GST Claims Under IBC: Rainbow Papers Conflict Resolved by Amendment

Treatment of GST Dues in CIRP, Liquidation and Resolution Plans: Consequences and the Resolution of a Two-Year Conflict of Authority

Summary: The treatment of GST dues during Corporate Insolvency Resolution Process (“CIRP”), liquidation and implementation of an approved resolution plan involves the interaction of the Insolvency and Bankruptcy Code, 2016 (“IBC”) with the CGST Act, 2017. During CIRP, the moratorium under Section 14 restricts recovery action for pre-CIRP dues, while the CBIC’s special procedure requires prescribed GST compliance by the Interim Resolution Professional or Resolution Professional. Pre-CIRP tax claims are governed significantly by the Supreme Court’s Ghanashyam Mishra clean-slate principle, under which claims not forming part of an approved resolution plan stand extinguished. The position became contentious after State Tax Officer (1) v. Rainbow Papers Limited, where a statutory first charge was treated as creating secured-creditor status. The Supreme Court subsequently confined that reasoning in Paschimanchal Vidyut Vitran Nigam Limited v. Raman Ispat Private Limited. The Insolvency and Bankruptcy Code (Amendment) Act, 2026 legislatively addressed the conflict by excluding security interests created merely by operation of law and clarifying the treatment of government dues under Section 53.

I. Introduction

Few areas of practice illustrate the friction between the Insolvency and Bankruptcy Code, 2016 and India’s fiscal statutes as starkly as the treatment of GST dues owed by a corporate debtor undergoing resolution or liquidation. The Code’s stated purpose — value maximisation and time-bound revival — sits uneasily against the state’s ordinary expectation that tax dues, particularly those secured by a statutory first charge such as Section 82 of the CGST Act, 2017 confers on the government, will be recovered in priority to other claims. For over two years, from September 2022 until the enactment of amending legislation in the spring of 2026, this tension produced a genuine and unresolved conflict of Supreme Court authority. This article traces the statutory treatment of GST during the Corporate Insolvency Resolution Process and liquidation, the “clean slate” doctrine that governs resolution plans, the disruption caused by the decision in Rainbow Papers, and the legislative resolution that has now, at least for the present, settled the position.

II. GST Compliance During CIRP: The Distinct Person Mechanism

The moment an Interim Resolution Professional or Resolution Professional is appointed and the moratorium under Section 14 of the IBC takes effect, the ordinary machinery of GST recovery against the corporate debtor is arrested: no suit, proceeding or recovery action in respect of pre-CIRP dues may be instituted or continued against the corporate debtor’s assets for the duration of the moratorium. This did not, however, resolve the practical question of how a corporate debtor whose management has been displaced is to remain GST-compliant during the resolution period, and the CBIC addressed this through Notification No. 11/2020-Central Tax and Circular No. 134/04/2020-GST, both dated in March 2020. Under this framework, a corporate debtor undergoing CIRP is treated as a “distinct person” of itself from the date of appointment of the IRP or RP, and the IRP or RP is obliged to obtain a fresh GST registration in each state where the corporate debtor was earlier registered, ordinarily within thirty days of appointment. The IRP or RP then files a first return under Section 39 covering the period from the date the liability to register afresh arose until the date the new registration is granted, and is permitted to avail input tax credit on inward supplies received since appointment even where the invoices bear the erstwhile GSTIN, relaxed from the ordinary time and matching restrictions under Section 16(4) and Rule 36(4) for that transitional window. A corresponding relaxation permits the corporate debtor’s own recipients to avail credit on such invoices without those restrictions. Where the corporate debtor had, before the IRP’s appointment, already filed all its GSTR-1 and GSTR-3B returns with nothing pending, a fresh registration is dispensed with altogether, and later clarifications addressed the position where an IRP’s appointment is not ratified by the Committee of Creditors and a different RP takes over. GST liability accruing on supplies made by the corporate debtor during the CIRP period itself — as opposed to pre-CIRP dues — is treated as a cost of keeping the corporate debtor running as a going concern, falling within insolvency resolution process costs that rank ahead of all other claims in the Section 53 waterfall, rather than being subjected to the ordinary distribution mechanism at all.

