Liability To Pay Tax In Certain Cases

Liability To Pay Tax In Certain Cases

While the ultimate burden of an indirect tax is to be borne by the consumer, under the Central Goods and Service Tax Act, 2017 (‘CGST ACT’) the responsibility to collect and deposit the tax with the government rests with the supplier. A supplier shall be liable for the collection and deposit of GST, provided he is a taxable person as per the GST Act. But in certain cases where the supplier ceases to exist, the liability on payment of tax is being shifted on such person as prescribed under the law. This article will deal with such exceptions where the liability to pay GST shifts to a person other than the supplier.

In this article we are going to cover: –

Liability In Case Of Transfer Of Business

As per section 85 of the CGST Act if a taxable person who is liable to pay tax under the CGST Act transfers his business wholly or partially by way of sale, gift, lease, leave and license, hire, or in any other manner, shall be liable to pay tax along with the transferee, jointly and severally. Thus, in case of transfer of business the transferor (taxable person) and transferee (the person to whom business is transferred) shall be jointly and severally liable to pay the outstanding tax including penalty and interest under the GST laws, due from the transferor up to the time of such transfer of business.

If the transferee of a business carries on such transferred business either in his own name or in some other name, he shall be liable to pay tax on the supply of goods or services or both effected by him with effect from the date of such transfer of business. Further if the transferee is a registered person under the CGST Act, he shall apply for amendment of his certificate of registration in Form REG-14 within a period of 15 days from such a change.

Illustration:
Reliance Automobile Ltd (RAL) transfers its business to Adani Automobile Ltd (AAL) wholly on February 14, 2020. If on February 14, 2020, RAL has an outstanding GST liability of INR 10 lakhs, then as per section 85 of the CGST Act, RAL and AAL shall be jointly and severally liable to pay the outstanding GST liability.

Liability In Case Of Agent & Principal

As per section 86 of the CGST Act where an agent supplies or receives any taxable goods on behalf of his principal, such agent and his principal shall, jointly and severally, be liable to pay the tax on such goods under the CGST Act, 2017. This section directly casts the liability on a principal, in addition to the liability of the agent who effects the supply of taxable goods on behalf of the principal or procures taxable goods on behalf of his principal. In this case, the Government is free to recover dues from either of them or both (up to the total dues only) without having to exhaust its remedies against the one who was principally liable (principal obligor) and then only proceed against the other.

Illustration:
Ltd is a cement manufacturer. He sells such cement through his agent B Ltd. In case of any liability arising on account of any supply made by A Ltd through B Ltd, both A Ltd and B Ltd will be jointly and severally liable for any tax due under the GST laws.

Liability In Case Of Amalgamation / Merger Of Companies

As per section 87 of the CGST Act, when two or more companies are amalgamated or merged in pursuance of an order of a court or of the tribunal and such order is to be made effective from a date earlier to the date of the order, then if there is any supply of any goods or services between the two amalgamating companies during the period falling between the date when the order becomes effective and the date of order, then such transaction of supply shall be included in the turnover of supply of the respective companies and they shall be liable to pay tax accordingly.Liability in case of Amalgamation or Mergers of Companies

Normally by virtue of the said order the transactions of supply of goods and/or services inter-sec between the companies merged/amalgamated, between two dates, would get nullified as they would become one entity from the effective date. But by virtue of section 87 of the CGST Act any transaction between the two amalgamating companies would be treated as supply by one company to another i.e. till the date of order of amalgamation/merger, those companies shall be treated as distinct companies and should discharge their respective tax liabilities.

Illustration:
Let’s say, Akbar Ltd. and Birbal Ltd. merges together to form AB Ltd. The date of the order of the Hon’ble Tribunal is May 31, 2020, however, the merger has been ordered to be effective from February 14, 2020. Therefore, by virtue of section 87 of the CGST Act any supplies between Akbar Ltd. and Birbal Ltd. between the period from February 14, 2020, to May 31, 2020, will be taxable in the hands of the respective companies.

Liability In Case Of Company In Liquidation

As per section 88 of the CGST Act when any company is being wound up whether under the order of the court or tribunal or otherwise, a person is appointed as receiver of any assets of the company hereafter referred to as the “Liquidator”. Such liquidator shall, within thirty days after his appointment, give an intimation of his appointment to the jurisdictional Commissioner under the CGST Act.

The Commissioner after making a necessary inquiry or calling of information will notify the liquidator to set apart a sum of money that would be sufficient to discharge, in his opinion, the amount of tax, interest, and penalty payable by the company under the CGST Act within a period of three months. Such intimation will be given by the commissioner to the said liquidator in FORM GST DRC -24. 

