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Abstract: This article discusses the liability to pay taxes under the Goods and Services Tax (GST) law in India, focusing on specific scenarios and implications for businesses and individuals.

Introduction: The Goods and Services Tax (GST) law in India imposes tax liability on different classes of persons, including under Forward and Reverse Charge Mechanism. However, there were past ambiguities on who should pay outstanding taxes. This article analyzes the legal provisions and defines responsibilities for tax payment in various situations.

Legal Background

Under GST Law, liability to pay tax has been bestowed upon 2 classes of persons:

(a) Forward Charge Mechanism (FCM) wherein the Supplier of Goods and Services is mandated to pay tax to the Government.

(b) Reverse Charge Mechanism (RCM) wherein the Recipient of specified goods and services is mandated to pay tax to the Government.

It is more or less a settled position, in whose corner the liability to pay GST shall fall. However, under the erstwhile indirect tax laws, in certain situations, it was not clear as to who will be liable to pay outstanding or past demands of taxes. This absence of legal provisions to define responsibility led to different practices across states which led to ambiguity and contradicting interpretations. GST law has provided to cover certain situations and define as to who would be liable to pay the taxes.

Further, in case of Companies and LLPs, their respective laws provide for the concept of Corporate Veil. Due to Corporate Veil, persons acting in name of company escape from the liability enforced against the company and are seldom required to pay these pending dues. Additionally, in the case of transfer of business, by way of sale or otherwise, there were ambiguities w.r.t. who shall be responsible to pay tax.

pay tax

To remove ambiguity, the lawmakers introduced a separate chapter 16 under CGST Act, 2017 which mandates on whose shoulders the liability shall fall in the given set of situations. Disputes mostly arose in cases for recovery of past taxes which were unpaid along with interest and penalty. This article is an attempt in analyzing these provisions contained in section 85 to 94 and understand who would be responsible for paying the tax in these specific situations.

Specific Liability and its Implications:

1. Liability in case of Transfer of business: [Section 85]

a. In cases where a taxpayer transfers his business, section 85 provides for a mechanism of collection of taxes payable by him up to the said transfer as under:

    • Transfer of business may be in whole or in part,
    • Transfer may be by way of, Sale, gift, lease, leave and license, hire or in any other manner whatsoever,
    • Liability to pay taxes including any interest or penalty up to the date of transfer would be joint and several of the transferor as well as the transferee.
    • Liability would be the extent of the whole amount or the extent of the value of such transfer.

b. Such liability would sustain in cases where:

    • Exact amount of tax, interest, and penalty was determined prior to the transfer of business but remain unpaid, or
    • Amount was determined any time after the transfer of business happened.

c. Further, the transferee carrying on the bought-out business, shall either take fresh registration or get his existing registration certificate amended to include the new business and pay the due taxes on the supply of goods and/or services after the date of transfer.

d. Important issue to note here is that the above provision shall be applicable only when a person buys a business as a whole or in part and shall not apply if only certain or all assets of a business are transferred. Transfer of business entails many things including past liabilities, manpower/employees, contractual obligations, etc., mere transfer of assets would not fall under section 85.

e. As discussed above, the transferee buying a business, would not just be liable to past tax (including interest and penalty) outstanding which are determined by the department but he would be jointly liable for any liability that the department may enforce against the transferor in future which relates to the business being transferred.

f. Liability to pay would be joint as well as several, which means that the department would first approach the transferor to pay up the taxes, if he refuses or is not traceable, then the department can invoke section 85 against the transferee.

2. Liability in case of Principal-Agent relations: [Section 86]

a. The relation between principal and agents is governed by The Indian Contract Act, 1872. Contract Act contains Latin proverb Qui facit per alium facit per se that means “He who acts through another does the act himself”. As per Contract Act it is clear that Liability falls on shoulders of principal as it will be presumed that principal himself is acting in place of agent.

b. The agent is only liable when he expressly agrees to or acts beyond his contractual boundaries. Principle is not responsible for any act of agent which is beyond his scope as agreed in contract of agency.

c. Section 86 provides that, where an agent, supplies or receives, any goods or behalf of his principal, then both would jointly and severally responsible for paying tax payable on such goods.

d. It is important to note here that section 86 does not apply to liabilities arising on account of supply of service by agent on behalf of principal.

3. Liability in case of Retrospective Order for Amalgamation or Merger of Companies: [Section 87]

The scheme of amalgamation or merger requires prior approval of NCLT or High Court. The process of merger takes considerable time, during which the business operations of one or both the merging companies are up and running. However, once the court grants permission for the merger, it shall apply it with retrospective effect from the date the court may choose. For the above situation, section 87 provides as under:

  • Supplies made prior to the date of the court order shall be considered as turnover of that particular company which has affected it.
  • Company supplying the goods shall be responsible for paying taxes thereon.
  • Said two or more companies shall be treated as distinct companies for the period up to the date of the said order and the registration certificates of the said companies shall be cancelled with effect from the date of the said order.

