Top Stories How GST Department Can Recover Demands from Debtors: Section 79(1)(c) Explained Section 79(1)(c) empowers the GST authorities to issue a notice to any third party—such as a debtor—who owes money to the defaulter or holds funds on their behalf. The notice directs the third party to pay such amounts directly to the government, effectively bypassing the taxpayer By Navasree A.M – On December 12, 2024 11:22 am – 5 mins read As Speaker Om Birla stated, the world learns keenly from India’s tax system. The GST has made the whole country pay uniform indirect taxes. Before that, each state had its own way of taxing items, however, many complications have been removed since implementation of GST. The GST statute has covered almost all the loopholes. It even has the provision to recover your demand from the people who owe you money. Section 79(1)(c) enables recovery from third parties, including debtors of the defaulting taxpayer. What is a GST Demand? A GST demand arises when a taxpayer fails to pay their due taxes, often resulting from errors in tax filing, incorrect input tax credit (ITC) claims, or suppression of taxable turnover. Once a demand is confirmed following proper adjudication, the taxpayer is required to pay the due amount within the specified timeline. Failure to comply triggers recovery proceedings under Chapter XV of the GST Act. Recovery under GST Act Section 79 of the GST Act provides for recovering outstanding GST dues, employing various methods to ensure compliance and secure government revenue. Tax authorities, referred to as “proper officers,” are empowered to recover unpaid amounts through methods such as attaching and selling movable or immovable properties, deducting amounts from refunds payable to the defaulter, or directly recovering from third parties indebted to or holding money on behalf of the defaulter. One recovery method involves deduction from payables (Section 79(1)(a)), where the proper officer can directly deduct outstanding amounts from any refunds or money owed to the defaulter by the government. Another approach is the attachment and sale of goods (Section 79(1)(b)), enabling authorities to seize and sell the defaulter’s goods or properties to clear dues. The provision also authorises tax authorities to initiate recovery from third parties (Section 79(1)(c)) by issuing a written notice to the defaulter’s debtors. These debtors are obligated to pay the amount directly to the government, even without documentation such as passbooks or deposit receipts. Non-compliance with such notices makes the debtor personally liable for the unpaid amount. However, if the debtor proves that no money is owed or likely to be owed to the defaulter, they are exempt from liability. Further, the Act allows for the seizure and sale of property (Section 79(1)(d)), where movable or immovable assets can be detained until dues are cleared. If unpaid after 30 days, the properties may be sold to recover the outstanding amounts and associated costs. Authorities can also recover dues by sending a certificate specifying the amount to the district collector (Section 79(1)(e)), who treats it as an arrear of land revenue. Finally, under Section 79(1)(f), tax authorities may approach a magistrate to recover the dues as if they were fines, thereby initiating legal proceedings to enforce payment. According to sub-section 2 of 79, states about the recovery from the bonds or instruments. If any bond or legal instrument executed under GST laws contains terms for recovery, the amount due can be recovered using the methods demarcated in Subsection (1). Further, the sub-sections 3 and 4 state on the Joint Recovery by Central and State Tax Authorities. When dues remain unpaid, State or Union Territory tax authorities can recover the amount on behalf of the Central Government. Recovered amounts are proportionately credited to the accounts of the Central and State governments based on the respective dues owed to each. RECOVERY FROM THIRD PARTIES UNDER SECTION 79(1)(C) OF GST ACT Coming to the topic, recovery from third parties under Section 79(1)(c) of the GST Act is one among methods. Section 79(1)(c) empowers the GST authorities to issue a notice to any third party—such as a debtor—who owes money to the defaulter or holds funds on their behalf. The notice directs the third party to pay such amounts directly to the government, effectively bypassing the taxpayer. For example, if a business owes ₹10 lakhs to a supplier who has defaulted on GST payments, the GST department can issue a notice to the business under Section 79(1)(c), instructing it to remit the ₹10 lakhs directly to the government instead of the supplier. This method is effective in cases where taxpayers attempt to shield their assets by transferring them to third parties or when the taxpayer has insufficient funds or assets to meet their tax liabilities.

Notice to Third Parties (Debtors) Under sub-clause (i), the proper officer may issue a written notice to a third party (debtor) who owes money to the defaulter or is likely to hold such money in the future. The notice requires the debtor to pay the specified amount directly to the government. This payment must be made either immediately upon the money becoming due or within a specified timeframe. The notice ensures that even future liabilities owed to the defaulter can be appropriated by the government, thereby securing tax dues in advance. Binding Obligation on the Recipient of Notice As per sub-clause (ii), any person receiving such a notice is legally liable to comply. This provision extends to entities such as post offices, banks, or insurers. Conspicuously, these institutions are not required to produce specific documentation, such as passbooks or deposit receipts, before making the payment. This clinches that procedural formalities do not obstruct or delay compliance with the notice.

Consequences of Non-Compliance Sub-clause (iii) imposes strict consequences for non-compliance. If the person fails to make the payment as directed, they are deemed to be defaulters. All legal consequences applicable under the GST Act for default will then apply to them. This incentivizes prompt compliance and discourages attempts to evade liability. Flexibility for Amendment or Revocation of Notice Sub-clause (iv) provides flexibility to the proper officer. The notice can be amended or revoked at any time, and the officer can also extend the deadline for payment. This adaptability ensures that the recovery process accounts for changes in circumstances, such as errors in the notice or delays in the debtor’s financial transactions. Legal Protection for Debtors Complying with Notice Sub-clause (v) protects third parties who comply with the notice. Payments made by the debtor in response to the notice are considered a valid discharge of their liability to the defaulter. Once credited to the government, such payments cannot be contested by the defaulter, ensuring the debtor is not held liable twice for the same amount.

Liability for Payments Made After Notice According to sub-clause (vi), if the debtor discharges any liability to the defaulter after receiving the notice, they become personally liable to the government. Their liability is limited to the lesser of the amount paid to the defaulter or the total dues owed by the defaulter to the government. This clause prevents the defaulter from benefiting from transactions made in disregard of the notice. Exemption from Liability Sub-clause (vii) provides relief to third parties who can exemplify that the money demanded was not due or likely to become due to the defaulter. If the debtor proves that they did not owe or hold any money for the defaulter at the time of the notice or that the amount is unlikely to be due in the future, they are exempt from complying with the notice.

RULE 145 OF GST RULES Rule 145 of the GST Rules pencils the procedure for recovering tax dues from a third party. Under sub-rule (1), the proper officer may issue a notice in FORM GST DRC-13 to a third party (as defined under Section 79(1)(c)), instructing them to deposit the specified amount. If the third party makes the payment as directed in the notice, sub-rule (2) mandates that the proper officer must issue a certificate in FORM GST DRC-14. This certificate will provide details of the liability that has been discharged by the third party.

RELEVANT FORMS The GST department uses specific forms to operationalize Section 79(1)(c): Form DRC-13: This notice is issued to the debtor, directing them to remit the specified amount directly to the government. Form DRC-14: This form serves as an acknowledgment or receipt once the debtor complies with the directive. Section 79(1)(c) is an important provision for the government as it is about recovering tax dues directly from third parties, helping avoid delays when the person owing taxes does not cooperate. It protects innocent third parties from being wrongly held responsible while ensuring those who owe money to the defaulter must pay the tax dues. The section also allows for changes or cancellations of notices, making the process more transparent and fair, and reducing mistakes or disagreements.