Adjudication vs. Prosecution under GST: The Dilemma of Parallel Proceedings and the Judicial Search for Balance

The Goods and Services Tax regime was introduced with the promise of simplification, transparency, and uniformity in indirect taxation. Yet, nearly a decade into its operation, one of the most complex and contentious issues confronting taxpayers and courts alike is the coexistence of adjudicatory and prosecutorial mechanisms under the GST framework. The parallel initiation of tax adjudication and criminal prosecution for the same set of allegations has generated a profound legal dilemma - one that sits at the crossroads of fiscal governance, criminal jurisprudence, and constitutional liberty.

At its core, GST is a fiscal statute. Its primary purpose is the assessment, levy, and collection of tax. The adjudicatory machinery under Sections 73 and 74 of the CGST Act is designed to determine tax liability, interest, and penalty after affording the taxpayer an opportunity of being heard. Prosecution, on the other hand, is envisaged under Section 132 as an exceptional measure, reserved for grave cases involving fraud, willful misstatement, or suppression of facts with intent to evade tax. In principle, the architecture of the statute suggests a calibrated sequence - first adjudication, then prosecution if the facts so demand. In practice, however, this sequence is frequently inverted, giving rise to parallel proceedings that impose disproportionate hardship on the accused.

The central nuance in this debate lies in the distinction between allegation and adjudication. GST investigations often commence with intelligence inputs or data analytics suggesting irregular availment of input tax credit or suspicious transactions. At this stage, what exists is only an allegation, yet prosecution is often initiated as though guilt were already established. Arrests are made, bank accounts are attached, and criminal complaints are filed, all while adjudication proceedings remain pending or have not even been initiated. This approach effectively transforms suspicion into punishment, undermining the foundational criminal law principle that liability must be determined before penal consequences ensue—a principle repeatedly emphasised by the Supreme Court in Sanjay Chandra v. CBI (2012) 1 SCC 40, where the Court cautioned against the use of pre-trial incarceration as a surrogate for punishment, even in economic offences.

The judiciary has consistently recognised the dangers inherent in such premature criminalisation. Courts have acknowledged that adjudication is not a mere procedural ritual but a substantive safeguard that determines whether the alleged tax evasion actually exists. Without adjudication, even the State does not possess a definitive finding that tax is payable, let alone that it was evaded with criminal intent. This reasoning found clear expression in Jayachandran Alloys (P) Ltd. v. Superintendent of GST (2019 SCC OnLine Mad 31206), where the Madras High Court held that prosecution prior to determination of liability is ordinarily premature and contrary to the statutory scheme of GST. The Court observed that GST law primarily contemplates assessment and recovery, and criminal prosecution cannot be allowed to precede adjudication as a matter of routine.

At the same time, courts have been careful not to adopt an absolutist position. The judicial approach has been marked by nuance rather than rigidity. While recognising that adjudication and prosecution are legally independent proceedings, courts have examined whether their simultaneous invocation serves any legitimate purpose or merely results in avoidable oppression. The guiding judicial inquiry has consistently been one of proportionality - whether the drastic consequences of criminal prosecution are justified at a stage when civil liability itself remains uncertain.

A critical strand in judicial reasoning has been the nature of GST disputes themselves. Many cases arise not from clandestine activity but from interpretational differences, classification disputes, eligibility of input tax credit, valuation issues, or complex supply chain arrangements. In such cases, courts have shown pronounced reluctance to permit criminal prosecution to outpace adjudication. The logic is both simple and constitutionally compelling: where liability turns on interpretation of law, criminal intent cannot be presumed. To prosecute before adjudication in such cases is to criminalise disagreement, not fraud. This principle echoes the Supreme Court’s reasoning in Radheshyam Kejriwal v. State of West Bengal (2011) 3 SCC 581, where the Court held that when adjudication proceedings exonerate an assessee on identical facts, continuation of criminal prosecution becomes untenable.

The judiciary has also taken cognisance of the documentary character of GST offences. Unlike conventional crimes involving oral testimony or volatile evidence, GST cases are built almost entirely on records - returns, invoices, ledgers, and electronic data, most of which are already in the possession of the department at the investigation stage. Courts have therefore questioned the necessity of invoking the coercive criminal process when the evidentiary foundation is static and not susceptible to manipulation. This reasoning has informed several bail and protection-from-arrest orders, where courts have noted that custodial interrogation serves little purpose once documents are seized.

