Directors And Promoters Liability For GST Default Or Fraud- Criminal Stand Point.

Introduction:

The Goods and Services Tax (“GST”) was implemented in India to simplify the indirect taxation system and prevent tax evasion. However, non-compliance with GST laws, especially fraudulent activities, can lead to severe penalties, including criminal liability for directors and promoters of a company. The Central Goods and Services Tax CGST Act, 2017 (“CGST Act”), provides provisions that hold directors and promoters responsible for tax fraud, defaults, and evasion. This article explores the legal framework governing their liability, applicable sections, penalties, and case laws.

Understanding Criminal Liability in GST:

Criminal liability arises when a company commits fraudulent acts under the GST framework, and its key managerial personnel, including directors and promoters, are involved in or have knowledge of such activities. The liability can be both civil (monetary fines and penalties) and criminal (imprisonment and fines) depending on the nature of the offense.

Offenses Leading to Criminal Liability under CGST Act:

Directors and promoters may face prosecution under CGST Act if the company is found

 guilty of the following offenses:

1. Tax Evasion (Section 122 & 132)

• Suppression of taxable transactions to evade GST.
• Issuing invoices without an actual supply of goods or services.

2. Fraudulent Input Tax Credit (“ITC”) Claims (Section 122 & 132)

• Availing ITC without actual receipt of goods/services.
• Using fake invoices to claim ITC fraudulently.

3. Failure to Pay Collected Tax to the Government (Section 76)

• A company that collects GST but fails to deposit it within three months.

4. Failure to Deduct or Collect Tax at Source (Section 51 & 52)

• Non-compliance with Tax Deducted at Source and Tax Collected at Source provisions.

5. Obstruction of GST Officers (Section 122)

• Preventing tax officers from conducting inspections or audits.

6. Falsification of Records (Section 122)

• Manipulating financial statements to reduce tax liability.

Punishment for Offenses – Section 132

This section specifies criminal liability for tax evasion and fraudulent activities. The punishments include:

• Tax evasion exceeding ₹ 5 crore: Imprisonment up to 5 years and a fine.
• Tax evasion between ₹ 2-5 crore: Imprisonment up to 3 years and a fine.
• Tax evasion between ₹ 1-2 crore: Imprisonment up to 1 year and a fine.
• Issuing fake invoices without actual supply: Punishable with up to 5 years of imprisonment and a fine.
• Obstruction of tax officers or destruction of evidence: Imprisonment up to 6 months and a fine.

Offenses by Companies - Section 137

This section states that if a company is guilty of an offense under GST, every director, manager, secretary, or responsible officer involved in the conduct of business at that time shall be liable for prosecution.

Liability of Directors for Company’s Dues - Section 89

If a company fails to pay GST dues, the liability extends to the directors of a private company if the outstanding dues cannot be recovered from the company itself.

A director is held accountable under the following circumstances:

• Misfeasance – Wrongful conduct in managing the company leading to financial mismanagement.
• Breach of Duty – Violation of legal obligations and fiduciary duties.
• Gross Negligence – Failure to ensure compliance.

Criminal Liability on Directors and Promoters

When a company engages in GST fraud, directors and promoters may face severe legal and financial consequences, including:

1. Personal Liability (Section 89) – If a company fails to pay GST dues, its directors can be personally held responsible, and their assets may be attached to recover the dues.
2. Imprisonment (Section 132) – For willful tax evasion, imprisonment of up to 5 years is applicable, making it a serious criminal offense.
3. Attachment of Assets (Section 83) – If the company’s tax dues are unpaid, the Commissioner has the authority to attach the personal assets of the taxable person.
4. Blacklisting and Debarment – Under Section 29, the company and its key personnel may be barred from future business activities if they engage in repeated fraud or non-compliance.

