While the Goods and Service Tax (GST) has been widely described as the major tax restructuring in the Indian history after the economic liberalization of 1991, the Insolvency and Bankruptcy Code (Code) is also reviewed for effectiveness as yet another landmark contemporary law. As a significant policy action, aptly praised to deal with various problems occurring during insolvency, the non-performing assets (NPA) crisis, the subsequent credit supply deadlock and the consequential effect on development are supposedly overcome by the Code. The Government introduced the Insolvency and Bankruptcy Code of 2016 ('the code') to overcome these issues and make the process smoother. Unfortunately, initially, the government still failed to stipulate precise relevant laws correctly. The interplay between the Code and the GST is one such issue that hinders the code’s success. However, recently some guidelines have been laid to make this hindrance at ease. This article will discuss the past and the present scenario of the issue.
Since the beginning of IBC, the interplay between the indirect tax rules, Goods and Services Tax (‘GST’) and the Insolvency and Bankruptcy Code, 2016 (‘IBC’), has become a troublesome problem. Many of the problems occur on account of both the legislation being very contemporary and not comprehensively checked by the tribunal. These problems are often combined with the lack of clarification on the interpretation of the provision of these laws by both the Resolution Professionals (RP) and the GST officials, with the former always viewing with the purpose of optimizing the value of assets while the latter being a tax statute exclusively aiming at increasing tax revenue.
These problems occur during the Corporate Insolvency Resolution Process (CIRP). It is a recovery mechanism for creditors. Under the Insolvency and Bankruptcy Code, 2016, the Insolvency Resolution Process (IRP) is one in which the National Company Law Tribunal (NCLT) initiates a Corporate Insolvency Resolution Process (CIRP) when a company fails to pay creditors. When an error has transpired, a financial creditor, operational creditor or company itself may file an application before NCLT to initiate IRP.
Under the IRP, an interim resolution professional is assigned with the authority to take control of the defaulting company. The role of the professional is to take the appropriate steps to regenerate the company. The designated professional also has the power to levy additional funds for operations to resume. In addition, the interim resolution professional is expected to take the necessary measures to maintain and safeguard the value of the corporate debtor’s property and to handle the operations of the corporate debtor as a going concern.
The whole resolution plan is carried out in the process. Section 5(26) of the Code defines Resolution Plan, “It means a plan proposed by resolution applicant for insolvency resolution of the corporate debtor as a going concern.”
Under Section 39(10) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’), the companies seeking insolvency resolution are in a bind owing to limitation. Section 39(10) read as: CGST Act bars a registered person from furnishing its return for a tax period if it has not furnished all the returns for previous tax periods.
Whereas, under IBC clauses, the responsibility to discharge the past dues, at the time of liquidation does not transfer to the buyer. The buyer, in fact, just buys the assets. The Liquidator appears to be liable for prior liabilities being discharged. As an effect, the buyer is not legally obligated to pay past dues.
An IRP / RP is responsible for managing affairs under an IBC, including the corporate debtor’s statutory compliance (CD). This involves the filing of returns and payment of dues for taxes. Nevertheless, at the onset of Corporate Insolvency Resolution Process (CIRP) most CDs failed to file GST returns and/or pay dues. This made it difficult for IRP / RP to file the CIRP period’s GST returns and discharge dues.
Despite the Code providing for a specific moratorium on the payment of dues (including GST) for the previous period, the above-mentioned GST ACT restriction further obliges the IRP / RP not to file new GST returns. Therefore, they had no choice but to appeal this constraint in the courts, which is contrary to the Code.
Impact of the issues
In addition to blocking the buyers’ working capital, this dilemma defeated the entire basis of the concept of insolvency resolution in India. In the end, as opposed to encouraging ease of doing business in India, it leads to difficulties doing business.
Some judgments’ which have dealt with this issue
The National Company Law Tribunal (NCLT), Chennai, in the case of T. R. Ravichandran for Kiran Global Chem Limited’s,1T.R. Ravichandran, RP vs. The Asst. Commissioner (ST) & Ors. [MA/1298/2019 in IBA/130/2019 directed the Asst. Commissioner (ST) & Ors. (“Respondents”) to enable the Corporate Debtor to enter their GST Portal account, enable the Claimant to file GST Return of Corporate Debtor generated after the commencement of CIRP before clearing past dues.
In this case, the Corporate Debtor’s Resolution Professional (RP) approached the NCLT, requesting access to the Corporate Debtor’s GST portal to file GST returns. The RP proposed that the payment of the net liability be allowed from the date of initiation of the CIRP until its completion, without regard to the non-payment of arrear GST for the duration before the CIRP began.
The revenue authorities submitted that there is no provision under the GST law, which allows acceptance of current dues before clearing the past dues.
The NCLT observed that as under:
- Section 238 of the Insolvency & Bankruptcy Code (IBC) shall have an overriding effect on all other laws which are in contravention.
- In respect of past dues, the revenue authorities fall within the ambit of ‘operational creditor’.
- Being an operational creditor, they are entitled to file a claim with the RP rather than insisting upon him to make payment of past tax dues.
Based on the above, the NCLT allowed the Corporate Debtor to access its GST account and permitted the RP to file GST returns of the Corporate Debtor after the commencement of CIRP without insisting on payments of past GST dues. Further, it stated to accept net GST liability, i.e., after availing eligible ITC from the date of commencement of CIRP and adjust the GST payment remitted by the Corporate Debtor towards discharge of GST for the CIRP period.
Based on some of the court rulings, the GST department ordered the receipt of GST returns in hard copies from IRP / RP. However, there was no standardized remedy and the IRP / RP failed to comply with the requirements for GST return filing. In the light of the above challenge, the Government has now informed GST of the special procedure relating to the new registration, filing of returns and payment of the CIRP tax dues.
However, as per the recent amendment, the above special procedures are not applicable for those CDs, who have furnished the statement of outward supplies (i.e., GSTR-1) and consolidated return of inward and outward supplies (i.e. GSTR-3B) for all the tax periods prior to appointment of IRP/ RP.
- How to proceed for filing of GST returns and payment of dues for CIRP period where GST returns and dues related to pre-CIRP period are not discharged?
The government has recommended special protocols for the discharge of GST dues and the filing of returns relating to the CIRP period, under which the CDs are obliged to obtain new registration. However, if all GST returns relating to the pre-CIRP period are properly filed with the CDs under the CIRP, no new registration is necessary. Furthermore, in the case of unpaid GST dues for the pre-CIRP period, the CBIC has clarified that the tax authorities can, in compliance with the provisions of the IBC, treat these dues as operating debt and file a claim before the National Company Law Tribunal (NCLT).
- In case, if the CIRP does not materialize and the CD goes into liquidation proceedings under the IBC, will the new registration under special procedure continue or erstwhile registration is used during liquidation?
The warning here lays down special protocols only for those CDs that are undergoing CIRP and not for those which are already subject to the liquidation process. So, regardless of whether CIRP materializes or fails, the notice remain silent as to the continuity of the fresh registration or the revival of the former registration.
This very problem, if not dealt with soon, would have been capable of discrediting India’s unsurpassed growth of the Code. In order to allow buyers to file current and future GST returns regardless of the payment of past GST dues, the government has made an amendment which has derailed the effect which the RP faced before it. Thus, the clarification comes as a welcoming move. It is important to preserve the balance between various laws that often come into effect concurrently, and such timely moves go a long way towards the objective.