Analysis of the circular issued by the central government in respect of procedure to be adopted in cases of insolvency resolution
Central Government vide Notification No. 11/20 Central Tax dated 21st March 2020 has prescribed special procedure in respect of GST formalities to be complied by Companies which are in the process Insolvency Resolution. Salient features of the same and also analysis of the provisions so notified is attempted herewith.
1. The procedure prescribed is applicable to registered persons (i.e. registered persons under the GST Normal regime) undergoing Corporate Insolvency Resolution Process (CIRP) and whose affairs are being managed by Interim Resolution Professional (IRP) or Resolution Professional (RP)
2. The procedure prescribed is applicable for the date of appointment of the IRP / RP till the period they undergo the CIRP
3. IRP/RP so appointed under CIRP will be treated as a distinct class of persons – distinct from the Corporate Debtor – and are required to apply and obtain Registration in each of the State (s) / Union Territories where the Corporate Debtor has applied. – within thirty days of being appointed as IRP/RP.
4. Existing IRP/RPs as on the date of notification i.e. 21.3.2020 are also required to be obtain new registration for each of the State(s) / Union Territories where the Corporate Debtor has earlier obtained registration – within 30 days from the date of the notification i.e. 21.3.2020
Analysis of the above provisions
1. The Notification is applicable to Corporate Debtors who are undergoing CIRP. This implies that those Corporate Debtors who have come out of the CIRP i.e. who have approved Resolution Plans will not be covered under the notification. It is only in case of Corporate Debtors who are currently undergoing the CIRP, then the IPR/RP are required to take new Registration under the GST Act.
2. On initiation of CIRP the Board of the Corporate Debtor is superseded and the IRP/RP takes control of the activities of the Corporate Debtor. There is no change in the constitution of the Corporate Debtor. Section 21 requires registration by every Supplier. Section 2(105) of the CGST defines supplier as “in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied. The RP/CIRP cannot by any stretch of imagination can be said to be supplying goods / services– because the goods or services are supplied by the Corporate Debtor.
3. The Word Person has been defined under Section 2(84) and the definition is an inclusive definition due to the use of the words – Person Includes in the definition. The definition enumerates 14 types / classes who can be defined as person. The IRP/CIRP does not fall in any of the enumerated situations.
4. Registration can be sought only from a Person as per the Definition of Person under GST Act. IRP/RP is not a distinct person in its capacity as RP / CIRP – he or it is bestowed with the authority to run the affairs of the Company during the CIRP. It is not clear at this point to specify with RP/IRP can be classified as a Person under GST Act.
5. The provisions of the notification have not covered the Resolution Professional appointed as Liquidator because in case of Company under Liquidation, the management of the Company is vested with the Liquidator and the principles which apply to the IRP/RP should also apply to Liquidator. It is not clear whether the registration obtained by the RP/CIRP will also be applicable to the Liquidation Professional – there can be practically situations where the RP/ IRP and Liquidation Professional could be different entities / Persons. In such a case what is the process to be followed has not been specified.
6. There may be instances when the IRP/RP are different. The IRP / RP initially appointed may be replaced by another IRP / RP. In such cases, whether each of the IRP / RP s so appointed have to registration or it is sufficient compliance if the first IRP takes registration and the same registration is valid for all subsequent appointments. There is no clarity in the notification in this regard.
7. Registration under GST is PAN specific. It is not clear from the Circular which PAN shall be used for applying the Registration by the IRP/RP. Section 25(6) mandates that every person seeking registration under the Act shall have a PERMANENT ACCOUNT NUMBER (PAN) ISSUED UNDER THE INCOME TAX ACT, 1961. There are many provisions in GST which are applicable to Registered Persons based on their PAN – for example intra-state supplies are not treated as Supplies if the supplies are made to the Registration with same PAN. It may be possible that the Registration number which will be given to the IRP/RP though may contain the PAN of the Corporate Debtor may contain some distinctive feature which will differentiate it from the Registration Number of the Corporate Debtor.
8. No specific format has been prescribed for the application for registration in which the existing form FORM GST-REG-01 should be used in terms of Rule 8 of the CGST Rules.
9. The requirement of registration prescribed under the Notification is only for States / Union Territories for which the Corporate Debtor is holding Registration. The Notification does not envisage a situation for a new Place of Business in a New State can be added during the CIRP. In case IRP/RP wants to take registration in a State for which earlier Registration was not obtained by the Corporate Debtor, then procedure for the same is not prescribed in the Notification. The better drafting could have been to include a provision that the IRP/RP shall take New Registration in the States /UT in which Corporate Debtor has already taken registration and also in new States where it is proposed to have business / supply by the IRP/RP. To this extent, the notification needs to be reviewed.
