Section 94 of GST – Liability of Partners and Members When a Business Is Discontinued, Reconstituted, or Dissolved

Understanding the implications of discontinuing or restructuring a business is crucial under the GST regime. Section 94 of the CGST Act, 2017, deals specifically with the liability of firms, associations of persons (AOPs), and Hindu Undivided Families (HUFs) in cases of business discontinuance, reconstitution, or dissolution. This provision ensures that the government’s revenue is protected, even when a business changes its legal or operational structure.

Let’s explore the provisions of Section 94 of the CGST Act in detail and understand how they apply to real-world scenarios.

What Happens to Tax Liability When a Firm or HUF Discontinues Business?

Under Section 94(1), if a business operated by a firm, an association of persons, or a Hindu Undivided Family is discontinued, then:

• Tax, interest, and penalty payable up to the date of discontinuance will still be calculated as if the discontinuance never occurred.

• Every partner or member at the time of discontinuance will be held jointly and severally liable for such dues.

Key Insight:

Even if the business no longer exists, the government can recover outstanding GST dues from any of the partners or members who were part of the entity when it was operational.

Who Is Liable When There Is a Change in the Constitution of a Firm or Association?

According to Section 94(2), if a firm or an association of persons undergoes reconstitution—such as when partners leave or new ones join—the following applies:

• All partners or members before and after reconstitution are jointly and severally liable for any tax, interest, or penalty due from the business before reconstitution.

• This provision operates in addition to Section 90 of the CGST Act, which deals with liability in case of death, partition, dissolution, etc.

Example:

If Partner A exits a firm and Partner B joins, both A and B are liable for any dues accrued before the change, even if the tax is assessed or determined later.

How Is Liability Determined in Cases of Dissolution or Partition?

Section 94(3) extends the applicability of Section 94(1) to:

• Dissolution of a firm or association of persons.

• Partition of a Hindu Undivided Family.

This means that in cases where a firm is legally dissolved or a HUF partitions its business assets, the tax liability does not vanish. Instead:

• The liability continues as if it were a case of business discontinuance, and

• All former members or partners are still liable for the taxes and penalties associated with the business activities up to the date of dissolution or partition.

How Does the CGST Act Treat LLPs and What Is the Role of Courts?

The Explanation to Section 94 clarifies two critical points:

1. A Limited Liability Partnership (LLP) registered under the LLP Act, 2008, is treated as a firm under this section. So, LLPs are also covered under Section 94.

2. The term “court” includes the District Court, High Court, and Supreme Court. This definition is relevant when disputes regarding liability are taken up in legal proceedings.

Why Is Section 94 Important for Businesses and Tax Professionals?

Section 94 plays a critical role in protecting the GST revenue by ensuring that businesses cannot avoid tax liability by simply discontinuing, restructuring, or dissolving. It also places a responsibility on tax professionals, business partners, and legal heirs to ensure that all tax dues are settled when any change in business structure occurs.

Key Takeaways:

• Tax liability continues even after business closure or structural changes.

• Partners or members remain liable jointly and severally, meaning each can be individually approached for the full amount.

• Legal and tax due diligence is essential during mergers, acquisitions, or partner exits.

Conclusion

Section 94 of the CGST Act ensures continuity in tax obligations, irrespective of a firm’s operational status or structure. Whether you are a partner in a firm, a member of a HUF, or an LLP stakeholder, understanding your liability under GST law is essential to avoid future legal and financial consequences.

If your business is undergoing structural changes or winding up, it is strongly advised to consult a qualified GST practitioner or chartered accountant to assess pending liabilities and comply with all GST requirements.

Looking for expert assistance with GST compliance, dissolution formalities, or business restructuring? Contact our team of experienced tax professionals today to ensure a smooth and compliant transition.