Judgment:

The case of Rasanna Karunakar Shetty vs. State of Maharashtra¹ primarily deals with the issue of liability imposed on a former director of a private company for GST dues and recovery proceedings initiated against him. The Bombay High Court analyzed the applicability of Section 79 and Section 89 of the Maharashtra Goods and Services Tax Act, 2017 (“MGST Act”) in determining whether the petitioner could be held liable for the company's tax dues despite his resignation.

Facts of the Case

• The petitioner was appointed as a director of a private company in March 2017.
• However, in November 2017, his Director Identification Number (DIN) was disqualified under Section 164(2)(a) of the Companies Act, 2013, rendering him ineligible to hold the directorship.
• Due to his short tenure, he did not actively participate in the company's business affairs.
• Following the disqualification, the petitioner recommended the appointment of another director in June 2018.
• However, due to procedural delays, the official recording of the petitioner’s resignation was not immediately reflected in the company records.
• A show cause notice was issued to the company for the period April 2018 to March 2019.
• The final order, confirming the tax demand, was issued in December 2020.
• Since recovery proceedings against the company and its existing directors failed, the authorities attached the bank account and personal property of the petitioner on the ground that he was a director during the relevant period.
• The petitioner challenged the attachment proceedings in the Bombay High Court, arguing that he was no longer a director during the tax assessment period and that no show cause notice was issued to him before initiating recovery.

Legal Arguments Presented by the Petitioner

1. Lack of Due Process:

• The petitioner argued that no show cause notice was issued to him before his personal property and bank account were attached.
• The authorities had bypassed the principle of natural justice, violating his constitutional rights under Article 14 and Article 300A of the Constitution of India.

2. Non-Applicability of Section 79 and Section 89 of the MGST Act:

• Section 79 of the MGST Act allows the authorities to recover tax dues from individuals connected with the defaulting taxpayer. However, the petitioner contended that he was not a registered person under GST and had ceased to be a director before the relevant tax period.
• Section 89 of the MGST Act states that directors of a private company may be held personally liable for tax dues only if they were responsible for the company’s affairs during the relevant period. Since the petitioner was not actively managing the company at the time, liability could not be imposed on him.

3. Directors Cannot Be Held Liable When the Company is a Separate Legal Entity:

• The petitioner cited the principle of corporate personality, established in Salomon v. Salomon & Co. Ltd., to argue that a company is a separate legal entity distinct from its directors and shareholders.
• The mere fact that recovery from the company was unsuccessful did not justify proceeding against a former director who was not involved in the company's business at the time of default.

Judgment of the Hon’ble Bombay High Court

1. Applicability of Section 79 (MGST Act) to the Petitioner:

• The Court ruled that Section 79 did not apply to the petitioner as he was not a registered person under GST.
• The principal liability for tax dues rested upon the company, and without a legal basis, the petitioner could not be made personally liable.

2. Importance of Subjective Satisfaction Under Section 89 (MGST Act):

• Section 89 requires the tax authorities to conduct a subjective assessment to determine whether a director was responsible for the company’s affairs during the relevant period.
• The Court found that no such inquiry was conducted before attaching the petitioner’s assets, rendering the proceedings unlawful.

3. Breach of Constitutional Rights:

• The attachment of the petitioner's personal bank account and immovable property was deemed illegal and unsustainable.
• The Court reiterated that a company is a distinct legal entity, and merely being a former director does not automatically impose liability for the company’s tax dues.
• The principle of limited liability applies unless it is proven that the director was actively involved in tax evasion or fraud.

Conclusion:

The GST framework imposes stringent liabilities on directors and promoters to ensure compliance and prevent tax evasion. Criminal liability under Sections 122, 132, and 137 of the CGST Act highlights the serious consequences of GST fraud. To avoid penalties and imprisonment, directors must ensure transparent tax compliance, maintain accurate financial records, and conduct periodic audits. With increasing government scrutiny, businesses must adopt ethical tax practices to safeguard their position from legal consequences.

Footnote

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