Buyer Cannot Be An Operational Creditor of Seller On Non-Payment of GST To Statutory Authorities.

This article deals with the situation where, the supply of the goods or service has been made by the seller and in lieu of which the GST has been charged by such seller from the buyer of the goods or services. If such seller fails to deposit the GST with the Statutory Authorities as enumerated under GST law, then who shall be the operational creditor of such seller.

i. GST Collected by the seller is due to Statutory authorities.

Goods and Service Tax that is GST is collected according to the provisions of the GST Law which comprises of (i) Central GST Act, 2017, (ii) State GST Act, 2017 as notified by respective States, (iii) Union Territory GST Act, 2017, (iv) Integrated GST Act, 2017 including Integrated GST (Extension to Jammu and Kashmir Act, 2017), (v) GST (Compensation to States) Act, 2017 (hereinafter referred as CGST, SGST, UTGST, IGST and CESS respectively). It is a tax which is imposed on the supply of the goods and is due for the payment upon the person who is the recipient of such supply but the same is being collected by the supplier of such supply.

S.9 of the CGST

S.9 of the CGST Act enumerates the provision related to the levy and collection of GST which reads as follows:

“Subject to the provisions of sub-S.(2), there shall be levied a tax called the central GST on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human  consumption, on the value determined under S.15 and at such rates, not exceeding twenty per cent., as may be notified by the Statutory Authority on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.”[1]

Thus, by the reading of this section, there shall be levied a tax, by the Statutory Authority and such tax, is to be collected in such a manner as may be prescribed and shall be paid by the Taxable Person. Hence, the position of Taxable person as an agent of the Statutory Authority who collects such taxes on the behalf of the Stautory Authority in a fiduciary capacity for the payment of the same as according to the due procedure.

S.122 of the CGST

Provision under Chapter XIX of CGST Act, which deals with the Offences and Penalties in certain offences. According to S.122(1) (iii) which reads as follows:

“122. Penalty for certain offences.

(1) Where a taxable person who––

…(iii) collects any amount as tax but fails to pay the same to the Government beyond a period of three months from the date on which such payment becomes due;

…he shall be liable to pay a penalty of ten thousand rupees or an amount equivalent to the tax evaded or the tax not deducted under S.51 or short deducted or deducted but not paid to the government or tax not collected under S.52 or short collected or collected but not paid to the governemt or input tax credit availed of or passed on or distributed irregularly, or the refund claimed fraudulently, whichever is higher.”[2]

The above section clearly, enumerates that if the taxable person who collects the tax on behalf of the government in capacity of the agent of the government fails to deposit such collected tax to the government, then such taxable person shall be liable to pay the fine of Rs10,000 or the tax collected on the behalf of the  government whichever is higher.Furthermore, the fine on non-payment of GST collected from the buyer of goods and services by the supplier of the goods and services is imposed upon the Taxable Person, such person in this transaction is always the supplier of goods.Hence, no fine or liability is imposed or stipulated upon the buyer of such goods until and unless it is fraudulent, or collusion or connivance with the registered selling dealer.

ii.  In case of non-payment of the GST by the seller, Statutory Authorities becomes the Operational Creditor.

The creditor is defined as a person to whom a debt is owed by another person, called the debtor.

S.2(10) of the IBC, 2016

IBC defines a creditor as:

 “creditor” means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder”[3]

S.5(20) of the IBC, 2016

Chapter-I of IBC defines Operational Creditor as:

“operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred”[4]

From the above definition, an operational creditor is a creditor whose claim arises out of a normal business transaction. Operational debt is held regarding the person to whom it is legally assigned to be transferred. This brings us to our next point which is what may constitute as an “Operational Debt”.

S.5(21) of the IBC, 2016

Operational Debt is defined in IBC as follows:

operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Statutory Authority, any State Statutory Authority or any local authority”[5]

As per the above section, a trade payable, employee’s dues and dues payable to Central Statutory Authority or State Statutory Authority under the law are covered under the operation debt.

Henceforth, the joint reading of the above sections that are of S.2(10), S.5(20) and S.5(21) of IBC, 2016 indicates that the payment of dues arising in respect of any law for time being in force is payable to the Central Statutory Authority, any State Statutory Authority, or any local authority and such dues may be termed as the “Operational debt” due in respect of the operational creditor that is Central Statutory Authority, State Statutory Authority or Local Authority as the case may be.

