The Insolvency and Bankruptcy Code (IBC), enacted in 2016, was heralded as a game-changer in India’s corporate landscape. Its primary goal was to expedite debt recovery and company revival while ensuring fairness to all stakeholders. However, eight years down the line, the IBC’s efficacy remains hindered by various tax-related challenges. This article explores these challenges in detail and suggests ways to overcome them for a more effective insolvency framework.
Introduced in 2016, the Insolvency and Bankruptcy Code (IBC) was envisioned as a transformative mechanism to expedite debt recovery and company revival within a set timeframe. However, after eight years, its effectiveness remains uneven. While some companies have been successfully brought back from the brink, the process faces criticism due to lingering tax-related hurdles.
The IBC wasn’t solely intended for corporate resurrection; it also aimed to improve lender balance sheets and empower buyers of distressed assets. Several amendments have been implemented since its inception, fine-tuning the process to address evolving industry needs. However, critical issues persist, hindering the IBC’s full potential. This article dives into specific tax aspects that necessitate clarification or amendment for a streamlined insolvency process benefiting all stakeholders.
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Unresolved Tax Burdens from the Past
Many approved resolution or liquidation plans involve scaling back statutory dues or writing them off entirely. This often stems from insufficient funds recovered during the process to satisfy both operational and financial creditors. The IBC’s waterfall mechanism prioritizes financial creditors over operational creditors, including the government. While the IBC provisions supersede other laws, tax authorities continue to pursue unwarranted actions and litigation. It’s crucial for the government to recognize the binding nature of resolution plans and the extinguishment of past tax demands in such cases. Understanding the inherent challenges of business operation, especially in distressed situations, is vital. Rather than hindering revival efforts, a more supportive approach from the government would be beneficial.
Uncertainties Regarding First Charge Privileges
A 2023 Supreme Court decision in the Rainbow Papers Ltd. case threw a wrench into resolutions that didn’t allocate funds for tax authorities compared to other creditors. The court categorized outstanding tax demands as secured debts with first charge privileges for tax authorities, particularly if supported by existing regulations. This disrupted the established landscape. A subsequent Madras High Court decision in Aginiti Industrial Parks Pvt. Ltd. offered some relief by emphasizing the fact-specific nature of the Supreme Court’s ruling, preventing its universal application. Government clarification on this matter would be immensely helpful in dispelling uncertainties and ensuring a fair resolution process for all stakeholders, while upholding the sanctity of resolution plans and the IBC’s waterfall mechanism.
Respecting the Moratorium Period
The IBC-mandated moratorium period aims to halt tax proceedings and coercive actions against a corporate debtor. The Supreme Court, in the Sundaresh Bhattacharjee case, clarified that tax departments have limited jurisdiction, restricted to assessing and determining the quantum of tax and other levies. Despite various circulars issued by the tax administration echoing this sentiment, instances of tax departments undertaking actions like search and seizure operations during the resolution plan’s development persist. Strict adherence to moratorium orders is essential to uphold the spirit of the IBC. A unified approach aligning actions with regulatory guidance is necessary.
Income Tax Regime Amendments for Enhanced Effectiveness
While past amendments have addressed specific concerns, further improvements can be made to strengthen the IBC’s efficacy. The income tax regime has seen some positive changes, including allowing losses to carry forward even with a change in shareholding, eliminating the requirement for a No Objection Certificate (NOC) from the income tax department, and reducing unabsorbed losses and depreciation when calculating Minimum Alternative Tax (MAT) liability.
However, additional changes could be highly beneficial:
- Minimum Alternative Tax (MAT) Provisions: Waiver of interest and loan reduction from income should be allowed for companies under insolvency within the MAT provisions. This would prevent distressed companies from facing an unnecessary tax burden due to loan waivers.
- Relaxation for Amalgamations and Demergers: The current requirements under Section 72A of the Income-tax Act, 1961, for carrying forward losses in the context of insolvency-driven amalgamations are overly rigid. Relaxing these conditions, particularly regarding holding fixed assets and continuing the business, would be helpful for companies seeking a fresh start. Similarly, the requirement for a “going concern” basis transfer for a tax-neutral demerger should be relaxed.
- TDS Exemption for Asset Purchases: Entities purchasing assets and goods from companies under IBC should be exempt from Tax Deducted at Source (TDS) provisions. The current system adds procedural hurdles, requiring the tax authority to first be directed by a judicial forum to return the deducted tax before it can be distributed as per the IBC’s waterfall mechanism.
- Extended Time for Return Filing and Relaxed Lapse of Losses: Companies under IBC should be granted an extension for filing tax returns. Additionally, the current rule of losses lapsing due to non-filing should be relaxed for such companies.
- Clarity on Resolution Process Cost Deductibility: Clear guidance is needed on the deductibility
Conclusion
The Insolvency and Bankruptcy Code holds immense promise as a tool for corporate revival and debt resolution. However, its effectiveness is hampered by various tax-related challenges. By addressing unresolved tax burdens, clarifying first charge privileges, respecting the moratorium period, and implementing necessary income tax reforms, the government can unlock the full potential of the IBC and ensure a fair and streamlined insolvency process for all stakeholders involved.
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