Inspection under GST - When the Law Observes Before it Acts

From Fear to Familiarity - Understanding Inspection, Search and Seizure under GST

The moment the words "inspection, search and seizure" appear in any departmental communication, they almost instinctively trigger anxiety, tension, and fear among everyone connected with a business - the promoters, employees, officers of the accounts department, and very often even the auditor or the consulting Chartered Accountant. Over the years, these expressions have acquired an intimidating aura, frequently perceived as a prelude to disruption, confrontation, and prolonged proceedings.

However, experience repeatedly shows that fear and panic do not resolve issues - they only complicate them. Anxiety clouds judgment, leads to hurried decisions, and sometimes results in actions that would have been avoidable had the law been adequately understood. The real solution to such fear lies not in speculation or apprehension, but in a clear and correct understanding of the legal provisions governing inspection, search and seizure - their scope, their limitations, and the safeguards deliberately woven into the GST framework.

Considering the immense practical relevance of Section 67 in the day-to-day professional life of Chartered Accountants and the frequency with which it is referenced in GST enforcement actions, it has been decided to examine Section 67 in depth, step by step, with illustrations and interpretative guidance. To make the discussion reader-friendly and conceptually clear, the commentary on Section 67 (read with Rules 139 to 141 of the CGST Rules, 2017) has been divided into three parts, each addressing a distinct stage of the statutory power.

It is sincerely hoped that, after carefully reading all three parts of this series, readers will feel more informed, composed, and confident, and that the initial fear or tension triggered merely by hearing the phrase "Inspection, search, and seizure" in a departmental communication will substantially diminish - replaced by a reasoned understanding of the true intent, scope, and limits of these provisions.

The Purpose and Spirit of Section 67

GST operates on the idea of self-assessment, where every registered person is encouraged to honestly report his supplies, keep clear records, and pay the appropriate taxes. While trust plays a key role, it is essential to verify to prevent misuse. Section 67 of the CGST Act 2017 offers a way to do just that. It allows officers to conduct inspections, searches, and seizures, but only in accordance with procedures that ensure fairness. It is also to be borne in mind that provisions of "Inspection Search, Seizure and Arrest" have been made applicable to the IGST Act vide Section 20 of the IGST Act, 2017.

The law starts with a gentle inspection (Section 67(1)); only if deception is suspected does it move to more assertive actions, such as searching and seizing (Section 67(2)). Essentially, Section 67 brings the saying "trust but verify" to life through legal means.

Power of Inspection - Section 67(1)

The power of inspection under the GST law represents the first and most cautious step in the enforcement chain. It allows the law to verify facts while still respecting the taxpayer's premises and dignity. Section 67(1) of the CGST Act, 2017 authorises, in writing, a proper officer not below the rank of Joint Commissioner to undertake an inspection of any place of business when he has reason to believe that:

The proper officer can authorise, in writing, another officer of the Central Tax to conduct an inspection of the following specific categories of places:

1. The place of business of the taxable person, or
2. The place of business of any person engaged in the business of transporting goods, or
3. The place of business of an owner or operator of a warehouse or godown.

Thus, the authority of inspection under Section 67(1) is confined strictly to business-related premises. It does not extend to "any other place" - a phrase which the law reserves for the stronger power of search and seizure under Section 67(2). At this preliminary stage, the law seeks only to verify and observe, not to intrude beyond the commercial boundary.

Meaning of "Reason to Believe"

The phrase "reason to believe" has not been explicitly defined under the GST Acts. Consequently, reliance must be placed on the Bharatiya Nyaya Sanhita, 2023 (BNS), which has become effective as of 1 July 2024. According to Section 2(30) of the Bharatiya Nyaya Sanhita, 2023, "A person is said to have 'reason to believe' a thing if he possesses sufficient cause to believe that thing, but not otherwise;" In simple terms, this expression signifies an objective, evidence-based belief formed in good faith by a reasonable and prudent individual, grounded on relevant material. It requires the application of reason, careful consideration, and the evaluation of facts. Furthermore, it cannot be based on conjecture, gossip, or anonymous complaints.

In GST, such a belief typically arises from concrete indicators-data mismatches between Form GSTR-1 and Form GSTR-3B, anomalies in e-way-bill movement, unverified ITC claims, or credible information from inter-departmental sources. This standard protects taxpayers from arbitrary action while ensuring that genuine suspicion of evasion can be lawfully examined.

The procedure for inspection power is governed by Rule 139(1) of the CGST Rules, 2017. As per Rule 139(1), the Joint Commissioner must issue a written authorisation in Form GST INS-01, specifying the officer, the premises, and the reason for inspection.

Judicial Pronouncement - Discipline of "Reason to Believe" under Section 67

The importance of forming and recording a valid "reason to believe" before invoking powers under Section 67 has also received judicial recognition. In M/s Gaurav Saurav Traders and Contractors v. State of Uttar Pradesh & Others (Writ Tax No. 1378 of 2022, Allahabad High Court, order dated 13 December 2023), the Hon'ble High Court examined the legality of an authorisation issued under Section 67 where the reasons were recorded after the authorisation had already been granted. The Court held that such a course of action strikes at the very root of the provision, as the formation of "reason to believe" is a condition precedent for authorisation, not a post-facto formality.

