The court stated:

“The power to arrest is not synonymous with the need to arrest. The ‘reason to believe’ must not only be recorded in writing but must be demonstrably supported by facts capable of judicial scrutiny.”

This judgment underscore that the arresting authority must show intellectual application of mind, backed by actual documentation. Without this, the arrest is illegal, arbitrary, and a violation of personal liberty under Article 21 of the Constitution.

What are the “grounds of arrest”?

The grounds of arrest must be specific, lawful and supported by material evidence. Under Section 69 of the CGST Act, 2017, arrest can be made if the Commissioner has “reasons to believe” that a person has committed offences under Section 132, such as tax evasion exceeding ₹100 lakh, wrongful ITC claims, or fake invoicing. However, mere allegation or departmental suspicion is not enough.

In Radhika Aggarwal v. Union of India (2025), the Supreme Court held that arrest powers under Section 69 must be used with great caution and only when non-bailable, cognizable offences are clearly made out. It observed that the grounds must be recorded in writing.

Similarly, in Arvind Kejriwal v. Directorate of Enforcement (2024), the court held that the absence of cogent material at the time of arrest made the action illegal. The ED could not justify how the arrest met the threshold under PMLA.

Thus, no arrest can be sustained without proper documentation, judicially reviewable material, and adherence to due process under Article 21 of the Constitution. Anything less is a direct abuse of power. 

The CBIC instruction no. 02/2022-23 has given comprehensive guidelines of arrest. Few of the major guidelines are as follows:

Authorization of Arrest: The Principal Commissioner/Commissioner must record in writing their reason to believe, based on the nature of offence, role of the accused, and evidence, that a person has committed an offence under Section 132 of the CGST Act. Only then can they authorize a Central Tax officer to arrest, strictly following Section 69(3) of CGST Act and CrPC provisions. Arrest is done only in exceptional cases, not as a regular practice. Arrest should not be resorted to in cases of technical nature i.e. where the demand of tax is based on a difference of opinion regarding interpretation of Law. The Commissioner or the competent authority must then determine if the answer to any or some of the following questions is in the affirmative: 

• Whether the person was concerned in the non-bailable offence or credible information has been received, or a reasonable suspicion exists, of his having been so concerned?
• Whether arrest is necessary to ensure proper investigation of the offence? 
• Whether the person, if not restricted, is likely to tamper the course of further investigation or is likely to tamper with evidence or intimidate or influence witnesses? 
• Whether person is mastermind or key operator effecting proxy/ benami transaction in the name of dummy GSTIN or non-existent persons, etc. for passing fraudulent input tax credit etc.? 
• As unless such person is arrested, his presence before investigating officer cannot be ensured.

Arrest Memo Compliance: An arrest memo must be prepared as per the Supreme Court’s directions in D.K. Basu v. State of West Bengal and in the format given by CBIC’s Circular No. 128/47/2019-GST. It must clearly mention applicable legal provisions, grounds of arrest, date and time, and acknowledgment by the arrested person. A copy must be provided to the arrestee, and each person must receive a separate memo in case of multiple arrests.

Rights and Communication: The grounds of arrest must be clearly explained to the accused. Additionally, the officer must immediately inform the person nominated by the arrested individual and record this in the arrest memo to ensure transparency and accountability.

Procedural Safeguards: Female arrestees must be arrested only by a woman officer. A medical examination of every arrested person must be conducted promptly by a government or registered medical practitioner. For women, it must be done by or under the supervision of a female doctor.

HOW, WHEN AND WHERE ARREST CAN BE OPPOSED?

Arrest can be opposed at three stages- pre-arrest, during arrest, and post-arrest by using constitutional and statutory remedies. 

Pre – Arrest: A person can approach the high court or session court under Section 482 of BNSS for anticipatory bail if they fear arrest for a non-bailable offence. In Radhika Aggarwal v. Union of Indian (2025), the Apex Court granted interim protection from arrest under CGST charges, holding that “arrest must not be a tool of coercion”. 

During Arrest: If arrest is imminent and illegal (no proper authorization or “reason to believe”), the person can refuse to comply, demand to see the arrest warrant or order under CGST Section 69, and assert rights under BNSS Section 482 including the right to legal counsel and information of arrest grounds. 

Post – Arrest: The arrested person can immediately apply for bail in Session Court or to the Magistrate under Section 480 of BNSS. After the Session Court or Magistrate denies the bail then the arrested person can move to the High Court/Supreme Court under Article 226/32 of the Constitution or BNSS Section 483, challenging the legality of arrest. 

Legal protection lies in due process- no arrest can override fundamental rights unless strictly in accordance with law. 

3. BAIL

Section 480 of Bharatiya Nagarik Suraksha Sanhita, 2023

When bail can be taken on Non-Bailable offence

• When a person is accused of Non-Bailable offence and is seeking Regular bail. 
• The Court (Sessions Court or Magistrate) may grant bail, depending on: 
• Nature and seriousness of the offence
• Evidence available
• Criminal background of the accused
• Chances of absconding or tampering with evidence

Bail can be prohibited in cases where:

• The offence is punishable with death or life imprisonment, and
• The Court has reasonable grounds to believe the accused is guilty of the offence.

