INTRODUCTION
Enactment of the Insolvency and Bankruptcy Code, 2016 (IBC) and the Central Goods and Services Tax Act, 2017 (CGST Act) are two major economic reforms of recent years which overhauled the existing system by introducing a comprehensive framework to govern the aspects of corporate insolvency and to streamline the levy of indirect taxes in India, respectively.
The IBC introduced significant changes to the insolvency and bankruptcy process of corporate entities, partnerships and individuals, by introducing time-bound process that is designed to help the country jump through the ranks of global ease of doing business. The Goods and Services Tax (GST) regime, on the other hand is an attempt to consolidate indirect tax levy in the country under one umbrella tax with different tax slabs for different items. Both of these enactments have in some ways reduced the compliance requirements while conducting trade or business in the country.
Under IBC, insolvency proceedings can be initiated against any Corporate Debtor that has defaulted in payment. It allows the Financial or Operational Creditors of the Corporate Debtor to initiate proceeding against the Corporate Debtor for the recovery of their dues, known as the Corporate Insolvency Resolution Process (CIRP).
CORPORATE INSOLVENCY RESOLUTION PROCESS
The CIRP can be initiated by three classes of persons, the Financial Creditors under Section 7, the Operational Creditors under Sections 9, and the Corporate Debtor itself by virtue Section 10 of the IBC. The initiation process for each of these parties is detailed under the IBC and the process varies for each party. When a company undergoes CIRP, the management and the assets of the Corporate Debtor vest with an Interim Resolution Professional (IRP) or a Resolution Professional (RP).
Thereafter, a moratorium is imposed where all the litigation pending against the Corporate Debtor and all other kinds of disputes, whether before judicial or quasi-judicial body, are halted during this period. It grants the company immunity from future litigations throughout the moratorium period. Section 32 A of the IBC gives immunity from all probable litigation by Government Authorities with regards to collection of any pre-CIRP dues.
GST IMPLICATIONS
Under the CGST Act, the tax liability of a company must be paid every month and in case of repeated defaults, the GST registration of the Assessee is liable to be suspended.
Addressing the implications of GST during the CIRP, the National Company Law Tribunal (NCLT) in Kiran Global Chem Ltd. (MA/1298/2019 in IBA/130/2019) held that pre-admission GST dues can be claimed by the Tax Authorities as operational debt for the purpose of CIRP. Further, since the object of IBC is to maintain the status of the Corporate Debtor as a going concern, the GST returns of the Corporate Debtor is allowed to be filed after admission of the Corporate Debtor into CIRP.
To simplify GST compliance for Corporate Debtors, the Central Government issued Notification No. 11/2020- Central Tax, dated 21.03.2020 (the Notification) under Section 148 of the CGST Act. The Notification requires Corporate Debtor being managed by the IRP or RP to be separately registered as a ‘Registered Person’ with the GSTN Portal and to avail Input Tax Credit (ITC) on payment of post-admission GST dues.
However, this is not applicable to those Corporate Debtors who have furnished their statement of outward supply under Section 37 of the CGST Act and filed the consolidated returns of inward and outward supplies under Section 39 of the CGST Act for all tax periods prior to the initiation of CIRP, as per Notification No. 39/2020-Central Tax dated 05.05.2020 which amends the Notification.
The Central Government further issued clarifications for certain issues concerning Corporate Debtor undergoing CIRP vide Circular No. 134/04/2020-GST (the Circular).
Major GST Implications during CIRP are:
- New Registration
In consonance with Section 32A of IBC which allows for the re-birth of company, the Corporate Debtor is to be treated as a distinct new entity for the purpose of GST compliance.
As a consequence, the Corporate Debtor must obtain new registration as a taxpayer in each State or Union Territory it was registered earlier, within 30 days of appointment of the IRP/RP. However, the Circular has clarified that previous GST registration of the Corporate Debtor is not liable to be cancelled under Section 29 of the CGST Act. The Proper Officer is empowered to suspend the previous registration, if required.
The requirement for new registration was discussed and elaborated by the NCLT Ahmedabad in Sapan Mohan Garg (RP) v. Commercial Tax Officer Ghatak 40, [I.A. No 206 of 2021 in CP(IB) No. 480/NCLT/AHM/2019]. The NCLT held that the Corporate Debtor is to be considered as a distinct person and is liable for new registration, in each State and Union Territory that it was previously registered in. The NCLT noted that the GST Department could not reject a fresh registration of the Corporate Debtor on the ground that its previous registration was suo moto cancelled by the Department, as the provisions of IBC override any other existing laws on this matter, including the CGST Act, by virtue of Section 238 of the IBC.
In cases where the RP is not the same as the IRP, the change can be incorporated in the new registration via an amendment, and his details would be added as the primary authorised signatory of the newly registered Corporate Debtor.
- Returns
After obtaining the new registration, the Corporate Debtor must file its first return under Section 40 of the CGST Act. While the IRP/RP is liable to file returns during the CIRP, they are not required to file pre-CIRP returns.
- Eligibility for Input Tax Credits (ITC)
From the date of the registration, the Corporate Debtor is eligible to avail the entire ITC after filing the first return. Further, even if the supplies bear the GSTIN of the erstwhile Corporate Debtor’s registration, the Corporate Debtor is eligible to claim the ITC for such supplies during the period of CIRP subject to the conditions stipulated for ITC under Chapter V of the CGST Act.
