Prevention of Money Laundering & GST: Continuum

A recent notification dated July 7, 2023 (“Notification”) under the Prevention of Money Laundering Act, 2002 (“PMLA”) frenzied the whole broadcast and electronic media world. The business industry along with many professionals are interpreting that with effect of this notification all the offences under Goods and Services Tax (“GST”) Act will now come under the purview of PMLA and within the radar of Enforcement Directorate (“ED”). However, a deep dive into the interpretation of the notification reveals a more strategic move.

This article focuses on understanding two aspects: Firstly, how various offences under GST Act become a means to launder money and under which circumstances offences under GST may coincide with offences under PMLA. Secondly, to provide the practical reason behind issuing the notification.

The Prevention of Money Laundering Act, 2002 is a law implemented in India to prevent and combat money laundering and terror financing activities and provides for civil and criminal punishment for laundering money. On the other hand, the GST Act is a comprehensive indirect tax system that was introduced in India in 2017 to bring various Indirect Taxes under one roof, following the idea of “One Nation: One Tax”.

Both PMLA and the GST Act aim to fight against financial crimes, however, they address different aspects. The PMLA deals specifically with money laundering and terror financing, while the GST Act focuses on streamlining the taxation system and preventing tax evasion.

The GST Act is a self-contained and self-policing legislation which also lays down the provisions related to arrest and prosecution in the case of tax evasion. Both the GST Act and PMLA operate independently, but in synergy to combat financial crimes and ensure compliance with regulatory frameworks in India.

Evasion of taxes and money laundering can be interconnected and often occur together. Here is how one can lead to the other and vice versa:

1. Tax evasion leading to money laundering: Individuals or entities involved in tax evasion may generate unaccounted or black money by underreporting income, inflating expenses, or using other fraudulent means to evade taxes. To hide the illicit funds and make them appear legitimate, they may engage in money laundering activities to convert their “tainted” money into “clean” money.

2. Money laundering leading to tax evasion: Money laundering often aims to integrate illicit funds into the legitimate financial system. Once the funds are successfully integrated, individuals or entities may not be willing to report the illicit funds as income or misrepresent the source of funds, with an intention to evade taxes and conceal the illegal origins of the money.

Further, the Financial Action Task Force (“FATF”) treats the criminal offence of tax evasion as an offence of money laundering involving concealing the origin and amount of income, making it appear legitimate or erasing evidence of it altogether. 

The Enforcement Directorate (“ED”) on one hand plays a pivotal role in implementing and enforcing PMLA by initiating investigations based on information received from various sources, collecting evidence, and prosecuting individuals involved in money laundering and terror financing activities.

On the other hand, in the context of GST, the role of ED cannot be ignored in cases involving tax evasion and fraudulent activities related to the GST regime. It may investigate cases of evasion, illegal input tax credit claims, fake invoicing and any other offenses under the GST Act.

So, if the case comes under the radar of the ED, it can exercise wide-ranging powers which include conducting investigations, issuing notices, freezing assets and initiating prosecution. These powers allow the ED to take swift action against those involved in money laundering and other economic offences.

The above explanation paves a foundation for the most essential question - “Whether the offences under GST may come under the realm of ED?”

Let’s carefully analyse and get the answer to the question:

Offences under PMLA are ‘scheduled’ and ‘predicate’ offences. Scheduled offences are the offences listed in the schedule to the PMLA, 2002. This includes specific offences under various Acts like Indian Penal Code (“IPC”) Narcotic Drugs and Psychotropic Substances (“NDPS”) Act, Companies Act, Explosive Substances Act, Arms Act, Wildlife Protection Act, and several others. Further, authorities under PMLA cannot prosecute a person based solely on the notion that an offence is a scheduled offence, a scheduled offence must be a predicate offence; which means it should be registered with the jurisdictional police and/or competent authorities for the PMLA Act to come into picture. Currently, offences under GST are not considered predicate/scheduled offences.

However, if there is an offence committed which comes under the purview of scheduled offences for example under the Indian Penal Code where the ED is already carrying out an investigation and while conducting the investigation ED has reason to believe that there has been a contravention of the provisions under GST which led to tax evasion, it can parallelly investigate it.  

To sum it up, since ED cannot probe tax crimes under the PMLA, GST crimes cannot be taken up by ED as standalone crimes. But ED may definitely take up the matter if there is any other scheduled offence along with GST violation.

Goods and Services Tax Network (“GSTN”) is a Section 8 Company under the Companies Act, 2013 to act as a technology backbone of GST and owns the GST portal. It is the repository of all GST-related information, including returns, tax filing and other compliances. The said notification has now included GSTN in the list of entities with which the ED and Financial Intelligence Unit (“FIU”) will share information. The notification has ensured that the information-sharing platform is more comprehensive and two-way as it now allows the flow of information from ED and FIU to GSTN. This notification deals with the flow of information “to GSTN from ED/FIU” and not “from GSTN to ED/FIU”, please note that GSTN was already sharing information with the Enforcement Wing, FIU, and other agencies like the Central Board of Direct Taxes (“CBDT”) etc. through a memorandum of understanding.

It is clear from the above analysis that the recent notification does not bring GST offences under the purview of PMLA offences. It brings GSTN under PMLA for the purpose of disseminating information. It primarily focuses on information sharing between the PMLA and GST authorities, rather than reclassifying GST offences as money laundering offences. Encompassing GSTN under PMLA will act as a Double-Edged Sword in the hands of the Government now allowing ED and FIU to share relevant information with GSTN if they have reasons to believe that there has been a contravention of the provisions under GST.

Further, the current GST Laws have enough teeth to detect fraud, and investigate and prosecute the offenders by itself. However, we cannot omit the fact that evasion of GST or other taxes may be used to divert or sever out funds or bring in tainted money to the economy, leading to the offence of money laundering and selective cases in which ED can take up the matter. This notification is a step in the right direction to eliminate loopholes leading to tax evasion and money laundering as well as a positive step to ensure communication flow between all the departments that should work in tandem for the most beneficial outcome.

Uday Singh Ahlawat is the Managing Partner of Ahlawat & Associates. Guneet Mayall is a Senior Associate at the Firm.