Power of GST Officers to Seize Cash During Searches

India's Goods and Services Tax (GST) regime may perhaps have offered tax authorities considerable enforcement to prevent tax evasion (including the power to search for, seize, and confiscate cash). Businesses and individuals must understand if, when and how far those rights extend by comprehending the power of the authorities and the manner in which the various legal provisions related to those powers are provided; so that they can understand their right to, and that it is necessary to, assert their rights.

Legal Provisions for Seizure of Cash

1. Section 67 of the CGST Act, 2017

This section allows GST Officials to inspect, search, and seize goods, documents, books or even cash, if they have, “any reasons to believe” that tax evasion has taken place. The search can be of business premises, the transport vehicle, warehouses, or even residential premises of the taxpayer.

2. Seizure of Cash

The CGST Act does not specifically cover cash (goods and documents are covered), but courts and departmental circulars at least have acknowledged that cash located during searches which is unaccounted for, or unexplained could constitute seized cash. The reasoning is that cash could be tax evasion proceeds, proceeds of fake billing or unaccounted supplies.

3. Detention of Money

Where the taxpayer has not substantiated the source of cash by records or linked it to declared income, the officer can detain the amount based on verification. Detained cash can be utilized to confirm a tax liability, assessed penalty, or released where the source can be justified as legitimate.

4. Safeguards

Officers are required to prepare a seizure memo and also establish verification by noting the cash in the presence of witnesses. This allows for both accountability and a documented record for the taxpayer to review and potentially challenge the action.

When Can Cash Be Seized

1. Unaccountable Cash

If there are staggering amounts of cash found in a search and the taxpayer cannot explain the origin or produce documents showing how it was earned which correlates to reported sales.

2. GST Evasion Connected to Cash

Cash is suspected to relate to false invoices, false suppliers, shell companies or undisclosed business transactions which lead to GST evasion.

3. The Taxpayer Fails to Produce Books

If the taxpayer does not produce books of accounts, invoices, ledgers, or other proof to support the cash they have.

4. Amount Fried out of Declaration

If the cash found is not consistent with the amount declared in the GST return, income tax return or financial statement.

5. Hawala or Benami

If the cash relates to informal transactions such as hawala or benami operations, the GST officer may detain cash for investigations.

Rights of Taxpayers During Seizure

It is important for officers to provide a panchanama record that states each and every item (including cash) which was seized.

Taxpayers have the right to a copy of the seizure memo as evidence of what was seized.

Cash may not be held indefinitely - it must be either returned to the taxpayer or taken into custody to be adjusted against tax obligations within the timelines outlined within GST law.

If cash is seized without justified reasoning or link to taxable actions, taxpayers have a right to appeal against that action before higher authorities, or to which they can file an appeal, or even file with the High Court.

Taxpayers have a right to respond to the inquiry/investigation and produce evidence as to the source of the cash (bank statements, or other accounting records) so as to facilitate the process to release the seized cash.

Refer this: Exploring Section 245 of the Income Tax Act: Intimation, Notice and More

Judicial Stand on Seizure of Cash

Courts have repeatedly ruled against the seizure of cash under GST unless it is shown to be connected to a taxable transaction, or undisclosed operation of a business. If cash is seized that demonstrates a nexus to fake invoicing, sales suppression and the non-payment of GST, the seizure is upheld.

At the same time, courts ruled that "reason to believe" must be based on material evidence and not just on suspicion. Courts have struck down arbitrary seizures of cash where no nexus to tax evasion was made out as illegal, and beyond the authority set out in Section 67. This balance means that while authorities can effectively curb tax evasion they can only do so within statutory limits, and that taxpayers are hence, safeguarded against possible misuse of that power.

Refer here: Case Laws on Sections 129 and 130 of the CGST Act, 2017

Practical Impact on Businesses

GST officers' power to confiscate cash during searches impacts businesses that use cash to make transactions, particularly high-value cash transactions.

1. Keeping Accurate Records

Businesses are required to maintain properly and contemporaneously recorded accurate records of all cash transactions (deposits, withdrawals, and/or expenses). Businesses should be able to verify every withdrawal, deposit or expense, with invoices, receipts, or vouchers. If there is no supporting evidence, GST officers will be suspicious and can seize cash.

2. Unexplained Cash

Any large amount of cash without supporting evidence is unaccounted money. Unexplained cash can lead to seizure in GST raids and increased scrutiny from income tax departments, creating double compliance issues.

3. Interruption to Operations

The seizure of cash will freeze working capital which has a direct impact on day-to-day operations like payments to suppliers and vendors, payment of payroll, and purchasing inventory. For micro, small and medium-sized enterprises (MSMEs) and cash-intensive businesses, the seizure of cash can have much more serious impacts.

4. Promotion of Digital Transactions

To escape confiscation of cash, many businesses are moving away from cash transactions to cashless transactions. Cashless transactions can promote business compliance risk but also provides a transparent trail of accounting that could further improve credibility.

Seizure of Cash – GST vs Income Tax

Parameter	GST Law (CGST Act, 2017)	Income Tax Law (IT Act, 1961)
Relevant Section	Section 67 of CGST Act	Section 132 of Income Tax Act
Scope of Seizure	Primarily goods, documents, and unexplained cash linked to tax evasion	Cash, bullion, jewellery, and valuable articles not recorded in books
Trigger for Seizure	Suspected tax evasion under GST (e.g., fake invoices, unrecorded sales)	Possession of undisclosed income or assets
Authority Involved	GST Officers (Joint Commissioner or above)	Income Tax Department Officers (Director, Principal Director, etc.)
Documentation	Seizure memo (panchanama) under GST proceedings	Warrant of authorization and detailed panchnama
Retention of Cash	Must be released or appropriated within investigation timelines	Retained until completion of income tax assessment
Challenging Seizure	Can be challenged before GST Appellate Authority or High Court	Can be challenged before Income Tax Appellate Tribunal (ITAT) or High Court
Impact on Business	May disrupt working capital but mostly GST compliance focused	Broader implications on both business and personal wealth disclosure

Conclusion

The power of GST officers to confiscate cash in a search situation is a very strong deterrent against tax evasion. However, taxpayers need to know their rights and your obligations under GST law to minimize any unreasonable hardship. Better records and documentation are the best protection against unnecessary seizures of cash.