18 Apr 2018Posted By: Mudit Handa

How to deal with overdue GST liability in case of liquidation of business?

Unquestionably, the realm of indirect taxes has been made comprehensible in the GST regime. Given the high degree of precision and rationality of the GST laws, one can easily fulfil the tax compliances under various situations.

Clearly, there are coherent guidelines vis-à-vis various circumstances ranging from the New GST registration procedure to the cancellation of GST registration. In this regard, there are explicit guidelines concerning various reasons of withdrawal of GST registration, wherein all the current and outstanding GST liabilities have to be paid off. One of them relates to dissolution or liquidation of the business.

#1. What are the various reasons for the dissolution of the business?

Depending upon the type of circumstances, an entrepreneur may opt to dissolve his business. Some of the common include insolvency or bankruptcy, government sealing, relocation of business premises and occupational shift. Notwithstanding the cause behind such decision, a trader has to settle all the GST tax liabilities prior to winding up.


#2. What are the laws of GST registration regarding liquidation of the business?

The GST laws have separate provisions for the clearance of all tax liabilities at the time of the dissolution of a business concern. As regards settlement of GST liabilities during the liquidation of the business entity, Section 88 of CGST Act 2017 is applicable. It clearly specifies the directives for due settlement of all the GST obligations well in advance of the liquidation of the business.

#3. How does Section 88 of CGST Act ensure proper settlement of the GST liabilities?

As per the clause, the procedure of settlement of the GST liability has been elucidated in detail. Besides, it clearly tells about whom to attribute the accountability for clearing all the tax liability.


#4. How to clear all GST liability prior to liquidation as per the law?

The laws of GST registration lay out the following procedure for clearing GST liability when any business is to be dissolved or liquidated -

Step 1: For the process of dissolution of a business entity, a person is appointed as the receiver of all assets, who is known as the liquidator. The appointment of the liquidator must be informed to the GST commissioner within a month of his appointment.

Step 2: Within 3 months of receiving intimation of his appointment, the Commissioner will make an inquiry and will legally notify the liquidator the amount of GST with the penalty that is payable by the company.

Step 3: In case any tax liability before, during or after the liquidation process is irrecoverable, all the directors will be jointly liable for its payment.  


#5. How can this law be practically applied?

This law can be understood with the help of the following case study-

3 directors A, B, C of a company RS Pvt Ltd have decided to wind up on 1st May 2018. They appoint Mr X as the liquidator on 6th May 2018. So, Mr X must inform the GST Commissioner regarding his appointment within a month, i.e., 6th June 2018.

Suppose, the Commissioner will inform the liquidator within 3 months, i.e. until 6th August 2018 that RS Pvt Ltd has a GST liability of INR 2.5 lakhs tax for 2017-18.

Now, RS Pvt Ltd has 3 months to pay the liability, i.e., till 6th October 2018, but the company fails to pay. Thus, the directors A, B & C will be held liable to pay the amount. If A & B fail to pay, then only C will be held liable.

In this case, C be exempted from the liability only if he can prove that the failure to pay GST was not due to his negligence.


#6. How will be the GST liability adjusted in case of a Dissolution of Partnership Firm?

In case of a Dissolution of a Partnership Firm, the entire GST liability will be jointly met by the partners before cancellation of GST registration.

#7. How will be the GST liability adjusted in case of a partition of HUF?

In case a Hindu Undivided Family or HUF business is to go for partition, all coparceners will be held liable to pay off the GST liability.


If you have any query related to GST registration process in India, feel free to contact us at 8881-069-069.


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