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Recovery of tax arrears from defaulters has always been a difficult area for the tax authorities. Such recovery becomes further difficult if the company/firm goes off for windup or the firm is dissolved, or the firm does not have paying capacity or the firm is not traceable, or the proprietor has died. In the cases of indirect tax, it should always be remembered that the tax amount defaulted by business entities was already collected from the ultimate consumer i.e the common public. Thus, the business entity should not be given a walkover with misappropriation of public money.

The same has been tried to be addressed in the GST law. The GST law not only covers the recovery of such tax dues of GST era but also covers the revenue arrears of the previous regime which stands recoverable but couldn’t be recovered under the erstwhile service tax/VAT or central excise law.

As per the provisions of section 142 (8)(a), any amount of tax/interest/penalty which was recoverable under the service tax/Central excise/VAT but couldn’t not be recovered under those laws becomes recoverable arrears of tax under the GST Act.

Personal liability of Directors-Partners & Legal heirs under GST for tax arrears

Further, Sec 89 of the GST Act talks about personal liability of the directors jointly & severally in cases of default of tax committed by the companies. Here the burden of proof that they were not responsible for such tax default by the companies lies upon the directors. Further, sec 89 starts with a non obstante clause, it says that notwithstanding anything given in the companies act, which means that the concept that company is a separate legal entity as given in the companies act automatically gets diluted when it comes to recovery of indirect tax like GST.

Similarly, as per section 90 of the CGST act 2017, the partners are jointly & severally liable for the default committed by the partnership firms unless they prove that the default is not due to their negligence.

Further, as per sec 93 of the CGST act 2017, even in cases of death of the proprietor/partners the liability shifts to the legal heir and same has to be discharged out of the estate/property of the proprietor or partners. This is unlike the service tax or central excise where there was no such provision and the ratio of judgement of Honorable Apex court in Shabina Abraham & Ors versus Collector of Central excise & Customs {Civil appl no 5802 of 2005} used to be quoted out of context to escape the liability of indirect taxes.

The intent of the legislature in institutionalizing such provisions in GST act appears to be governed by the common logic that one should not be given freedom to misappropriate public money collected in the name of indirect taxes like GST. Thus, the arrears of tax under GST or under previous regimes of Service tax/Central excise tax /VAT appears to be recoverable as personal liability from the directors/partners/ legal heirs jointly or severally under the provisions of Sec 79 of the GST Act 2017 read with section 89 or sec 90 or sec 93 as applicable. However, the principle of natural justice i.e Audi alteram Partem needs to be followed by the tax authorities by giving the defaulters an opportunity of being heard.

There is a need to imbibe a sense of accountability and responsibility upon the business entities which is usually missing in India. It should be well understood that the facilitation should only be given to the honest and compliant taxpayers. There should never be any incentive for being deliberate non- compliant and tax evader.

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April 2024