Section 482 of BNSS, 2023 – Inherent power to High Court or Court of Session to grant bail if there is “reason to believe” that the person may arrest. But the conditions are

• Person make him available for interrogation by police officer.
• Person shall not threaten or influence any witness.
• Person shall not leave the country without permission.
• Any other conditions if the court things if necessary.

Section 483 of BNSS, 2023 – special power to High Court or Court of Session to grant bail after rejected by Magistrate.

In short the law is firm but not blind. Knowing these legal provisions isn’t just about having knowledge, rather, it is about knowing “how” and “when” you can take the defense. 

CASE ANALYSIS AND JUDICIAL INTERPRETATION

Arrest, particularly in taxation and financial offences, is governed by a complex interplay between statutory power and constitutional safeguards. Indian courts have played a pivotal role in interpreting the scope, legality, and necessity of arrest, especially under special legislations like the CGST Act, 2017 and the PMLA, 2002 and Customs Act, while also applying the protective framework of the Bharatiya Nagarik Suraksha Sanhita (BNSS), 2023 and Article 21 of the Constitution.

RADHIKA AGGARWAL v. UNION OF INDIA

In this landmark judgment, a three judge bench comprising Chief Justice of India Sanjiv Khanna and Justices MM Sundresh and Bela M Trivedi the Apex Court ruled that arrest under Section 69 must be exercised with caution and only after verifying concrete materials that indicate the commission of a serious offence. The court observed that:

“Arrests cannot be made based on mere suspicion. Officers must have concrete material evidence leading to a “reason to believe” that the person has committed an offence under the Act. This reasoning must be recorded in writing and communicated to the arrestee”.

ARVIND KEJRIWAL V. DIRECTORATE OF ENFORCEMENT (2024)

The judgment is passed by a single judge bench, Justice Sanjiv Khanna.This high profile case further clarified the meaning of “reasons to believe”. The court held that mere possession of arrest powers does not imply a need to exercise them. The Enforcement Directorate had arrested Mr. Arvind Kejriwal under Section 19 of PMLA, alleging involvement in a money laundering case, without disclosing any fresh, credible material, justifying the arrest. 

The Court noted:

“The power to arrest must be exercised with restraint, and not as a substitute for investigation. If the reasons to believe are not rooted in verified material, the arrest becomes unconstitutional”.

SANTOSH KUMAR SAH V. UNION OF INDIA (2025)

In this case the Calcutta High Court granted the anticipatory bail to the petitioner who was arrested under the CGST provisions. The court said that:

“The petitioner has cooperated with the respondent authority and there is no chance to abscond. Thus considering the nature of allegation, materials on record, period of detention and stage of investigation this Court is of the view that further detention of the petitioner is not necessary for the purpose of investigation. Hence the petitioner should be granted bail”

Y.S. JAGAN MOHAN REDDY V. CBI (2013)

In this landmark case involving allegations of disproportionate assets and money laundering, the Apex Court denied bail to Mr Jagan Mohan Reddy. The Court emphasized the gravity and economic ramifications of white-collar crimes, holding that economic offences are grave in nature and affect the economy of the country as a whole. The Court observed:

“Economic offences constitute a class apart and need to be visited with a different approach in the matter of bail. The impact of such offences is not confined to an individual but has far-reaching societal consequences.”

VINEET JAIN V. UNION OF INDIA (2025)

The offences alleged against the appellant are under Clauses (c), (f) and (h) of Section 132(1) of the Central Goods and Services Tax Act, 2017. The maximum sentence is of 5 years with fine. A charge-sheet has been filed. The appellant is in custody for a period of almost 7 months. 

The court observed that: “These are the cases where in normal course, before the Trial Courts, the accused should get bail unless there are some extra ordinary circumstances”.

Number of judgments make it clear that arrest in taxation offences is not a routine tool, but an extraordinary power that must be backed by “reasons to believe”, due process, necessity and proportionality. Any deviation is not only subject to judicial challenge under the BNSS Section 482 and 483, but also a constitutional violation. Thus, Indian Courts have emerged as protectors of liberty, ensuring that investigative powers are not misused as instruments of coercion or harassment in economic offence matters.

CONCLUSION 

In conclusion, while the state is justified in curbing economic crimes, this power cannot come at the cost of violating constitutional liberties. Courts have clarified that arrest must be the exception, not the norm, and procedural safeguards must be followed meticulously. Judgments like Mohan, Arvind Kejriwal, Radhika Aggarwal, Vineet Jain and Santosh Kumar Sah have shaped the judicial approach to financial crimes, balancing the need for enforcement with the sanctity of liberty. Awareness of one’s rights under the CGST Act, PMLA, and Customs laws is not just beneficial, it is essential in an era where the line between investigation and oppression often blurs.

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