III. The Clean Slate Principle and Government Dues Under an Approved Resolution Plan

The treatment of GST dues that predate the CIRP, and that the tax authority has not succeeded in bringing within the approved resolution plan, is governed by the “clean slate” doctrine articulated by the Supreme Court in Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited (2021 SCC OnLine SC 313, decided 13 April 2021). The Court held that once a resolution plan is approved under Section 31 of the Code, it binds the corporate debtor and every stakeholder, expressly including “the Central Government, any State Government or any local authority,” and that any debt — including dues arising under any applicable tax law — which does not form part of the approved plan stands extinguished, with no person thereafter entitled to initiate or continue any proceeding in respect of such a claim. The Court further held that the clarificatory 2019 amendment to Section 31(1) codifying this position operates retrospectively, so that the principle applies even to resolution plans approved before that amendment came into force. The practical consequence for GST authorities is exacting: a demand, whether already adjudicated, under show cause, or not yet even issued, that is not lodged as a claim before the Resolution Professional within the timeline fixed in the public announcement and included in the resolution plan, is extinguished on the plan’s approval, and successful resolution applicants have consistently obtained relief from High Courts restraining continuation of assessment or recovery proceedings in respect of such extinguished dues.

IV. The Rainbow Papers Disruption

That settled position was thrown into disarray by the Supreme Court’s decision in State Tax Officer (1) v. Rainbow Papers Limited (2022 LiveLaw (SC) 743, decided 6 September 2022). The Gujarat Value Added Tax Act, like Section 82 of the CGST Act, creates a first charge on the property of a defaulting dealer for outstanding tax. The Supreme Court held that this statutory first charge brought the state tax department within the definition of “secured creditor” under Section 3(30) of the IBC, and that a resolution plan which did not provide for the state’s dues at the priority applicable to secured creditors under Section 53(1)(b) could not be approved consistently with the Code. The ruling was immediately and widely criticised for disregarding the carefully calibrated waterfall of Section 53, which places government dues in the considerably lower priority of clause (e), below workmen’s dues, secured creditors and unsecured financial creditors, and for potentially unsettling every resolution plan approved on the assumption that statutory tax charges did not confer secured status. The government’s review petition against the substance of the ruling, in Sanjay Kumar Agarwal v. State Tax Officer, was dismissed on 31 October 2023, leaving Rainbow Papers formally undisturbed.

Barely nine months later, however, a different bench of the Supreme Court confined the ruling sharply in Paschimanchal Vidyut Vitran Nigam Limited v. Raman Ispat Private Limited (decided 17 July 2023). That case concerned dues owed to a state electricity distribution utility under a first charge created by the Uttar Pradesh Electricity Supply Code, and the Court held that a statutory corporation supplying electricity is not, in the ordinary sense, “the Central Government” or “a State Government” for the purposes of Section 53(1)(e) — only amounts properly accruing to the Consolidated Fund under Article 265 of the Constitution qualify as government dues in that sense. Addressing Rainbow Papers directly, the Court observed that the earlier decision had not considered the operation of the Section 53 waterfall at all, and held that it should accordingly “be confined to the facts of that case alone” rather than treated as a general proposition that any statutory charge elevates government dues to secured-creditor priority. The result, for practitioners, was two years of genuine uncertainty: NCLTs and NCLATs, and counsel advising on resolution plans, were confronted with two Supreme Court decisions pulling in opposite directions, neither formally overruled, on a question — the ranking of GST and other tax dues in the waterfall — that goes to the heart of how much a resolution plan must set aside for the exchequer.

