Liability of Directors under CGST Act, 2017

Download this article in PDF: Liability of Directors under CGST Act

Section 89 and 137 of the CGST Act, 2017 are the sections that discuss liabilities of Directors in case of recovery of taxes, interests and penalties for offences. It is to be noted that these sections override the related sections of Companies Act, 2013.

Section 89 of CGST Act, 2017

Section 89: (1) Notwithstanding anything contained in the Companies Act, 2013, where any tax, interest or penalty due from a private company in respect of any supply of goods or services or both 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 tax, interest or penalty unless he proves that the 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.

(2) Where a private company is converted into a public company and the tax, interest or penalty in respect of any supply of goods or services or both for any period during which such company was a private company cannot be recovered before such conversion, then, nothing contained in sub-section (1) shall apply to any person who was a director of such private company in relation to any tax, interest or penalty in respect of such supply of goods or services or both of such private company: 

 Provided that nothing contained in this sub-section shall apply to any personal penalty imposed on such director.

Key takeaway:

  • This Section refers to recovery of tax, interest and penalties in case of private companies.
  • On non-payment of dues by the company, its directors are held liable.
  • Only those directors who were in office during the period when the tax was due will be held liable.
  • Neither the section nor the Act defines the term ‘Director’. Hence, the definition as per Companies Act is to be accepted. Companies Act defines a Director as one who is appointed to the Board of a company. This includes Managing Director, Whole-time Directors as well as Non-Executive Directors which includes Independent Directors as well as Nominee Directors.
  • There will be no liability on the director if he/she proves that the non-recovery of dues is not due to any gross neglect, misfeasance or breach of duty on his/ her part in relation to the affairs of the company.
  • If the private company having dues converts into a public company, then the directors of the erstwhile private company cannot be held liable.
  • Since there is no other section talking about liability of directors in public companies and as this section explicitly states that directors are not held liable if the company converts from a private company to public company, it can be understood that there is no liability of directors of public companies, which includes listed companies.

Section 137 of the CGST Act, 2017

Section 137: (1) Where an offence committed by a person under this Act is a company, every person who, at the time the offence was committed was in charge of, and was responsible to, the company for the conduct of business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

(2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any negligence on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.

(3) Where an offence under this Act has been committed by a taxable person being a partnership firm or a Limited Liability Partnership or a Hindu Undivided Family or a trust, the partner or karta or managing trustee shall be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly and the provisions of sub-section (2) shall, mutatis mutandis, apply to such persons.

(4) Nothing contained in this section shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.

Explanation. ––For the purposes of this section,––

(i) “company” means a body corporate and includes a firm or other association of individuals; and

(ii) “director”, in relation to a firm, means a partner in the firm. 

Key takeaway

  • This section refers to offences committed by and resulting punishment and penalties for all companies – private and public.
  • For an offence committed by a company, the company as well as everyone who is in charge of and is responsible for conduct of business of the company will be held liable and punished accordingly.
  • If it is found that any other person, who may be a director, manager, secretary or other officer, was also involved in committing the offence, he/she will also be held liable and punished accordingly.
  • There will be no liability on the person if he/she proves that the offence committed was without his/ her knowledge and he/she had exercised all due-diligence for its prevention.

Conclusion

From the above two sections of the CGST Act, it is understood that there is no liability for directors of public companies for non-payment of dues like taxes, interest and penalties. However, the directors of such companies are held liable, proceeded against and punished if they are involved in any offences committed by their companies. And such directors may not be exclusively whole-time directors but also include non-executive and independent directors.

Additional info – What about Liability of Partners?

As per Section 90 of the CGST Act, partners of a partnership firm are liable to pay any GST dues irrespective of any clause of Partnership Deed or any other law. The partnership firm also includes Limited Liability Partnerships (LLPs). Additionally, the Commissioner must be informed by the firm or the retiring partner in case of retirement of a partner. The retiring partner could be held liable for dues under GST until the date of his retirement. If any intimation regarding the retirement is not given within 1 month, the retiring partner will be continued to be held liable till such intimation is received by the Commissioner.