In the absence of any statutory provision, no liability can be automatically fastened on the Director of a public company.
The tax authorities have historically had difficulty in collecting arrears of taxes from defaulters. If the company files for bankruptcy, loses its ability to pay or becomes untraceable, the recovery process becomes even more challenging. When it comes to GST, it’s important to keep in mind that the money owed by the Company, which is due to the Government, may already be collected from the final customer. As a result, there should not be any exemption from punishment for any gross neglect or misfeasance in relation to the affairs of the company.
Section 89 of the Central Goods and Services Tax Act, 2017 discusses the joint and several personal liabilities of the Directors of a Private Company where any tax, interest, or penalty cannot be recovered. Here, it is the Directors’ responsibility to provide evidence that they were not at fault for the companies’ tax default. Additionally, Section 89 begins with a non-observant clause, i.e. the provision supersedes anything provided in the Companies Act. Therefore when it comes to the recovery of GST, the idea that a corporation is a separate legal entity as provided in the Companies Act instantly becomes eroded.
Under the GST laws, the recovery of taxes is contemplated on the person who makes a taxable supply. Therefore, such liability should ideally be fastened on the Company as a whole and not on a person by virtue of his fiduciary position as a Director, unless proven otherwise.
It is interesting to note that there is no other provision that fixes liability on a Director with respect to the tax dues of a public company. In the absence of a provision to this effect, can it be said that no liability can be automatically fastened on a Director to recover the dues of the public company under the GST laws? It can safely be argued that any proceeding initiated by the Department fastening liability on a Director to recover dues of a public company would be violative of the Constitution of India. There are a plethora of judgements which have stated that no liability can be fastened on a Director of a company w.r.t. statutory dues of the Company in the absence of an enabling statutory provision. The said decisions also highlighted the principle of the separate legal existence of a Company.
However, in certain exceptional scenarios, the above principle of the separate legal existence of a Company can be made redundant by the application of the fiction that the veil of the Company be lifted in certain tax cases involving evasions/fraud as has been held by the Courts from time to time. The common law doctrine of lifting the corporate veil can be applied in cases where tax obligations under a statute are sought to be evaded by the Company. The Hon’ble Supreme Court has observed that the Courts have the power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation.
It is pertinent to note that Section 132 of the CGST Act envisages punishment for offences including a scenario where whoever collects any amount as tax but fails to pay the same to the Government. Does this give the Department a backdoor entry to hold the Directors liable for defaults of the Company and accordingly punish them? In view of the authors, the said provision should not be misused by the Department and in a situation where the Department holds the Director liable for punishment in terms of the said provision, it is to be seen if the Directors can defend themselves from tax recovery proceedings particularly when they were not involved in any of the offences.
In the absence of any statutory provision, no liability can be automatically fastened on the Director of a public company. However, in certain exceptional scenarios, the tax dues of a company can also be recovered from the Directors if it is shown that they were responsible for the affairs of the company and were responsible for non-payment of Government dues. The presence of certain indirect provisions to hold any person responsible for any offence should not be misused by the Department since it is likely to put the Directors in a worse-off situation to prove their innocence and non-involvement in any of the offences.
Source: https://www.financialexpress.com/money/income-tax-can-the-directors-of-companies-be-held-liable-for-recovery-of-taxes-3283642/
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