However, the condition pertaining to last date of claiming ITC under Section 16(4) of the CGST Act and the restriction on availment of ITC under Rule 36(4) of the Central Goods and Services Tax Rules, 2017 (CGST Rules) shall not be applicable in this situation.
Customers of the Corporate Debtor are also eligible to avail ITC on invoices bearing the previous GSTIN of the Corporate Debtor from the date of appointment or IRP/RP till the date of re-registration or thirty days from the date of the Notification, whichever is earlier.
- GST Cash Ledger
Amount deposited in the cash ledger under the old registration by the IRP/RP shall be available for refund from the date of appointment or IRP/RP till the date of re-registration of the Corporate Debtor.
GST DUES OF THE PRE-INSOLVENCY PERIOD
In 2018, the Delhi Bench of the National Company Law Appellate Tribunal (NCLAT) in Pr. Director General of Income Tax (Admn. & TPS) v. Synergies Dooray Automotive Ltd. [CA (AT) (Ins) No. 205 of 2017] upheld the decision of the NCLT, Hyderabad that all statutory liabilities including taxes would be considered as operational debt. The NCLAT held that:
“29. … As the ‘Income Tax’, ‘Value Added Tax’ and other statutory dues arising out of the existing law, arises when the Company is operational, we hold such statutory dues has direct nexus with operation of the Company. For the said reason also, we hold that all statutory dues including ‘Income Tax’, ‘Value Added Tax’ etc. come within the meaning of ‘Operational Debt’.”
This implies that the Tax/Revenue Authorities have no priority over Financial Creditors for the recovery of past dues that the debtor is liable to pay. Provisions of both the IBC and the CGST Act, state that no coercive action can be taken for the recovery of GST dues and that the Authority can instead be part of the proceedings in the capacity of an Operational Creditor.
Tax Authorities can file their claim of tax dues before the NCLT. However, if the Authorities fail to bring to the notice of the NCLT during the CIRP about the pending tax dues, it cannot later appeal against the resolution plan for not making provisions for the payment of statutory tax dues, as held by the NCLAT in The Deputy Commissioner of GST & Central Excise v. Mr. Vijay Kumar V. Iyer, Resolution Professional for Dishnet Wireless Limited and Anr. [CA(AT) (Ins) No. 604 of 2021]. Such dues would stand extinguished if not brought to the notice of NCLT before the CIRP is finalised.
In T.R. Ravichandran- Resolution Professional (RP) for Kiran Global Chem Limited [MA/1298/2019 in IBA/130/2019], the RP requested access to the GST Portal to pay net liability from commencement of the CIRP and requested the NCLT to disregard the non-payment of GST arrears before the insolvency process. The Chennai bench of NCLT allowed the same and directed the GST Authorities to not insist upon payment of past dues while the Corporate Debtor is undergoing CIRP.
The Andhra Pradesh High Court in Leo Edibles & Fats Ltd. v. Tax Recovery Officer (2018) 407 ITR 369 held that Revenue Officers cannot claim priority of debt during the insolvency process, as the IBC has an overriding effect over other laws.
Hence, despite past GST dues being considered a debt under the IBC, it only amounts to Operational Debt and the Tax Authorities cannot take any coercive action to collect tax dues for the period before the insolvency process commenced.
LACUNAE IN THE FRAMEWORK
The foremost issue with the present framework is its limited application on the CIRP. If the process fails and the company moves towards liquidation, the law is silent on whether the new registration remains, or the old non-terminated registration would remain valid for the Corporate Debtor. This is of special importance as the law currently prohibits the erstwhile registration to be cancelled or revoked.
Also, where the erstwhile company already had multiple registrations in a state as per the Proviso to Section 25(2) of the CGST Act, whether the Corporate Debtor now has to take a new registration for every such predecessor entry or if one entry per state suffices is also a question that the Notification and the Circular has not been able to identify or explain.
Further, while the Notification allows availing of ITC on erstwhile GSTIN supplies, it does not mention whether the credit can be transferred or utilised to pay off the GST arrears pending.
AMLEGALS REMARKS
Both the IBC and the CGST Act are two major economic reforms of the decade with a specific focus on reducing the compliance procedures and to streamline the process thereby making it easier to conduct business in the country.
However, both the legislations have a long way to go before they sufficiently address each issue surrounding the process.
The Notification issued greatly eases the process of GST dues for a Corporate Debtor that is undergoing CIRP and being managed by an IRP/RP. It provides for a special procedure catering only to the class of persons undergoing the CIRP.
The Notification aims to create a balance between recognising the genuine inability in certain cases of the Corporate Debtor to pay past tax dues, but at the same time, does not write off the dues as bad debt but instead allows the Corporate Debtor to re-register itself and pay off GST dues post-admission into CIRP. The Revenue Department is empowered initiate a fresh claim under Section 9 of the IBC in the capacity of Operational Creditors, to recover the statutory tax dues, which are recognised as Operational Debt.
– Team AMLEGALS assisted by Ms. P. Sriya (Intern)
For any query or feedback, please feel free to get in touch with aditi.tiwari@amlegals.com or riddhi.dutta@amlegals.com.
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