V. The Legislative Resolution: The Insolvency and Bankruptcy Code (Amendment) Act, 2026

Parliament resolved the conflict directly. The Insolvency and Bankruptcy Code (Amendment) Bill, 2025 was introduced in the Lok Sabha on 12 August 2025 for this express purpose, and the resulting Insolvency and Bankruptcy Code (Amendment) Act, 2026 was enacted in the spring of 2026. The Act inserts an explanation to the definition of “security interest” clarifying that security interest exists only where it arises from an agreement or arrangement between parties, and expressly does not include a security interest created merely by operation of law — directly excluding statutory charges of the kind at issue in both Rainbow Papers and Raman Ispat from secured-creditor status. Correspondingly, the Act inserts an explanation to Section 53(1)(e) clarifying that amounts due to the Central Government or a State Government, whether or not purportedly secured by a statutory charge, in respect of the two years preceding the liquidation commencement date are to be distributed under that clause — the government-dues priority — and any amount beyond that two-year look-back falls to the still lower priority under clause (f). The legislative history makes the intent unambiguous: the amendment is designed to restore the position the drafters of the Code originally intended, confirm the narrower reading taken in Raman Ispat, and legislatively override the contrary reading in Rainbow Papers, including for GST dues secured by the first charge under Section 82 of the CGST Act. The same Act separately addressed the unrelated but contemporaneous controversy over the Adjudicating Authority’s discretion to reject a financial creditor’s insolvency application despite proof of default — the so-called Vidarbha Industries question — by making admission of a properly constituted application under Sections 7 and 9 mandatory once default and completeness are established.

VI. Consequences and Legal Remedies

The practical consequences of this sequence are significant for both the tax administration and corporate debtors. For the GST authority, the amendment means that reliance on the Section 82 first charge to claim parity with secured financial creditors is no longer available; the remedy is to ensure that its claim is filed with the Resolution Professional within the time fixed in the public announcement under the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, in the prescribed form, since a claim not so filed and not incorporated into the resolution plan is extinguished on approval regardless of its underlying merit, and the department’s only recourse if a claim is wrongly rejected or omitted is to approach the Adjudicating Authority before the plan is approved, or to challenge the resolution plan itself in appeal to the NCLAT under Section 61 on the ground that it does not meet the minimum-payment requirements the Code prescribes for operational and government creditors. For the corporate debtor or successful resolution applicant, the amendment restores predictability: government dues, including GST, rank as unsecured claims within the Section 53(1)(e) tier for two years preceding liquidation and lower thereafter, and dues not brought within an approved resolution plan remain extinguished under the Ghanashyam Mishra principle, a position a resolution applicant facing a stray post-approval GST demand can enforce by way of a writ petition restraining continuation of the proceeding, on the combined strength of Section 31(3) of the Code and the clean slate doctrine. Practitioners should nonetheless note that the clean-slate protection has, in several High Court decisions, been treated as unavailable where the corporate debtor is shown to have suppressed the existence of a demand from the Resolution Professional or the Committee of Creditors — a fact-sensitive exception that makes full and honest disclosure of pending and contingent GST exposure, at the information-memorandum stage, a matter of real consequence for both the outgoing management and the incoming resolution applicant.

VII. Concluding Observations

The GST treatment of a corporate debtor in distress now rests on reasonably settled ground, but it arrived there by an unusually visible route: a Supreme Court ruling favourable to the revenue, a review petition that left it standing, a differently constituted bench that confined it to its facts within the year, and finally a legislative amendment that resolved the resulting conflict in favour of the narrower, Code-consistent reading. For counsel advising either a corporate debtor entering CIRP or a tax authority seeking to protect the exchequer’s interest, three points now govern practice: compliance obligations continue, through the distinct-person mechanism, without regard to the merits of any dispute over past dues; the clean slate principle remains the taxpayer’s most powerful shield against a demand the department failed to press within the resolution timeline; and the statutory first charge under Section 82 of the CGST Act, whatever its force outside insolvency, no longer purchases priority above secured financial creditors once a corporate debtor enters the Code’s process.

References

• “GST Provisions relating to Corporate Insolvency Resolution Process (CIRP) to be complied with by IRP/RP,”TaxGuru
• “Clean Slate Principle Re-Affirmed By The Hon’ble Supreme Court, ‘Inter Alia’,”K Law
• “Claims Not Part of Resolution Plan Get Extinguished on Approval of the Resolution Plan, “AZB & Partners
• State Tax Officer (1) v. Rainbow Papers Limited, 2022 LiveLaw (SC) 743, decided 6 September 2022
• “The clouds of Rainbow Papersroll away,”asia (on Paschimanchal Vidyut Vitran Nigam Ltd v. Raman Ispat Pvt Ltd)
• “IBC (Amendment) Bill 2025: No Priority of Govt. Dues as Secured Creditors, Overturning the Rainbow Papers ruling,”IBC Laws, 13 August 2025
• Aishik Lahiri, “Insolvency And Bankruptcy Code (Amendment) Act, 2026 – Comprehensive Analysis,”LiveLaw, 10 April 2026