Beyond doctrinal legality, courts have increasingly acknowledged the lived reality of the accused under GST prosecution. The suffering occasioned by parallel proceedings is neither speculative nor incidental, it is immediate and severe. Arrest carries with it stigma that no subsequent acquittal can fully erase. Businesspersons find their operations paralysed, their credibility destroyed, and their financial lifelines severed through attachment of bank accounts. Even where bail is granted, restrictive conditions and prolonged litigation extract a heavy personal and professional toll. All this unfolds while adjudication often delayed by years may ultimately exonerate the taxpayer or substantially dilute the allegations. This human cost has found implicit recognition in Satender Kumar Antil v. CBI (2022) 10 SCC 51, where the Supreme Court cautioned that arrest should not become a tool of harassment and reaffirmed that criminal law must operate with constitutional restraint.

Judicial sensitivity to this hardship marks an important evolution in GST jurisprudence. Courts have repeatedly observed that criminal law cannot be used as a pressure tactic to secure recovery or enforce compliance. The existence of a comprehensive adjudicatory and recovery mechanism under GST reinforces the view that prosecution should be the exception, not the rule. The compoundable nature of GST offences under Section 138 further strengthens this position. When the legislature itself contemplates settlement through payment of tax, interest, and penalty, the rationale for incarcerating an accused before liability is crystallised becomes increasingly tenuous a concern echoed by several High Courts while granting bail in GST prosecutions.

Yet, judicial restraint has not translated into judicial indulgence. Courts have drawn a clear and principled distinction between bona fide disputes and cases of manifest fraud. Where investigations disclose the creation of fictitious firms, forged documentation, or organised syndicates operating solely to generate fake ITC, courts have upheld parallel prosecution even in the absence of completed adjudication. In such cases, the judicial rationale rests on the clarity of criminality where fraud is apparent on the face of the record, adjudication is not permitted to become a shield against prosecution. This calibrated approach ensures that constitutional protections are not misused to insulate sophisticated economic crime.

The evolving judicial approach thus reflects a conscious attempt to harmonise enforcement objectives with constitutional discipline. Rather than adopting a one-size-fits-all rule, courts have insisted on contextual adjudication examining the nature of allegations, the stage of proceedings, the conduct of the accused, and the necessity of criminal prosecution at that point in time. This jurisprudential maturity recognises that parallel proceedings are not per se illegal, but their mechanical and premature invocation is deeply problematic.

In essence, the adjudication–prosecution dilemma under GST is not merely a technical legal issue; it is a test of constitutional governance in fiscal administration. The judiciary has repeatedly reminded the executive that efficiency cannot come at the cost of fairness, and deterrence cannot justify disregard for due process. The suffering of the accused—loss of liberty, livelihood, and reputation has emerged as a legitimate consideration in judicial reasoning, signalling a shift from revenue-centric enforcement to rights-conscious adjudication.

As GST law continues to evolve, the judicial message is becoming increasingly clear. Adjudication must ordinarily precede prosecution. Criminal law must remain a measure of last resort, reserved for clear and egregious cases of fraud. Parallel proceedings, when invoked without discernment, erode trust in the tax system and risk transforming fiscal regulation into punitive overreach. The future of GST enforcement lies not in aggressive criminalisation, but in principled restraint where the power to prosecute is exercised with care, and constitutional liberty is not sacrificed at the altar of expediency.

~ Ramakant Gaur & Sobia Manzoor

Financial auditor or ethical hacker, the rules of the game are the same

In days when words like parallel economy, shell companies and money laundering flood blogs, intellectual and after-party discussions, liquor baron and former Kingfisher boss Vijay Mallya’s extradition proceedings in a British court are just a reminder of how high-profile white collar crimes influence the psyche of society.

Seeing an influential public figure face music over alleged irregularities – read laundering, account bungling and non-repayment of loans, perhaps, reignites the hope that justice shall prevail.

For every big fraud that hits headlines, there are dozens which go undetected. From Harshad Mehta’s security scam in 1992 to Ramalinga Raju’s Satyam Computer Services accounting scam in 2009 and now the Sahara and the liquor baron’s issue, some white collar crimes always remain in public memory because of the investigators who dared to expose something that would, otherwise, remained under cover.  

