Budget 2022-23: Directors may face tax recovery heat, say experts

The proposal in the Finance Bill to amend provisions of Section 179 of the Income Tax (I-T) Act from April 1, 2022, could increase risks for directors of medium and small-sized firms, said experts.

The proposal in the Finance Bill to amend provisions of Section 179 of the Income Tax (I-T) Act relating to tax liability of directors of private limited companies from April 1, 2022, could increase risks for directors of medium and small-sized firms in case of non-payment, said experts.

While the language of the provision is quite broad, the title of the section limits itself to ‘liability of directors of private companies in liquidation’. The Bill proposes to align the title with the scope of the provision, thereby ensuring that orders under this section can be issued even if the relevant company is not under liquidation.

“Clause 55 seeks to amend the Section 179 of the I-T Act relating to liability of directors of private company in liquidation. It provides for recovery of tax dues of a private company from its directors, in cases where such tax dues cannot be recovered from the company itself,” the Bill observed. “The marginal heading of the said section reads as liability of directors of private company in liquidation. However, the provisions of the section do not deal with companies in liquidation. Therefore, it is proposed to omit the words ‘in liquidation’ from the marginal heading of the said section.”

By expanding the scope of the title, the government has clarified to tax authorities that this provision may be used against directors of private companies regardless of whether they are under liquidation or not. This may increase the risk of directors, especially for mid and small-sized companies that do not have separate tax heads or chief financial officers, experts said.

“Technically, the title of the section does not determine the interpretation of a particular section. However, provisions of Section 179 were predominantly viewed in relation to the company in liquidation. The amendment appears to have been aimed at mitigating any interpretation issues and litigation. This also clears the intent of the I-T department to make directors of private limited companies, not in liquidation, accountable for the non-payment of tax dues,” said Yashesh Ashar, partner, Bhuta Shah & Co.

This may be of direct impact to family-owned businesses and SMEs wherein the owners are the directors of the company and drivers of the business and may not be able to delink themselves from the default on the payment of tax dues by the companies, Ashar added.

According to experts, the tests of gross neglect, misfeasance and breach of duty themselves are wide in nature, and directors will have to prove that the non-recovery of dues is not due to any of the above shortcomings on their part.

Section 179 was earlier amended on June 1, 2013, to include interest and penalty in tax dues, which is the amount quantified by the assessing officer. These dues will now also include fees. Tax dues are to be recovered from the company, failing which they can be recovered from the directors of the company.