Independent Directors liability under GST
D Arvind Managing Partner of DAA LLP
26 May 2022
The Independent directors have an important role to play in any company. They are responsible for improving credibility and governance standards of a company. They are often involved as members in various committees set up by the company amongst various important roles, one of the most important role is to check on the integrity of financial information and ensure that financial controls and systems of risk management are in place. The independent directors are held liable for any act of omission or commission by the company which has occurred with their knowledge and or with their consent or connivance or where he has not acted diligently. For the limited purpose of this article, we will see Independent Directors Liability in the context of GST law in India.
Independent Directors often go to companies in which they are directors once in a quarter to attend board meetings and very rarely go beyond attending these meetings. However, they are expected to be diligent and ensure no misappropriation or fraud or any diversion of funds take place in the company in which they are directors.
Let us examine a case where a company indulges in GST evasion either in the form of suppressing sales in their GST returns to pay lesser tax or take fake GST credits without actually purchasing goods or services or contravene any of the provisions of GST Act or rules with or without intent to evade duty
An Independent director who is not involved in day-to-day operation will find it very difficult to unearth such frauds committed on the revenue by their company. However, it will not be too much to expect from him to find out or entertain doubts regarding tax compliance and question the management and the executive directors in the board meetings. Normally a non-finance professional or a person who is an independent director in a company can ask (in my view should ask) for compliance certificate from the management as well as from the statutory auditors or experts appointed by the company who are managing tax compliance, that the company has complied with the GST liabilities correctly and on time.
If the independent directors happen to be a finance professional or a person with finance background, he is expected to examine the Profit & Loss A/c, the balance sheet and verify whether the correlation between purchase & sales and the value added is appropriate and consistent with the company’s business.
He can also ask for copies of contracts and invoices of goods purchased or services received if he believes that the credit taken is in excess of actual purchases or purchases required for the sales reported by the company. Every quarter he can ask for payment proof of GST along with GST returns filed with the department.
On yearly basis the independent director who is a finance professional is expected to ask for Form 9 (Annual Return) and Form 9C (GST Auditors Report) and cross check with the financials. If he finds discrepancy in any of the document mentioned above, he is expected to take it up in the board meeting and ensure his question as well as the answers given by the management is recorded. If he is not convinced with the reply of the management, he should advise the management to take appropriate action for rectifying the revenue leakage and also ensure to record his recommendation in the minutes of board meeting.
However, you will hardly find any such participation or questions from Independent directors during board meeting, in companies which are caught for GST evasion. In such a situation let us examine whether Independent directors are liable personally for the fraud committed on the revenue or at least make good of the losses caused on the revenue.
As per Section 88 of the Central GST Act if a private company is wound up due to liquidation and any tax, interest or penalty determined under the GST Act cannot be recovered, then every person who was a director of such a company at anytime during the period for which such tax was due will be jointly and severally liable unless he proves to the satisfaction of the commissioner that such non-payment cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the office of the company. As per Section 89 of CGST Act not withstanding anything contained in the companies act the GST, Interest or Penalty due from a private company cannot be recovered for any reason then every person who was the director of private company during such period shall be jointly and severally liable unless he proves that such nonpayment cannot be attributed to any gross neglect, misfeasance, or breach of duty on his part.
CGST Act does not make any distinction between executive directors and nonexecutive directors though Section 88 & 89 applies only to private companies. Thus, the provision applies to all type of directors including executive and nonexecutive directors. The phrase ‘the person responsible for conducting businesses’ has been tactically carved out from the provisions contained under earlier Indirect Tax Laws. However, the Companies Act and in particular the SEBI Regulations expect Independent Directors to exercise reasonable care, diligence, and skills to ensure that financial statements are correct, sufficient and credible.
Overlooking any gross anomalies, red flags in the financial statements and failing to ask relevant questions and record those questions and answers to that would amount to gross negligence if not more on the part of independent directors.
Though as per Companies Act, Independent Directors are liable only for the acts or omission or commission by the company that occurred with their knowledge, attributable through board processes and with their consent or connivance the companies act also provides that if the directors have not acted diligently then they are liable to all the stakeholders including tax authorities.
Thus, Companies Act does not provide any distinction between private company and a public company in the context of diligence to be exercised by the independent directors for the purpose of recovery of any taxes. Therefore, failure on the part of independent directors to be diligent would amount to gross negligence and make him liable. In view of above it is advisable for all directors and in particular independent directors to insist on checking of annual return in Form 9 by an independent expert/Chartered Accountant in spite of government doing away with mandatory GST Audit by Chartered Accountant in Form 9C. It may be relevant to state here that most of the MNC’s operate in India.as private companies and hence directly covered by the Section 88 and 89 of CGST Act mentioned above.