The Goods and Services Tax (‘GST’) was introduced in 2017 to replace multiple cascading indirect taxes such as Value Added Tax, Service Tax, Purchase Tax, and Excise Duty, which was imposed on the supply of certain goods and services. GST was introduced pursuant to the powers of the Central and State Government to collect taxes under the Constitution of India.
Collection of both direct and indirect taxes is a fundamental priority for the Government, as the taxes collected are instrumental for the country’s infrastructural development, human capital, and maintaining a proper balance between enhanced revenue generation, long-term growth, and lower compliance expenses.
However, the recovery of tax arrears after the demise of a taxable person has been a difficult task for Tax Authorities. The process is further complicated in case of death of a director or a partner, or a sole proprietor of a business entity.
Hereinbelow we have discussed the liability incurred by the legal heirs to pay the tax arrears under the GST regime in the event of death of a Partner, Sole Proprietor, or Director of a business entity.
LIABILITY OF LEGAL HEIRS AND TAX TREATMENT UNDER GST
In the case of Rajkumar Devraj & Ors. v. Jai Mahal Hotels Pvt. Ltd. & Ors, Co. A (SB) No. 25/2011 dated 12.12.2012, the High Court of Delhi defined the term legal heir as ‘a person who is entitled to the estate of the deceased.’
Section 93 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) deals with the liability of legal heirs and legal representatives to pay the tax arrears in case of death of the taxable person. It states that if the business is continued by the legal heirs, then such person shall be liable to pay tax, interest or penalty in case of death of the taxable person. In case the business is discontinued before or after the death of the taxable person, the legal heir shall pay out of the estate of deceased, the outstanding taxes, interest and penalty.
The following elements determine the liability of the legal heirs under the CGST Act in the event of the death of a taxable person:
- The nature or forms (i.e., whether the taxable person is a Sole Proprietor, a Partner in a Partnership Firm, or a Director of a Company) of the taxable person;
- Whether or not a person’s death results in the transfer of business; and
- Whether the taxable person’s legal heirs or the remaining partners of the partnership firm want to continue operating the enterprises or close them down.
In the case of Kamal Gupta v. Bank of India AIR 2008 Delhi 51, the High Court of Delhi observed that legal heirs are liable for the debts of their predecessor to the extent of the property inherited by them from their predecessor. They are not personally liable for the predecessor’s liability, but the liability is to the extent of the deceased’s estate.
I. SOLE PROPRIETORSHIP
A Sole Proprietor is a person who runs and controls the business all by himself. It is not a separate legal entity, and thus the business comes to an end on the death of the Sole Proprietor. Subsequently, the estate of the deceased Proprietor is distributed according to the will.
In the case of M/S S.A. Enterprise v. The General Manager Eastern Railway W.P No. 26493(W) of 2017 dated 07.11.2017, the High Court of Calcutta held that since Sole Proprietorship is not a separate legal entity, the legal heirs cannot automatically succeed in the business.
In the case of a Sole Proprietorship, two situations are possible upon the death of the Sole Proprietor:
- When the legal heirs continue the business
If a person being the legal heir chooses to continues the business after the death of the Sole Proprietor, it shall be construed as a transfer of business, and new registration has to be obtained as provided under Section 22(3) of the CGST Act.
Section 22(3) of the CGST Act mandates the successor or transferee of Sole Proprietorship to obtain registration of business from the date of transfer of the business from a taxable person by way of succession.
Further, where a business is transferred to another person for the reason of death of the Proprietor, the transferee is required to mention the reason of obtaining registration as ‘Death of the Proprietor,’ in the registration form GST REG-01 filed in electronic mode on the GST portal.
With regards to tax liability of the transferee, Section 85 of the CGST Act states that when a taxable person transfers his business by way of sale, gift, leave and license, hire or in any other manner, the transferee is liable to pay the taxes, interest and penalty which is unpaid or undetermined at the time of or before such transfer.
Further, Section 93 of the CGST Act requires the legal heirs, who shall carry on the Sole Proprietorship business, to pay all such tax, interest or penalty unpaid or undetermined against the Sole Proprietor at the time of transfer.
Through Circular No. 96/15/2019-GST dated 28.03.2019, the Central Board of Indirect Taxes and Customs (‘CBIC’) clarified that in case of transfer of business due to the death of the Sole Proprietor to any person including transferee or successor, the unutilized Input Tax Credit (‘ITC’) lying in the Electronic Credit Ledger shall be transferred to the transferee.
- When the business is closed down/ discontinued by the legal heirs
In accordance with Section 29(5) of the CGST Act read along with Rule 20 of the Central Goods and Services Rules, 2017 (‘CGST Rules’), a taxpayer seeking cancellation of registration of a deceased Sole Proprietor shall pay an amount equivalent to the ITC contained in the stock of inputs, semi-finished goods, finished goods, capital goods or plant and machinery, or the output tax payable on such goods, whichever is higher.
