GST 2.0 and Decriminalisation of Tax Offences: Key Changes Explained

More than nine years after the introduction of the Goods and Services Tax (GST) in July 2017, India is considering a significant reform of its tax-enforcement framework. The proposed GST 2.0 reform may seek to remove arrest powers under GST-specific laws and move towards greater decriminalisation of tax offences.

The proposal is expected to be discussed at the 57th GST Council meeting on October 7, 2026. If approved, legislative amendments may be required.

Read Also: UPSC Daily Current Affairs 2026

What Is GST 2.0?

GST 2.0 broadly refers to the next phase of GST reforms aimed at making the indirect tax system:

• Simpler and more taxpayer-friendly.
• More predictable and transparent.
• Less dependent on criminal enforcement for routine tax disputes.
• Better aligned with Ease of Doing Business (EoDB).
• Strong enough to tackle deliberate tax evasion and fraud.

The proposed removal of arrest powers is therefore part of a broader debate on balancing tax enforcement with taxpayer rights.

Why Decriminalise GST Offences?

Businesses have raised concerns that arrest provisions can sometimes lead to administrative overreach, harassment and uncertainty.

The proposed reform could:

• Improve taxpayer confidence.
• Strengthen investor sentiment.
• Reduce the fear of coercive tax administration.
• Improve India’s Ease of Doing Business.
• Encourage quicker resolution of tax disputes.
• Separate genuine tax administration from criminal enforcement.

The reform is particularly significant for sectors such as banking and insurance, where businesses have expressed concerns that criminal provisions could become a bargaining tool during tax disputes.

Existing GST Arrest Framework

Under the Central Goods and Services Tax (CGST) Act, different mechanisms are available for dealing with tax violations.

These include:

• Section 50: Interest on delayed payment of tax.
• Section 122: Penalties for specified offences.
• Recovery provisions: Recovery of unpaid tax and related dues.
• Section 69: Arrest in specified serious offences.

Section 69 allows the Commissioner to authorise an arrest where there are reasons to believe that a person has committed specified GST offences.

These offences can include:

• Issuing fake invoices.
• Fraudulent availment of Input Tax Credit (ITC).
• Issuing invoices without actual supply.
• Collecting GST but not depositing it with the government.
• Availing ITC without receiving goods or services.

Scale of GST Enforcement

GST enforcement has expanded significantly in recent years. Between 2021-22 and 2024-25, Central GST formations reportedly made 887 arrests in 72,393 GST-offence cases.

Common mechanisms of GST fraud include:

1. Creation of fake identities and mule accounts.
2. Generation of bogus invoices without actual supply.
3. Fraudulent ITC claims.
4. Undervaluation of taxable goods.
5. Supplying taxable goods or services without payment of GST.

These practices can cause substantial revenue leakage and undermine tax compliance.

What Could Change Under GST 2.0?

The proposed reform could shift the GST framework from a criminal-enforcement-oriented approach towards a civil and administrative tax-compliance model.

However, decriminalisation does not necessarily mean that tax fraud would become consequence-free.

Routine defaults, technical violations and genuine tax disputes could increasingly be dealt with through:

Tax demand → Interest → Penalty → Recovery

rather than arrest.

At the same time, intentional fraud, deception and serious economic wrongdoing could continue to attract prosecution under the broader criminal-law framework.

GST 2.0 and the VAT Regime

The proposed removal of GST-specific arrest powers would take GST enforcement closer to the approach followed under the earlier VAT regime, where tax authorities generally did not possess comparable direct arrest powers.

Interestingly, the issue was debated even before GST was introduced.

During the fifth GST Council meeting in December 2016, representatives of Maharashtra and West Bengal questioned whether arrest powers were consistent with Ease of Doing Business and the practices followed under VAT.

The Centre, however, had defended arrest provisions as necessary to deter serious tax evasion, subject to safeguards such as Commissioner-level authorisation and specified offences.

Wider Trend of Tax Decriminalisation

The proposed GST reform should also be viewed in the context of a wider move towards decriminalisation of tax-related defaults.

On the direct-tax side, the Income-Tax (Fourth Amendment) Rules, 2026 reportedly removed arrest and detention provisions from tax-recovery rules with retrospective effect from April 1, 2026.

This indicates a possible policy shift towards distinguishing between:

Genuine tax disputes and technical defaults
versus
Deliberate fraud and wilful tax evasion.

Challenges

Despite its potential benefits, removing arrest powers could create certain challenges.

1. First, strong deterrence is required against organised GST fraud involving fake firms, invoices and fraudulent ITC.
2. Second, enforcement agencies need alternative mechanisms to prevent sophisticated tax evasion.
3. Third, excessive decriminalisation could potentially weaken compliance if taxpayers perceive penalties as insufficiently deterrent.
4. Fourth, GST is a cooperative federal tax system, requiring coordination between the Centre and States. Any major change must therefore balance the interests and enforcement capacities of both.

Way Forward

A balanced GST 2.0 framework should follow a risk-based enforcement model.

• Decriminalise technical and procedural defaults.
• Retain strong penalties for deliberate tax evasion.
• Use data analytics and technology to detect fake ITC networks.
• Strengthen audit and investigation mechanisms.
• Ensure due process and accountability of tax officials.
• Provide faster dispute-resolution mechanisms.
• Clearly distinguish between tax avoidance, genuine disputes and criminal fraud.
• Maintain effective Centre-State coordination through the GST Council.

UPSC Perspective

The proposed decriminalisation of GST offences represents a shift from coercive enforcement towards trust-based tax administration. While protecting taxpayers from arbitrary or excessive enforcement can improve Ease of Doing Business, the government must ensure that deliberate fraud and organised tax evasion continue to face credible deterrence.

Thus, the objective of GST 2.0 should not be merely to reduce arrests but to create a predictable, technology-driven and rights-based tax administration that combines taxpayer facilitation with strong action against wilful evasion.

Conclusion

The proposed GST 2.0 reforms highlight an important principle of modern tax administration: compliance should be encouraged through simplicity, certainty and trust, while criminal enforcement should be reserved for serious and intentional wrongdoing.

A carefully designed decriminalisation framework can improve taxpayer confidence and India’s investment climate without compromising revenue mobilisation. The success of GST 2.0 will ultimately depend on achieving the right balance between taxpayer rights, revenue protection, enforcement and Ease of Doing Business.