Liability to Pay in Certain Cases Under GST
“Under GST statutes, the liability to pay the tax has been casted on the supplier of goods or services. There are situations where either the effective control of a taxable person is affected by another person or benefits of its property is received by one or more persons. The statute in order to expand the liability of such persons who are in effective control of affairs of business or are in possession of the property of such person has provided their liability under the GST statutes for recovery of any unpaid tax of such taxable person from them. The provisions are absolute in certain cases, but restricted liability is provided in others. This article examines the liability of persons other than the taxable person and limitation of liability in such cases. Read on…”
1 Understanding the Statutory Context & Scope of Chapter XVI
Section 9 is the charging section of the Central Goods and Services Tax Act, 2017 (“CGST Act”). The section provides that every supplier of goods or services is liable to pay GST on every taxable supply effected by him. However, under specific provisions of section 9 of the CGST Act, the liability to pay tax has been shifted from the supplier to the recipient in case of notified goods and services (Reverse Charge Mechanism – Section 9(3) and 9(4)) and in certain specified services on the E-commerce operator through whom such services are being supplied (Section 9(5)).
The extension of liability to pay tax by persons other than the supplier finds extension beyond section 9 also. While under section 9, the liability has been shifted absolutely from the supplier to the recipient or the e-commerce company, there are certain occasions where the liability to pay tax has not been shifted absolutely but is co-extended to specified persons other than the supplier. Thus, it becomes pertinent for persons undertaking such transactions to understand the nature and extent of the tax liability which they have become liable for. Chapter XVI of the CGST Act (Sections 85 to 94) provides for the specified cases where the liability to pay has been co-extended to specified persons other than the supplier.
2 Liability in Case of Transfer of Business (Section 85)
Section 85 of the CGST Act provides that the transferee in case of transfer of business along with transferor shall be jointly and severally liable to pay the tax, interest or any penalty due from the taxable person (transferor) in respect of such business.
Thus, the transferee along with the acquisition of business from another person, also acquires his liability of GST which remains unpaid for any period prior to date of such transfer. The determination of such liability would ensure the transferee to take adequate precautions in terms of making due diligence of all GST liabilities which remains unpaid on the date of such transfer of business in whole or in part.
Scope of Business Transfer – Whole vs. Part
The transfer of business would include the activity continuing or resuming as it was being undertaken prior to such transfer and such entity or part of entity is capable to function as an unit as a whole.
- Full Transfer: M/s ABC Enterprises purchasing the entire manufacturing facility of M/s Anything Private Limited shall be liable for any GST liability for any past period which is determined or is determined after such transfer.
- Partial Transfer: In case of part of enterprises, for e.g., purchasing the logistics business of M/s Anything Private Limited which can be run as an independent logistics business by the purchaser, the purchaser would be liable for any GST liability of such part of the enterprise only.
Transfer as Going Concern (Exempt)
Usually, the purchaser prefers to purchase the business as a going concern since the transfer of such business is exempt from levy of GST under Entry No. 2 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. Thus, GST is not levied on transfer of such business or any part or fixed assets, or stock as part of such business.
Individual Asset Purchase (Taxable, No Section 85)
In alternate, the purchaser can purchase individual assets of the business, in which case the transfer would be that of assets and not of business. GST would be applicable on different assets as per their applicable rates and no exemption is available. However, in case of individual asset purchase, the transferee would not be liable for any past liability of the transferor under section 85.
3 Liability of Agent and Principal (Section 86)
Section 86 of the CGST Act provides that where an agent supplies or receives any taxable goods on behalf of his principal, he shall also be jointly and severally liable to pay the tax payable on such goods.
Critical Statutory Nuances of Section 86
- Goods Only, Not Services: The section is strictly applicable to the supply of goods and does not extend to services.
- Receipt & Custody Extension: The section is carefully worded to extend the liability of the agent even on goods received from the principal so as to cover situations like goods lost, stolen, destroyed, or not available post-receipt in the hands of the agent.
- Immunity from Other Dues: The agent shall not be liable for any other liability of the principal under the GST statutes, including in respect of any goods which are not received through/by him.
- No Liability for Principal’s ITC: In the opinion of the author, the agent shall also not be liable for any Input Tax Credit (“ITC”) which was not available in any manner to the Principal even when such ITC can be linked to such goods.
- Commencement Point: The liability of the agent shall only start on the receipt of goods which he receives on behalf of the principal and shall be limited strictly in respect of such goods.
