GST: Directors face higher risks for tax default

GST Acts don't define 'director' or make distinction between executive or non-executive directors

The goods and services tax (GST), India’s new indirect tax regime, makes directors of private limited companies liable for recovery of unpaid taxes, interest or penalties pertaining to supply of goods or services. To complicate matters, the GST Acts do not provide a definition for the term ‘director’ or make any distinction between executive or non-executive directors. Further, the existing directors and officer’s liability insurance — that helps a company hedge against professional and functional risks emanating from managing and running a business – do not cover the additional risks under GST.   

Section 89 of the Central GST Act refers to recovery of tax, interest and penalties in case of private companies. “In such cases all directors will be held liable unless they prove it is not due to their neglect or breach of duty,” says Shriram Subramanian, founder and managing director, InGovern Research Services.
 

Legal experts say VAT Acts of some states put the onus on directors for such pending recoveries from private companies, which are in the process of being wound up. However, GST extends this to pending tax dues of all private companies, taking a cue from provisions similar to the one provided in Section 179 of the Income Tax Act, 1961, notes Lalit Kumar, partner, J Sagar Associates.

Experts point out that these provisions are applicable notwithstanding the limited liabilities that a director may have under the Companies Act, 2013. 

What the Central GST Act says 

 

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.

“As a consequence, all persons who were directors of the company during the period of default would be exposed to personal liability to make good the unpaid tax, interest or penalty liabilities,” says Sandeep Chilana, partner, Shardul Amarchand Mangaldas. The maximum penalty liabilities under GST laws can go up to 100 per cent of the pending tax amount, he adds.

The provision does not cover directors of public companies, including those which converted from private to public before recovery proceedings are initiated.

As the GST Acts do not define the term ‘directors’, this means the provisions would apply to executive as well as non-executive directors, including independent and foreign directors, exposing them to the liabilities. This could expose foreign directors in Indian subsidiaries and joint ventures to huge risks in India, necessitating a review of their position, points out a note on GST by law firm Shardul Amarchand Mangaldas.

Insurance policies may not come in handy to cover the risks posed to directors by the new indirect tax regime. Experts say directors and officers liability insurance (also known as D&O insurance) covers are general in nature and are not specific to any kind of tax liability. “Taxes are always excluded from D&O policies. Also there is an exclusion for negligence,” says Chilana.

In face of charges of non-recovery of taxes, interest or penalties, the best bet for a director is to prove that there has been no gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company, say legal experts.