The journey of catching the scent of a fraud and digging the evidence to prove irregular financial transactions is tortuous. It is like virtual reality gaming by a new-age super sleuths – also known as a forensic auditor -in the dark and meandering lanes of economic offences.

Had it not been for the court-appointed forensic auditors, the Mallya case would never have reached the current stage. The good times for the “Liquor King” would have never ended with the help of advisers - present in coteries of all over-ambitious industrialists – who specialize in bypassing the legal stipulations and rules of fair play.

The functions of a forensic auditor are akin to the blind man entering a dark room during midnight in search of a black hat that was not there, as he has to go beyond the figures and statements so as to unearth the fact.

To put it differently, a forensic auditor goes beyond numbers. The concept requires blending of the three principles - accounting, auditing and investigation. Investigation is what makes forensic audit different from a traditional audit. And, mind you we are not talking about an ordinary investigation, it has to carry the evidentiary value that can be used in a court of law.

I cannot stop myself from comparing a forensic auditor to an ethical hacker. Just as an ethical hacker helps investigators break into the most guarded programmes and files of a suspect, a forensic auditor takes off the shells of the corporate veil of the entity for establishing the intentions of the person(s) behind questionable transaction(s). A forensic audit finds out the basis on which each decision was taken.

From the point of view of a legal expert, I can say that the litigation support provided by a financial auditor helps the court understand the depth and width of the financial scams under its lens.

In any corporate environments data exists not only on PCs but on server(s) too, forensic auditors use such data to investigate into the depths of the transaction(s).

For instance, in the liquor baron’s case, the company’s internal support team allegedly took precautions against early detection but it was the skill of the investigator who thought forensically to arrive at the conclusion of the fraud and substantiate it with evidence.

If we just talk about the banking sector, it was an accepted reality much before the allegations against Mallya became public that the traditional audit methodologies will not suffice to arrive at the realities behind complex financial transactions.

What is needed is a melange of processes, techniques and investigations to fully decrypt and decipher the complex transactions under scanner and conclude about the presence of and, henceforth, present the case in a manner amenable and acceptable in the court of law.

The RBI has repeatedly underscored the importance of forensic audit, as banking is all about trust and confidence and fraud is one important aspect of eating away these vital pillars on which banking leans upon.

It is not just about the losses suffered by banks but also about the issues of culture and system in banking sector which should have a zero tolerance towards such fraudster and fraudulent activities and should have strong preventive, detective and corrective capability.

Banks are required to set up dedicated and well organised “Special Surveillance and Investigative Function”. Due to all these concerns, the RBI also wants to create a common pool of forensic audit firms.

Another aspect that cannot be ignored about financial auditors  or “ethical white collar crime hackers” is their shortage in our country. The shortage persists despite the specialised field being a well-developed and established branch of probes into accounting frauds abroad.

The growing significance of forensic audit can be gauged from the  Institute of Chartered Accountants of India move to introduce a specialised course in the subject recently. But, there is still a long way to go before an experienced breed of financial auditors gets down to work.

For the well-meaning and law abiding industrialists, forensic audit can prove to be a tool for checking wrongdoings of their own subordinates.

Unfortunately, this form of audit is currently used only for detecting frauds. Its use as a preventive tool – by corporates or entrepreneurs - against frauds by their own unscrupulous employees is yet to pick up in our country.  

Due to the complex judicial system and political compulsion, forensic auditors face the challenge of gathering information against the “big shots‟ that is admissible in the court of law.

In our country, the situation is more challenging as the first remedy that a troubled industrialist seeks is from the investigators or guardians of law themselves, albeit, against personal favours and “cuts”.

"It takes two hands to clap!” and this is true for alleged money laundering and accounting scams as well. Economic offences are chiefly conspiracies seldom committed by an individual.

Like the script of any Bollywood pot-boiler, someone, somewhere in the government set-up turns a blind eye towards the fraudster and the booty worth millions of rupees gets divided among the beneficiaries.

As past experience has shown us, a large number of frauds revolve around functionaries of public sector. If I have my say, I would recommend appointment of forensic accountants in all public sector and large scale companies so as to limit the scope for wrongdoings.

Any fraud investigation is part art and part science. Since so much information is now created and stored electronically, a good knowledge of computers and information technology is an essential part of the investigator’s toolkit.

One of the attributes of forensic audit is the retrieval of concealed information/data majorly essential for the investigation of economic offenses.