4 Liability in Amalgamation or Merger of Companies (Section 87)
Section 87 of the CGST Act provides for liability in case of amalgamation and mergers in respect of liability acquired for supply amongst the merging/amalgamating companies:
When two or more companies are amalgamated or merged from an earlier date (prior to date of order of such merger or amalgamation) and any of such companies have supplied or received any goods or services or both to or from each other during the period commencing on the date from which the order takes effect till the date of the order, then such transactions of supply and receipt shall be included in the turnover of supply or receipt of the respective companies and they shall be liable to pay tax accordingly.
Date of Cancellation of Registration: The registration of such amalgamating or merging companies shall be cancelled with effect from the date of the said order and NOT retrospectively from the effective date of merger mentioned in such order.
5 Company in Liquidation & Directors of Private Companies (Sections 88 & 89)
Company in Liquidation (Section 88)
Section 88 prescribes that in the case of a company under liquidation, the Commissioner would notify the liquidator within three months from the date on which he receives intimation of the appointment of the liquidator, the amount which shall be sufficient to provide for any tax, interest or penalty which is then, or is likely thereafter to become, payable by the company.
In case of a private company wound up before or during winding up, the liability is cast on person(s) who was director of such company at any time during the period for which tax was due. Such directors are jointly and severally liable unless they prove to the satisfaction of the Commissioner that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on their part.
Liability of Directors of Private Company (Section 89) & Judicial Scrutiny
Section 89 renders a Director of a private limited company jointly and severally liable for unpaid tax, interest, or penalty due from the company, unless he proves that non-recovery cannot be attributed to gross neglect, misfeasance, or breach of duty on his part in relation to company affairs.
Such liability has not been affixed on shareholders. Relying on Nihal Chand v. Kharak Singh Sunder Singh (1936) 2 Comp Cas 418, company liability is not shareholder liability. Courts do not lift the corporate veil unless fraud against the State is demonstrated.
In Pepsico India Holdings Private Limited v. Food Inspector [(2011) 1 SCC 176], the Hon’ble Supreme Court held that a mere bald statement that a person was a Director is not sufficient unless a specific allegation regarding his role in management is established.
6 Liability of Partners, Guardians, Trustees & Estates (Sections 90 to 94)
Absolute Liability of Partners of a Firm (Section 90) & The 1-Month Retirement Rule
Section 90 provides that where tax, interest or penalty cannot be recovered from the firm, each partner shall be jointly and severally liable. Unlike directors, partners have no statutory defense of proving absence of gross neglect. The statute fastens absolute liability.
Fiduciary Liability: Guardians, Trustees & Court of Wards (Sections 91 & 92)
Section 91: In business carried on by a guardian, trustee or agent of a minor or incapacitated person, tax dues unrecoverable from the business vest in and are recoverable from the guardian, trustee or agent in like manner and to the same extent as the owner. No exception is carved out even where the fiduciary was not at fault.
Section 92: Provides corresponding joint and several liability where business is managed by Court of Wards, Administrator General, Official Trustee, or receiver/manager appointed by court order.
Recovery in Case of Death, Dissolution or Termination (Section 93)
Section 93 provides for recovery of tax, interest, or penalty upon death or dissolution, expressly subject to the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC):
| Situation | Person Liable to Pay Tax and Other GST Dues |
|---|---|
| In case of death of a person, if business is continued after his death by his legal representative or any other person. | Such legal representative or other person. |
| In case of death of a person, if the business carried on by the person is discontinued. | His legal representative shall be liable to pay, out of the estate of the deceased. |
| Where property of HUF or AOP is partitioned amongst various members or groups of members. | Each member or group of members shall be jointly and severally liable to pay dues from such HUF or AOP. |
| In case of dissolution of a partnership firm. | Every person who was a partner shall be jointly and severally liable to pay tax, interest or penalty due. |
| In case of termination of guardianship or trust. | The ward or beneficiary shall be liable to pay dues up to the time of termination of guardianship or trust. |
7 Author’s Synthesis & Guiding Principles
From the comprehensive examination of Chapter XVI, the author deduces the following guiding principles:
- Primary Liability Remains on Taxable Person: Liability under GST statutes is primarily absolute on the taxable person making taxable supplies. Third-party recovery is an exceptional secondary mechanism.
- Estate Ceiling on Recovery: While certain sections frame liability as joint and several, recovery from heirs and successors cannot legally exceed the value of estate benefits received on succession, partition, or dissolution.
- Culpability vs. Fiduciary Status: Liability should be fastened on persons actually responsible for non-payment, rather than universally penalizing individuals merely by virtue of holding a formal fiduciary or managerial title.
- Mandatory Sequence of Recovery: Tax liability must first be formally determined in the hands of the taxable person. The Revenue must first exhaust recovery against the primary taxable person before invoking secondary recovery provisions against third parties.