The Court observed that statutory powers under Section 67 cannot be exercised mechanically or retrospectively justified. That recording of reasons must precede the issuance of authorisation, failing which the entire action stands vitiated. Though the case arose in the context of search and seizure, the principle laid down applies with equal force to inspection under Section 67(1), since both stages demand prior satisfaction and authorisation by the competent authority. The judgment thus reinforces the view that inspection is a reasoned and regulated exercise, not an unfettered exercise of administrative discretion.

A similar emphasis on the prior formation of "reason to believe" before invoking Section 67 powers has also been echoed in High Court decisions, reiterating that inspection cannot be initiated as a routine or exploratory exercise.

Illustration: Kirti Ltd., a registered supplier of construction materials. A data analytics report indicates that while Kirti Ltd. has generated a large number of e-way bills for outward supplies, its monthly Form GSTR-3B returns show comparatively low taxable turnover. The Joint Commissioner, after analysing the variance and verifying relevant records, forms a reason to believe that certain supplies may have been suppressed. He therefore issues Form GST INS-01 authorising a subordinate officer to inspect the company's warehouse.

The inspection in this case serves its intended purpose - to verify facts based on objective indicators - without presuming evasion or causing unnecessary disruption, thereby exemplifying the restrained and reasoned application of Section 67(1).

The Philosophy of Section 67(1) - When the Law Chooses to Observe, Not Overwhelm

Section 67(1) showcases the GST law at its most confident and clear. It's a deliberate legal choice that understanding should develop before any enforcement action occurs. Inspection under this provision isn't motivated by suspicion but by a respectful desire to confirm accuracy. It recognises that compliance issues often arise from complexity, large amounts, or human mistakes rather than intentional avoidance.

The scope of Section 67(1) is intentionally limited to recognised business spaces-such as the business premises of the taxable person, transporter, or warehouse operator. This boundary isn't a coincidence; it shows respect for commercial independence and indicates that inspections are meant to observe what is already visible, rather than searching for hidden information. At this point, the law doesn't assume anything is concealed; it simply aims to bring clarity.

The phrase "reason to believe" serves as the moral compass of this authority. It encourages the officer to pause, thoughtfully assess, and clearly explain - both internally and officially - why an inspection is necessary. This approach makes sure that inspections are deliberate decisions driven by evidence, identifiable patterns, or trustworthy signs. In this way, Section 67(1) is not just about controlling power, but also about promoting responsible and fair conduct towards taxpayers.

Procedural formalities under Rule 139 help support this approach. Written authorisation, recorded findings, and clear reporting make sure that inspections are transparent and reassuring rather than overwhelming. The law steps in quietly, observes carefully, and leaves with facts in hand-bringing clarity, not fear.

"आने से उसके आए बहार…"- (Anand Bakshi, Jeene Ki Raah, 1969)

Just as the simple act of truth brings understanding and fresh beginnings, inspection under Section 67(1) depends on being present, not on pressure. It believes that when systems are looked at openly, any inconsistencies tend to resolve on their own.

In essence, Section 67(1) highlights the law's message of patience. It shows that good governance isn't about rushing to accuse but about taking the time to understand. By starting with inspection, the GST law promotes a spirit of fairness - emphasising that cooperation and compliance are most likely to thrive when approached with calm and careful scrutiny, rather than fear or haste.

Inspection as the First Pause of the Law - Where Knowledge Replaces Fear

A careful study of Section 67(1) reveals that inspection under GST is a disciplined process of verification that operates within clearly demarcated statutory limits. It allows the tax administration to examine facts at the business premises, while ensuring that such examination is backed by senior-level authorisation and documented procedure. For the practising Chartered Accountant, this stage is not merely procedural-it is a moment where preparedness, orderly records, and reasoned explanation can decisively shape the course of subsequent proceedings.

Equally important, however, is an awareness of what may follow if inspection uncovers material suggesting concealment or evasion. The GST law does not abruptly jump from inspection to punitive action; instead, it proceeds through a carefully structured next phase, where the focus shifts from observation to securing evidence. This subsequent phase-covered under Section 67(2) to Section 67(5) read with Rule 139(3) to Rule 139(6)-deals with matters such as authorised search of premises, seizure of goods or documents, custody without physical removal, sealing or breaking open where access is denied, preparation of inventories, and strict limits on the duration of retention. These provisions, which form the subject matter of Part II, represent the most sensitive and misunderstood segment of GST enforcement. They combine strong statutory authority with equally strong procedural safeguards, ensuring that power remains answerable to purpose, proportionality, and fairness. A clear understanding of this next stage is essential for professionals not to fear it, but to recognise its scope, its boundaries, and the rights and obligations it creates on both sides.

With a comprehensive understanding of the principles of inspection, the reader is now better positioned to engage with Part II, where the law's hands replace its eyes, and where evidence is secured-not to disrupt business, but to preserve the integrity of the tax system.