With regards to liability of the legal heirs, Section 93 of the CGST Act states that in case the business is discontinued after the death of the Sole Proprietor, his legal representative shall be liable to pay, out of the estate of the deceased, to the extent to which the estate is capable of meeting the charge, the tax, penalty or interest receivable from such deceased Proprietor under the CGST Act, whether such tax, interest, or penalty was assessed prior to his death but remained unpaid, or was assessed after his death.
A Partnership is an agreement between two or more persons to share profits in the business. Any changes in the existing Partnership agreement may result in the reconstitution of the Partnership firm.
Section 42 of the Indian Partnership Act, 1932 lists the following circumstances when the firm can be dissolved subject to contract between the partners:
- after the expiry of the fixed term for which the Partnership was agreed to be constituted;
- on the completion of the undertaking for which it was constituted;
- on the death of a partner; and
- on adjudication of a partner as insolvent by a Court.
Thus, a Partnership may be dissolved on the death of any partner, subject to the contract between partners.
In S.P. Misra & Ors. v. Mohd. Laiquddin Khan & Anr., C.A. No. 3311 of 2015 dated 18.10.2019, the Supreme Court held that in view of the death of one of the partners, the partnership itself stands dissolved by the operation of law in accordance with Section 42(c) of the Indian Partnership Act, 1932.
In such circumstances, upon the dissolution of the partnership firm, there cannot be a partnership existing in which the legal heirs could presume partnership in the deceased’s place.
In Smt. S. Parvathammal v. CIT, 1987 163 ITR 161 Mad, the High Court of Madras stated that a partnership usually dissolves on the partner’s death, unless there was an agreement to the contrary in the original partnership deed. Even if such an arrangement existed in a partnership of two partners, the partnership ends automatically when one of them dies. There is no longer any partnership into which a third party can be admitted. A partnership is not a heritable position but rather a contractual arrangement.
Section 90 of the CGST Act deals with the liability of partners of a firm to pay GST. According to Section 90 of the CGST Act, the remaining partners of a firm are jointly and severally liable for the payment of tax, interest or penalty under the CGST Act. Accordingly, Section 90 of the CGST Act does not impose any liability on the legal heirs of a deceased partner for the payment of his tax arrears. This is in consonance with the judicial precedents as partnership does not devolve into legal heirs of a partner after his death.
Company is a distinct legal entity governed by the Companies Act, 2013 and enjoys perpetual succession. The death of one or more members or Directors of a company does not impact the company’s perpetual succession, as the same company continues to carry one business.
Section 89 of the CGST Act provides for the liability of Directors of private company. It states that in case of non-payment of tax by a private company, the Directors of the company are jointly and severally liable for the tax, interest or penalty under the CGST Act.
Section 89 of the CGST Act starts with a non-obstante clause, which excludes anything stipulated by the Companies Act, 2013. Based on the aforesaid non-obstante clause, a company’s status as a separate legal entity, as provided under the Companies Act, 2013, gets diluted for the purpose of recovery of the company’s GST dues.
A plain reading of Section 89 of the CGST Act makes it evident that no personal liability is prescribed to the legal heirs of a Director for the payment of tax arrears of the company in the event of the Director’s death. However, the remaining Directors of the company remain personally liable for the payment of such arrears in the event of the Director’s death.
The Government is enshrined with the responsibility of collection of taxes with authority of law under the Constitution of India. Such authority to collect taxes extends to the collection of tax arrears from the legal heirs of a taxable person after the death of such person.
The introduction of the CGST Act proved to be beneficial for the country’s economy by subsuming all the prevailing earlier taxes and unifying the indirect tax legislation. However, a significant lacuna exists in the uniformity of liability of a legal heir in case death of the Sole Proprietor, Partner, or Director of different business entities.
In a Sole Proprietorship, a legal heir is liable to pay the tax arrears of the deceased Proprietor. At the same time, in a Partnership, the Partners are liable jointly and severally to pay the tax arrears and the liability is not extended to the legal heir of the deceased Partner. In the case of a private company, the death of a Director does not affect the position of the legal heirs since the remaining Directors are held personally liable to pay the unpaid tax arrears of the company.
The non-uniform practice of prescribing liability for tax arrears on legal heirs may cause difficulties for the Revenue in finally recovering the tax arrears of the deceased persons, and may further cause unnecessary confusion amongst the legal heirs of such deceased persons regarding their liability to settle the tax arrears.
Thus, the need of the hour is for the Government to issue clarifications or amend the CGST Act in order clearly highlight the liability, or non-liability thereof, of legal heirs of a deceased Partner of a partnership firm or a Director of a company.
-Team AMLEGALS, assisted by Ms. Pritha Lahiri (Intern)
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