As investigators in the Vijay Mallya’s alleged fraud case would have realized, fraud is a complicated strategy and investigation of data for fraud is gigantic.

Culprits use sophisticated technology and to withstand this cutting-edge stereotype, traditional investigation methodology has to be replaced, therefore, right technology has to be adopted to be at par with the IT platform.

Cyber crime is a huge risk since expansion of businesses geographically and organically implies attaching more and more risk and incompatibility of data and technology will only amplify such risks.

Thus, a forensic auditor isn’t a watchdog but a bloodhound sniffing out fraudulent and criminal transactions. And, my experience shows that enforcement agencies themselves lack the trained manpower or skill to take on the whiz-kids of frauds.

May be time has come for these agencies to introspect on the need and speed with which the whole new world of forensic audit should be explored for curbing the parallel economy.

                    Indian  Tax  Laws Lack Teeth

Tax crimes, money laundering and other financial crimes have posed  the great threat to the strategic, political and economic interests of both developed and developing countries. The launderers and criminals  undermine citizens’ confidence in their governments’ ability to get taxpayers to pay their taxes and may deprive governments of revenues needed for sustainable development. A general perception is prevalent these days that corruption is quintessential for survival of any business, trade or commercial activities.

These activities are thriving in the present global scenario of secrecy, inadequate legal frameworks and arbitrary policies formations in relation to the tax regulations, poor enforcement, and weak inter-departmental coherence. The offence including money laundering, corruption or other economic crimes typically constitutes a tax crime, which is not being taken very seriously in India. Even the smuggling activities have been held bailable by virtue of a recent Supreme Court judgment viz. Omprakash Vs. Union of India. This very fact shows that the Indian tax laws lack teeth. The govt. could have come up with the new bill in spite of crying wolf by resorting to the misinterpretation of old weaker law. 

The statistics in relation to the prosecution in such tax matters are pathetic. On 16th May 2012, the then finance minister of India Shri Pranab Mukherji bragged in parliament whilst presenting paper on black money (pls. refer page 47 at http://finmin.nic.in/reports/WhitePaper_BlackMoney 2012.pdf)

"7.15 Although sparingly used, the department has utilized these provisions successfully to enhance tax compliance, with a success rate of about 48 per cent convictions or fiscal compounding in the last six years, one of the highest amongst all law enforcement agencies in India.

The data in the said report reveals that in last 7 years, only 1485 prosecution cases were filed by Income tax dept. and only 123 persons were convicted out of such cases. Even in this minuscule number of cases, settlement or compounding formed the major part as a consequence of so called action on black money, whereby tax evaders were given the benefit of compounding. Who'll believe that there were only 1485 cases of income tax evasions in last 7 years in country like India, where IT dept. thought it appropriate to prosecute the evaders. And the conviction rate speaks voluminous about the seriousness of the department on such a sensitive issue. Therefore, it can be easily make out that huge talks of action on black money constitute the lip service only.

In recent past, we've witnessed the pressure on the honest investigating officers of Enforcement directorate. They're being harassed and their investigational records become the part of idle pads of red tapism. Justice is not seen anywhere in such cases. we're happy with eyewash like presenting white paper on black money and getting diverted from real issues. The ace investigating agencies like Enforcement Directorate, Central Bureau of Investigation, Central Board of Direct taxes and Central Board of Excise and Customs lack the teeth to take earnest action on the white collared criminals. It is unfortunate that in such scenario, the country's tax evasion is bound to grow exponentially and the law enforcement agencies will be busy in political persecutions only. 

Who doesn't know the cash dealings in real estate sales but no one is bothered to look into it. It is extremely difficult for a home seeker to find a home according to his budget. Even in the realm of global recession, Indian real estate market has shown unusual steep hike. This issue must be a cause of concern for lawmakers, if they find time for people at large. Rich is becoming richer and poor is becoming poorer. The situation is catastrophic and would be resulted in increase of economic crimes and white collared criminals. Public awareness may exert some pressure on the Govt. but the poor public is also busy in arranging their bread, clothing and shelter.

To counter these activities, the govt. requires to create more stringent laws, acquire political will to enforce the laws, greater transparency, more strategic intelligence gathering avenues and improved efforts to harness the capacity of different government agencies to work together to detect, deter and prosecute these crimes. A transformation in whole of government's approach is required to tackle the gruesome problem of financial crimes.