Goods and Services Tax - On Death and Taxes

Death and taxes are certain. As per the Central Goods and Services Tax Act, 2017, if a person carrying out a taxable business dies, the outstanding tax liability from such business must be recovered by her legal representatives. The legal representative or anyone who continues the business after her death must account for outstanding tax liability. If the business is discontinued at any time before or after her death, her executors/administrators must pay outstanding dues to the extent that the estate is capable of meeting the charge [1].

A person may wish to create a will bequeathing her property to certain legatees (a person receiving a legacy) upon her death. Or he may create trusts of her property to be held for certain beneficiaries. It is possible for tax authorities to raise a claim on such estate/trust property in order to satisfy the tax dues.

Furthermore, the Central Goods and Services Tax Act, 2017 states that tax will always be the first charge on property, except as provided otherwise under the Insolvency and Bankruptcy Code, 2016 [2]. This provision clarifies that the priority of executors, administrators and legal representatives is to comply with tax and insolvency laws first. The power of a trustee to advance trust property to or for the benefit of a beneficiary, or the duty of an executor to pay the legacies under a will, may be affected by their duties under tax and insolvency laws.

Trusts must be created for a lawful purpose [3]. Obviously, a trust cannot be used for the purpose of avoiding tax claims and repayment of debts. In particular, a person who has unpaid debts cannot transfer immovable property (including by way of creating a trust) if she intends to defeat/delay her creditors [4]. But what if tax authorities determine a taxpayer’s liability after she has created a trust out of the funds or property that could have been applied to discharge her tax liability?

This question is answered in Chogmal Bhandari and Ors. v. Deputy Commercial Tax Officer [5]:

‘In this view of the matter, we feel that it cannot be said in the present case that the trust-deed executed by the settlors is prima facie fraudulent or a colourable transaction. It will, however, be open to the sales tax authorities to avoid the document by bringing a properly constituted suit, if so advised’ (emphasis supplied).

Legal proceedings would be "properly constituted" under the anti-avoidance provisions of the tax statute in question.

Hence, the trust itself will be valid with respect to any property that remains after the payment of tax dues and debts.

Note 1: Section 93(1), Central Goods and Services Tax Act, 2017.

Note 2: Section 82, Central Goods and Services Tax Act, 2017.

Note 3: Section 4, Indian Trusts Act, 1882.

Note 4: Section 53(1), Transfer of Property Act, 1882.

Note 5: AIR 1976 SC 656.