If a private company is not able to clear its dues, then every person who was the director at any time during the period, for which tax is due, would be liable jointly and severally to pay the dues. However, if any director proves to the satisfaction of the Commissioner that such non-recovery is not due to his gross neglect, misfeasance, or breach of duty, the liability would not arise in the hands of such director.

Illustration:
Let’s say, A Pvt Ltd having 3 directors was under liquidation because of an NCLT order. The outstanding GST dues of the company was INR 10 lakhs. If the liquidator has been able to set apart only INR 7 lakhs against the outstanding GST liability then for the balance INR 3 lakhs all the 3 directors of the company will be jointly and severally liable.

Liability Of Directors Of Private Company

As per section 89 of the CGST Act, in the case where any tax dues are outstanding under the GST Act from a private company and the same cannot be recovered from the said private company, then every person who was the director of the private company during such period shall, jointly and severally, be liable for the payment of such tax dues. However, a director of a private company cannot be made liable for such tax dues if he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance, or breach of any duty on his part in relation to the affairs of the company.

Further section 89 of the CGST Act also states that when a private company is converted to a public company, then no such recovery of old dues can be made from the person(s) who were directors of the private limited company before such conversion. However, an exception has been carved out for the aforementioned provision, thus making a director liable for any personal penalty which can be imposed on such director.

Illustration:
Let’s say, Kingfisher Private Ltd (KPL) was incorporated on June 1, 2016, and at the time of incorporation there were 3 directors of the company. So as per section 89 of the CGST Act, any tax dues which the company is unable to pay will be recovered from the 3 directors. However, if on February 14, 2020, KPL is being converted into a public company then in that case the above directors will not be liable towards any outstanding GST liability which was due from KPL and which it was unable to pay.

Liability Of Partners Of Firm To Pay Tax

As per section 90 of the CGST Act in the case where any tax dues are outstanding under the GST Act from a partnership firm and the same cannot be recovered from the said firm, then every person who was a partner in the firm during such period shall, jointly and severally, be liable for the payment of such tax dues.

If any of the partners retire, then such a partner or the firm shall intimate the Commissioner by a notice in writing within one month from the date of retirement. In such cases, the retiring partner shall be liable to pay tax, interest and penalty, if any up to the date of his retirement (whether determined or not prior to retirement). However, where no such intimation is given by the partner to the Commissioner within one month from retirement date, the liability of such a retired partner will continue till the date on which the intimation is received by the Commissioner. Further Limited Liability Partnership Firm (LLP) will also be covered within the ambit of a partnership firm.

Illustration
Let’s say, 3A was a partnership firm having three partners namely Mr. Amar, Mr. Akbar & Mr. Anthony. If Mr. Amar, was to be retired as a partner of such firm on January 1, 2020, then Mr. Amar or such firm shall intimate of such retirement to the jurisdictional commissioner within one month (i.e. by January 31, 2020) from date of retirement. Otherwise, Mr. Amar will continue to be liable towards the firm’s GST dues until the date on which such intimation is received by the commissioner.

Liability of guardians, trustees etc.

As per section 91 of the CGST Act, where the business in respect of which any tax dues is payable under the GST Act is carried on by any guardian, trustee, or agent of a minor or another incapacitated person on behalf of and for the benefit of such minor or another incapacitated person. Then the outstanding tax dues shall be levied upon and recoverable from such guardians, trustee or agent in such manner and to the same extent as it would be determined and recoverable from any such minor or another incapacitated person, as if he were a major or capacitated person and as if he were conducting the business himself.

The deeming fiction is required to overcome the general principle of law, which operates in favor of a minor or incapacitated person to plead minority or incapacity in respect of dues or claims, particularly penal liability. Further, the term ‘incapacitated person’ is not defined in the GST laws, in our understanding, it should refer only to a person who is a person of unsound mind or one who is terminally ill.

Illustration
Mr. A was the owner of an amusement park. When Mr. A passed away in an accident the entire business of Mr. A was transferred in the name of Master. M (Age 11 years), son of Mr. A. As per the will of Mr. A, Master. M will be the owner of the business but the business will be run by Mr. Z (‘Guardian’ of Master. M) till the time Master. M attains the majority. In such a case as per section 91 of the CGST Act, Mr. Z will be liable for all the GST liability arising out of Master. M’s business till the time Mr. Z is handling the business on behalf of Master. M.