In the case of Pr. Director General of Income Tax (Admn. & TPS) vs M/s. Synergies Doorway Automotive Ltd. & Ors.[6] (clubbed with certain other appeals) there were two questions raised before the Hon’ble NCLAT, they are as follows:

Whether ‘Income Tax’, ‘Value Added Tax’ or other statutory dues, such as ‘Municipal Tax’, ‘Excise Duty’, etc. come within the meaning of ‘Operational Debt’; and

Whether the Central Statutory Authority, the State Statutory Authority or the legal authority having a statutory claim, come within the meaning of ‘Operational Creditors’.

After, listening to the arguments of both the sides the Hon’ble NCLAT   held that statutory dues such as income tax, value-added tax etc. fall within the ambit of ‘operational debt’ under the Code and the statutory authorities claiming the aforesaid dues will be treated as operational creditors under the Code. Following is the relevant excerpt from the judgement:

“29. ‘Operational Debt’ in the normal course means a debt arising during the operation of the Company (‘Corporate Debtor’). The ‘goods’ and ‘services’ including employment are required to keep the Company (‘Corporate Debtor’) operational as a going concern. If the Company (‘Corporate Debtor’) is operational and remains a going concern, only in such case, the statutory liability, such as payment of Income Tax, Value Added Tax etc., will arise. As the ‘Income Tax’, ‘Value Added Tax’ and other statutory dues arising out of the existing law, arises when the Company is operational, we hold such statutory dues has direct nexus with the operation of the Company. For the said reason also, we hold that all statutory dues including ‘Income Tax’, ‘Value Added Tax’ etc. come within the meaning of ‘Operational Debt’. For the said very reason, we also hold that ‘Income Tax Department of the Central Statutory Authority’ and the ‘Sales Tax Department(s) of the State Stautory Authority’ and ‘local authority’, who are entitled to dues arising out of the existing law are ‘Operational Creditor’ within the meaning of S.5(20) of the ‘IBC, 2016’”[7]

Hence, from reading of the above judgement the GST payment due for the payment to the statutory authorities is operational debt for the statutory authorities and in respect of that, those statutory authorities will be treated as the operational creditor of the taxable person that is the seller of the goods.

In the case of Shri IRK Raju vs Immaneni Eswara Rao & Ors,[8] the issue raised before the Hon’ble NCLAT was regarding the definition and ambit of Operational Debt. In this case, NCLAT interpreted S.5(21) of the IBC,2016 and held that the payment of statutory dues as operational debt. Following was interpreted and held NCLAT in this case:

“23. S.5(21) makes a provision of payment of statutory dues as ‘operational debt’. however, what is pertinent to mention is “payment” of statutory dues. This by itself indicates that a statutory due is only operational when it is paid to the relevant authority, and not when it is repaid to a party that has paid such statutory authority. The amendment of S.5(21), where the word “repayment” in the context of statutory dues was replaced with the word “payment” makes clear the intent of the legislature that a statutory due becomes operational debt only when the same is to be paid to the relevant authority and not otherwise. Consequently, a statutory due dehors of the invoice of the good or service cannot be claimed as an ‘operational debt’ from a party, where the party is not a statutory authority”[9]

It is clear from the reading of the above-stated judgement that the Statutory dues are operational debt, in respect of the Statutory Authority and such statutory dues dehors of the invoice of the good or service, cannot be claimed as an operational debt from a party, where the party is not a statutory authority. Therefore the buyer of the goods or services cannot be an Operational Creditor on non-payment of the GST by the seller of the goods or services.

Notes

[1] S.9 of The CGST Act, No.12, Acts of Parliament, 2017.

[2] S.122(1)(iii) of The CGST Act, No.12, Acts of Parliament, 2017.

[3] S.2(10) of IBC, 2016, No. 31, Acts of Parliament, 2016 (India).

[4] S.5(20) of IBC, 2016, No. 31, Acts of Parliament, 2016 (India).

[5] S.5 (21) of IBC, 2016, No. 31, Acts of Parliament, 2016 (India).

[6] Company Appeal (AT) (Insol.) Nos. 205 of 2017 & 309, 559, 671 & 759 of 2018.

[7] Ibid Note 15.

[8] Company Appeal (AT) (Insolvency) No. 1058 of 2019.

[9] Ibid Note 17.

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