4. Liability in case of Liquidating Companies: [Section 88]

a. When a Company is in the process of being wound up or goes into liquidation, under the provisions of The Insolvency and Bankruptcy Code, 2016 (IBC) a receiver of assets is appointed who is known as the Liquidator, who shall be responsible for distribution of assets. To safeguard GST dues, section 88 provides as under:

    • Liquidator shall within 30 days of his appointment intimate the commissioner of his such appointment.
    • The Commissioner after internal assessment shall inform the liquidator within 3 months from the date on which he receives intimation of the appointment of the liquidator, the amount which in the opinion of the Commissioner would be sufficient to provide for any tax, interest, or penalty which is then, or is likely thereafter to become, payable by the company going under liquidation.

b. In cases where a private company is under liquidation and if there is insufficiency of funds and arrears of GST cannot be met then all persons who were directors during the period for which such GST arrears pertains shall be liable jointly and severally for paying GST arrears.

c. The Commissioner can absolve any such director from such liability if he proves to his satisfaction that such non-recovery cannot be attributed to any gross neglect, misfeasance, or breach of duty on his part in relation to the affairs of the company.

5. Liabilities of Director of Private Company: [Section 89]

a. Where any tax, interest, or penalty due from a private company for any period cannot be recovered, then, every person who was a director of the private company during such period shall, jointly and severally, be liable for the payment of such amount unless he proves that the non-payment cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.

b. Where a private company is converted into a public company, then the GST arrears pertaining to the company when it was a private company which are not recovered before such conversion, shall not be recovered from any of the past directors of such private company.

c. Above provisions shall not be applicable in cases where any personal penalty is imposed on any director.

6. Liability in case of Partners of Firm: [Section 90]

a. In the case of a partnership firm, all partners shall be jointly and severally liable for any GST arrears.

b. Where a partner retires from the firm, he or the firm, will have to inform the commissioner in writing within 1 month of such retirement. Accordingly, the retiring partner would be liable to pay GST arrears up to the date of his retirement whether such GST arrears are determined then or later.

c. If such intimation is not given within 1 month of the retirement, the liability of the retiring partner shall continue till the date the intimation is given to the commissioner.

d. Above provision shall prevail over any contrary contractual arrangement or any other law.

7. Liability of Guardians, Trustees, etc.: [Section 91]

a. Earlier, there were practices wherein people used to escape penal provisions by doing business in the name of minors stating that such operation is being carried out for the benefit of minors.

b. If the business is carried on by any guardian, trustee, or agent of a minor or any other incapacitated person, GST arrears in respect of this business, shall be levied upon and recoverable from such guardian, trustee or agent.

8. Liability of Courts of Wards, Receiver, Trustee, manager, Administrator General, etc.: [Section 92]

Where the estate of a taxable person owning a business, in respect of which any GST arrears are payable, is under the control of the Court of Wards, the Administrator General, the Official Trustee, or any receiver or manager appointed under any order of a court, such GST arrears shall be recovered from such Court of Wards, Administrator General, Official Trustee, receiver or manager.

9. Liability in case of death, partition, or dissolution: [Section 93]

Section 93 deals with liability in cases of death of the person running a business, partition of a HUF or AOP, or dissolution of a firm. The provisions of section 93 discussed below, would be subject to the provisions of the Insolvency and Bankruptcy Code, 2016

a. In case of death of a person: [Section 93(1)]

    • In case of continuation of business: The legal representative or any person carrying on the business of the deceased person shall be liable to pay GST arrears.
    • In case of discontinuation of business: The legal representative shall be liable to pay GST arrears out of the assets of the deceased or to the extent of assets inherited by him.
    • If the assets of the deceased or not capable of meeting the entire liability, then the unmet portion of the liability would not be payable.

b. In case of partition of HUF/AOP: [Section 93(2)]

    • In case of partition of HUF/AOP, each of the members receiving the share of property shall be severally and jointly liable for payment of GST arrears.
    • Members or group of members are liable for GST arrears which has arisen till the time of partition. The liability can be determined either before or after partition.

c. In case of dissolution of Firm (including LLP): [Section 93(3)]

    • Every person who was the partner at the time of the dissolution of a firm, whether he has received any share in the assets of the firm or not, is jointly and severally liable for GST arrears.
    • GST arrears can be determined before or after the dissolution of the firm.
    • In our view, partners would be liable to pay GST arrears in the ratio of the distribution of profits in the firm, however, this is not expressly mentioned in the provision.

d. On termination of guardianship or trust: [Section 93(4)]

    • When guardianship of a ward or trust is terminated, then ward or the beneficiary shall be liable to pay GST arrears up to the date of termination irrespective of whether GST arrears are determined before or after the date of termination.

10. Liability in residual cases: [Section 94]

a. On discontinuance of business in case of firm (including LLP) /HUF/ AOP: [Section 94(1) & Section 94(3)]

    • In case of discontinuation of a firm, HUF, or AOP, its partners or members would be liable to pay any outstanding GST arrears which may be determined any time pre or post such discontinuation.

b. On change of constitution of Firm (including LLP)/AOP: [Section 94(2)]

    • Where a change occurs in the constitution of business of a firm or AOP, the partners of the firm and members of AOP before and after reconstitution are jointly and severally liable to pay GST arrears before its reconstitution.

Conclusion: Provisions discussed above are imbibed with a theme that any GST arrear does not go unpaid for lack of legal requirements as was the case in the past. As we see it, GST arrears can remain unpaid only in 2 situations:

1. If the taxpayer of a sole proprietor, all partners of a firm, all members of an HUF or AOP or all directors of a company meet with unfortunate death and their businesses, or their individual assets are not capable of meeting the outstanding tax, interest and penalty.

2. The business gets shelter of the Insolvency and Bankruptcy Code, 2016

Authored by: CA Nitesh Jain &  Article Fuzail Miran.

CA Fuzail Miran & CA Nitesh Jain

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April 2024