When running a business, priorities typically revolve around market expansion, customer service, team strength, leadership, and legal protection. Facing investigative agencies like the Enforcement Directorate (ED), the Directorate General of GST Intelligence (DGGI), and the Income Tax Department (ITD) is unlikely to be on your radar. However, if such a scenario arises, questions about preparation, legal implications, and subsequent investigations become pertinent. Imagine one day, the ED showed up to investigate financial irregularities in your business under the Prevention of Money Laundering Act, 2002 (PMLA) and Foreign Exchange Management Act, 1999 (FEMA). After this, the DGGI shows up to investigate offences under the Goods and Services Tax (GST), followed by the Income Tax Department to investigate tax evasion. While this may seem distant, it's a reality for many businesses. This discussion aims to equip you with the knowledge and readiness to navigate these challenges confidently.
ED is a statutory body empowered under the Central Vigilance Commission Act, 2003 to investigate money laundering offences and violations of foreign exchange laws. The ED operates within the jurisdiction or limits of the PMLA, FEMA, Fugitive Economic Offenders Act, 2018 (FEOA), Foreign Exchange Regulation Act, 1973 (FERA) and Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (COFEPOSA).
In recent times, raids conducted by ED as part of the investigation process or collection of evidence have shown a higher possibility of investigations by other agencies like DGGI and the ITD. There have been several instances in the news wherein once a business is raided by the ED, an investigation by the ITD and/or DGGI follows next. This shows that the ED raids do not always conclude with a final report, rather investigations are initiated by other departments based on the information discovered by ED. This leads to the expansion of the scope of the initial raid. This series of investigations is chiefly a result of the sharing of data between these agencies. Various investigation agencies are legally authorized to share the relevant data to facilitate the investigation into financial crimes through an inter-agency collaborative approach, which leads to their involvement in the dispute.
According to Section 66(1)(ii) of the PMLA read with relevant notifications, ED officers are authorized to provide information available to notified agencies when necessary for the fulfilment of their functions under the relevant statute. The Central Board of Direct Taxes (CBDT), which frames policy for the ITD, vide Order dated 21.07.2020 allowed the ITD to share PAN and bank account details of any entity with investigative and intelligence agencies, including the ED and DGGI, under the integrated counter-terrorism platform NATGRID. On a similar line, the Central Board of Indirect Taxes & Customs (CBIC) vide Notification dated 07.07.2023 expanded the scope of PMLA by including the Goods and Services Tax Network (GSTN) in the specified list of agencies that are required to share information with the ED. These law enforcement agencies/regulatory bodies collaborate to ensure compliance with laws and effective prosecution of offenders. It cannot be lost sight of that all these multiple raids and investigation proceedings by different agencies can be parallel or at different times.
It cannot be ruled out that if one of the agencies has given a clean chit, the others cannot charge on the same subject matter if their investigation leads to appropriate evidence. This leads to a situation where one particular act is considered as an offence when viewed from both ED’s as well as DGGI / ITD’s lens. Therefore, a person can be subjected to arrest and custody by different agencies at the same time.
As regards GST, there are certain actions which involve business transactions undertaken either to avoid paying the legitimate amount of tax or, to claim wrongful input tax credit (ITC), which can be investigated by DGGI. However, when these transactions are undertaken cross-border and/or involve siphoning off the money especially if the funds are circulated through shell companies or overseas entities, such offences then fall within the purview of ED. In this situation, such transactions may attract investigation by both agencies (i.e. ED and DGGI) due to their overlapping nature. An illustrative list of such transactions is hereunder:
Similarly, activities such as concealing income/assets abroad or engaging in fraudulent cross-border transactions, fall within the jurisdiction of both the ITD and the ED due to their implications for tax evasion, money laundering, or violation of foreign exchange regulations. During the investigation, when the ED identifies such violations, it shares data with the ITD resulting in simultaneous proceedings by these agencies thereby expanding the scope of the original scrutiny. Below are a few instances which may attract parallel actions by ED and the ITD:
In case of overlapping of offences falling within the jurisdiction of more than one investigative agency, a situation may arise when a person who is already arrested by one agency for a violation or allegation of an offence, can further be arrested by another agency for an offence falling under the jurisdiction of that other agency. Hence, it is possible in some instances that one person can be arrested by more than one investigative agency for violation of overlapping offences falling within the jurisdiction of these agencies. For instance, recently the Delhi High Court has remanded BRS leader K. Kavitha to the custody of CBI for her alleged involvement in a corruption case related to an alleged Delhi liquor policy scam. She was earlier arrested by ED for alleged money laundering in the excise policy scam and hence, was already in judicial custody when CBI arrested her.
There have been numerous instances wherein businesses were bombarded with different investigations after ED raids. In 2022, the ED conducted raids on various offices of the M/s DSL Dharampal Satyapal Group, owners of 'Rajnigandha' pan masala and 'Catch' spices, over allegations of money laundering and tax evasion. During the investigation, ED found alleged diversion of funds to offshore entities in tax havens (tax evasion), and bogus ITC under the GST laws. The ED's investigation led to the ITD and DGGI initiating parallel investigations into the group's financial irregularities.
In another instance, ED conducted raids on Xiaomi, Oppo, and Vivo offices in India qua alleged tax evasion, transfer pricing, and violation of FEMA regulations and subsequently, the ITD and DGGI also joined the bandwagon.
Global commodities trader ‘Trafigura’ came under ED scrutiny for a Transfer pricing violation. Trafigura is alleged to have companies in Tax havens and moving money to those companies helped it avoid taxes. Earlier, the company was investigated by the ITD.
Recently in 2023, troubled British news broadcaster BBC came under ED scrutiny for alleged foreign exchange violations. ED came into the picture after the ITD’s survey of the BBC Delhi office revealed several discrepancies and inconsistencies in transfer pricing documentation.
These trends of investigations reveal expanded jurisdiction of ED concerning certain offenses. For instance, above mentioned cases of Xiomi, Trafigura, and BBC highlight the instances of transfer pricing violations that were being investigated by ED. In a nutshell, due to the overlapping of certain offenses between PMLA, FEMA, Income Tax, and GST, the simultaneous proceedings by different agencies appear to be inevitable.
Standard Operating Procedures (SOPs) may be put in place defining the roles and responsibilities of different teams/verticals in case of sudden investigation, to ensure smooth coordination and submission of correct information to the investigating agencies. Training may be imparted to the employees in respect of maintaining confidentiality, protecting sensitive information, and safeguarding legal rights during questioning/investigations. Regular audits and health check-ups are another way to mitigate the risk of potential inquiry. Besides mitigating litigious positions, a business review would also assist in adopting tax-efficient structures.