As per section 92 of the CGST Act, where there are any outstanding tax dues relating to a business of a taxable person and the estate or part thereof of such taxable person is under the control of the courts of wards, the Administrator General, the official trustee or any receiver or manager appointed by or under any order of the court. Then such persons appointed by the court will be liable to pay outstanding tax dues under the GST laws as if they were themselves conducting the business.

Illustration
Mr. Dhoni is appointed as manager of Mr. Pointing, to manage the estate of Mr. Pointing, who owns a sports equipment manufacturing business. Mr. Pointing is liable to pay INR 5 lakhs GST, interest, and penalty to the Government. The department can recover such dues from Mr. Dhoni who is managing the estates of Mr. Pointing, by invoking the provision of section 92 of the CGST Act.

Section 93 of the CGST Act gives reference to the Insolvency and Bankruptcy Code, 2016. As per section 93 of the CGST Act the provisions of the Insolvency and Bankruptcy Code, 2016 will supersede the aforementioned provisions under the CGST Act. Section 93 of the CGST act has enlisted various scenarios in which the liability to pay tax dues under GST laws is shifted, such scenarios are as follows:

Scenarios

Liability

In case of death of a person who is liable to pay tax under the GST Laws  
  • Business Continued – the legal representative or any other person who carries on the business after his death is liable to pay tax, interest, penalty, or any other due which is due from the deceased person; or
  • Business discontinued – the legal representative shall be liable to pay, out of the estate of the deceased, to the extent to which the estate is capable of meeting the outstanding tax dues from such person under the GST laws.
In case of partition of a Hindu Undivided Family (HUF) or Association of Persons (AOP), who is liable to pay tax under the GST Laws In case a HUF or AOP property is partitioned between the member or group of members then the liability to pay outstanding tax dues is on each member or group of members jointly and severally who got a portion in that property.
In case of partition of dissolution of a partnership firm, who is liable to pay tax under the GST Laws   In case the firm is dissolved then every person, who was a partner up to the time of dissolution of the firm will be jointly and severally liable to pay the outstanding tax dues.
In case of termination of guardianship or trusteeship, who is liable to pay tax under the GST Laws   In case the guardian is carrying on the business on behalf of award or the trustee who carries the business under the trust on behalf of the beneficiary, then on the termination of guardianship or trusteeship, the ward or the beneficiary is liable to pay tax, interest or penalty up to the time of such termination.

As per section 94 of the CGST Act in case of discontinuance of business, the partnership firm or AOP or HUF, the liability of the firm/AOP/HUF shall be determined (up to the date of discontinuance) as if such discontinuance had not taken place. Further, every partner of such a firm or member of such AOP or HUF at the time of discontinuance shall be jointly and severally liable for payment of such outstanding tax dues.

Further, as per section 94 of the CGST Act, if there is any change in the constitution of the firm or association, the partners and members who existed before reconstitution shall be liable jointly and severally to pay outstanding tax dues for any period up to the date of reconstitution. This will operate even if the retirement was intimated to the commissioner in terms of Section 90. Further Limited Liability Partnership Firm (LLP) will also be covered within the ambit of a partnership firm.

Illustration
Let’s say, 3A was a partnership firm having three partners namely Mr. A, Mr. B & Mr. C. 3A was involved in various businesses such as manufacturing of cars, textiles, manpower supply, etc. If the firm decides to discontinue its textile business and as on such a date of discontinuance the firm for the textile business has an outstanding GST liability of INR 5 crores, then all the three partners will be jointly and severally liable towards such liability.

Sr.No

Particulars

Person Liable To Pay Tax.

1

Business TransferredBoth Transferor and Transferee shall be jointly and severally liable.

2

Agent and PrincipalBoth agent and principal shall be jointly and severally liable.

3

Merger or amalgamation of companiesEach company shall be liable for the supplies made by them.

4

Liquidation of a companyThe principal liability will be of the company and if such company is unable to pay tax dues then liability will be of the directors.

5

Private Limited companyThe principal liability will be of the company and if such company is unable to pay tax dues then liability will be of the directors.

6

Partnership firmPartners

7

Guardianship/ TrustThe guardian/ trustee

8

Court of wards, Administrator General, Official Trustee, etc.The principal liability will be of the taxable person and if such a taxable person is unable to pay tax dues then liability will be of such Court of wards, Administrator General, Official Trustee, etc.

9

Death of a taxpayerThe legal heir who has inherited the estate.

10

Dissolution of a HUF/AOP/Partnership FirmAll members or partners

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