Prosecution Of Companies Avoiding Vat And Customs Duties

15 Oct 2025 --
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1. Legal Framework for Prosecution

A. VAT Evasion (Under National VAT Laws / GST Regime)

Companies that avoid paying VAT or manipulate their accounts to reduce tax liability can be prosecuted under:

Value Added Tax Acts of respective States (in pre-GST era)

Goods and Services Tax Act, 2017 (post-2017, India’s unified indirect tax law)

Sections commonly invoked:

Section 132(1) of the CGST Act, 2017 — Punishment for certain offenses

Section 122 — Penalty for false invoicing, tax evasion, etc.

Section 135 — Presumption of culpable mental state

Section 137 — Offenses by companies

B. Customs Duty Evasion

Governed by the Customs Act, 1962:

Section 111–114 — Confiscation of goods for improper import/export

Section 135 — Punishment for evasion of duty, fraudulent evasion, or dealing with smuggled goods

Section 140 — Offenses by companies

2. Modes of Evasion by Companies

Under-invoicing or over-invoicing of imports/exports

Fake billing or fictitious firms for claiming input tax credit (ITC)

Suppression of sales or inflating purchases

Misclassification of goods to attract lower duty or tax rate

Diversion of goods meant for export or duty-free import

3. Detailed Case Laws

Below are six major cases (from Indian and UK jurisprudence) that deal with VAT and Customs duty evasion by companies.

Case 1: R. v. Allen [2001] UKHL 45

Jurisdiction: United Kingdom (VAT Fraud)
Facts:
Mr. Allen was involved in a “carousel” or “missing trader” VAT fraud scheme. Companies were set up to import goods VAT-free from other EU countries, sell them domestically with VAT added, and then disappear without remitting VAT to HMRC.

Held:
The House of Lords held that deliberately failing to pay VAT while continuing business operations constitutes fraudulent evasion. The key element was the intent to deceive and benefit financially.

Principle:
Even complex corporate arrangements that obscure VAT liability can be traced to the controlling minds of the company directors for criminal liability.

Case 2: Commissioner of Customs (Import), Mumbai v. M/s Dilip Kumar & Company (2018) 9 SCC 1

Jurisdiction: Supreme Court of India
Facts:
The respondent company claimed a lower customs duty rate under an exemption notification for imports. The classification was found incorrect, and the authorities alleged duty evasion.

Held:
The Court ruled that exemption notifications must be strictly construed, and any ambiguity must go against the assessee. If a company claims a tax exemption without a clear legal basis, it can be prosecuted for duty evasion.

Principle:
Corporate entities are liable for false claims of exemption or misclassification intended to reduce customs liability.

Case 3: State of Tamil Nadu v. M/s India Cements Ltd. (2011) 2 SCC 258

Jurisdiction: Supreme Court of India
Facts:
India Cements was accused of suppressing production data and manipulating invoices to avoid VAT liability.

Held:
The Supreme Court upheld the finding that deliberate suppression of turnover amounted to intentional evasion. The company’s senior officers were held liable because they oversaw the accounting and sales data.

Principle:
For VAT evasion, mens rea (guilty intent) can be inferred from consistent suppression or falsification of records, even if indirect.

Case 4: Commissioner of Customs v. Essar Oil Ltd. (2004) 11 SCC 364

Jurisdiction: Supreme Court of India
Facts:
Essar Oil imported crude oil under a duty-free license for use in a notified refinery zone. However, the refinery was not operational when imports took place, and customs alleged misuse of exemption.

Held:
The company was found to have violated customs conditions, and the exemption was denied. However, criminal intent had to be established for prosecution under Section 135.

Principle:
Corporate criminal liability arises if the company knowingly makes false declarations or uses exemptions improperly. Strict compliance with customs license terms is essential.

Case 5: Commissioner of CGST & Central Excise v. M/s. Radha Krishan Industries (2021) 6 SCC 771

Jurisdiction: Supreme Court of India
Facts:
The company was accused of issuing fake invoices to claim Input Tax Credit under GST (a form of VAT). The tax department froze bank accounts and initiated prosecution.

Held:
While the Supreme Court granted limited relief from account freezing, it held that issuing fake invoices and availing fraudulent ITC are serious cognizable offenses under Section 132 of the CGST Act.

Principle:
Fraudulent input tax credit claims constitute tax evasion and invite criminal prosecution under GST law, not merely civil penalties.

Case 6: Union of India v. Rajasthan Spinning & Weaving Mills (2009) 13 SCC 448

Jurisdiction: Supreme Court of India
Facts:
The company was found to have evaded excise duty (predecessor of VAT) by manipulating input declarations.

Held:
The Court held that mere duty short payment due to misinterpretation does not automatically imply fraud, but deliberate suppression and falsification do.

Principle:
There is a clear distinction between bona fide misclassification (civil penalty) and intentional evasion (criminal prosecution).

4. Summary of Legal Principles

Aspect	Principle Established
Corporate Liability	Companies can be prosecuted under VAT/GST or Customs laws for intentional tax evasion.
Mens Rea	Guilty intent is inferred from conduct like fake invoicing, suppression, or misuse of exemption.
Director’s Responsibility	Senior officers are deemed liable if offenses occur with their consent, connivance, or neglect.
Strict Interpretation	Tax exemptions and benefits must be strictly interpreted; ambiguity goes against the company.
Burden of Proof	Once fraudulent intent is shown, the burden shifts to the company to rebut presumption of culpability.

5. Conclusion

Prosecution for VAT and Customs duty evasion is both civil and criminal in nature. Companies may face:

Penalties (monetary)

Confiscation of goods

Imprisonment of responsible officers

Revocation of licenses

The courts consistently hold that tax evasion through deception or deliberate misstatement is a serious economic offense that undermines public revenue. The corporate veil may be lifted to identify individuals controlling the fraudulent operations.