10. It is presumed, due to the use of the words, “to take new registration in each of the states /UT where the Corporate Debtor was registered” – that the Notification will apply to Registration as Input Service Distribution (ISD), Tax Deduction at Source or Tax Collected at Source and such other registrations that are to be taken under GST regime under different enactments i.e. IGST, SGST, UTGST, CGST etc.
11. What is the IRP/RP fail to take Registration as per the Notification? No consequences have been specified in the notification for failure to take Registration. Can the Section 25(8) be made applicable in such a case. Section 25(8) reads as under:
Where a person who is liable to be registered under this Act fails to obtain registration, the proper officer may, without prejudice to any action which may be taken under this Act or under any other law for the time being in force, proceed to register such person in such manner as may be prescribed
But the RP/IRP is not a person who is liable to be registered under the GST Act. He is only required to take registration by way of notification. In such case can 25(8) be invoked.
Whether the other provisions of the GST Act i.e. Section 21 to 25 will also apply mutatis mutandis to a registration covered under this notification? The notification does not elaborate or clarify on this matter. Section 25(10) and Section 25(12) specify the period within which registration can be granted or rejected or provision for automatic registration. Whether these provisions apply for an application for registration under the notification?
Filing of return by the new registration holder
Return.- The said class of persons (IRP/RP) shall, after obtaining registration file the first return under section 40 of the said Act, from the date on which he becomes liable to registration till the date on which registration has been granted
Analysis
The New Registration Holder i.e RP/IRP is required to file the first return under section 40 of the said Act, from the date on which he becomes liable to registration till the date on which registration has been granted.
Section 40 of GST Act reads as under:
Every registered person who has made outward supplies in the period between the date on which he became liable to registration till the date on which registration has been granted shall declare the same in the first return furnished by him after grant of registration.
The requirement is only with reference to the outward supplies made by the Newly Registered Person from the date from which is liable to register i.e. from the date when he became IRP/RP till the date when the New Registration has come into effect.
Again, when the IRP/RP is replaced with another IRP/RP whether at each such instance a fresh return (FIRST RETURN) has to be filed or not – the Notification is not clear on this.
How about other returns filed or to be filed under the New Registration Number – it is not clear as the notification does not clarity on the same.
Provisions regarding input tax credit
The IRP/RP shall, in his/ its first return, be eligible to avail input tax credit on invoices covering the supplies of goods or services or both, received since his appointment as IRP/RP but bearing the GSTIN of the erstwhile registered person, subject to the conditions of Chapter V of the said Act and the rules made thereunder, except the provisions of sub-section (4) of section 16 of the said Act and sub-rule (4) of rule 36 of the Central Goods and Service Tax Rules, 2017 (hereinafter referred to as the said rules).
Analysis
- Credit can be availed only the supply of goods or services or both received since the appointment as RP / IRP even if the invoices bear the GSTIN of the Corporate Debtor
- The input tax credit availed is subject to the conditions of Chapter V of GST Act and the rules made thereunder
- The Words “except the provisions of Sub Section 16(4) and rule 36(4) of the CGST” require further consideration.
- Sub Section 16(4) reads as under:
A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.
Does this imply in respect of the Registration by RP/IRP the credit can be availed at any time and Section 16(4) is excepted i.e not applicable?
Section 37(4) of the CGST Act reads as under:
Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 10 per cent of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37
Here again the restriction in availing credit for invoices which are not matching, it seems is not applicable to the a Registration done by IRP/RP.
But is this the real intent or is there a drafting error.
- A reading of the Clause (4) of the Notification indicates that the credit can be availed only for invoices which have been received after the appointment of IPR/RP. This implies the Transitional Credit under Tran-1 cannot be carried forward for utilization for the IRP/RP. This will have serious ramifications for the cash flows.
- Section 140 (1) of the CGST Act reads as under:
A registered person, other than a person opting to pay tax under section 10, shall be entitled to take, in his electronic credit ledger, the amount of CENVAT credit carried forward in the return relating to the period ending with the day immediately preceding the appointed day, furnished by him under the existing law in such manner as may be prescribed
Transitional Credit is a vested right and can it be curtailed by a notification? By specifying that the input tax credit can only be availed for the services / goods received from the date of appointment of RP/IRP, does it not amount to saying that the carry forward credit as of the date of appointment of RP/IRP is not available to be taken credit.
- What happens if the Corporate Debtor , RP, IRP have availed more credit than is prescribed under the current notification? Will be treated as dues of tax and the RP/IRP will have to pay the same to the exchequer – with interest or without interest – There is no clarity on this issue
Registered persons who are receiving supplies from the said class of persons shall, for the period from the date of appointment of IRP / RP till the date of registration as required in this notification or thirty days from the date of this notification, whichever is earlier, be eligible to avail input tax credit
on invoices issued using the GSTIN of the erstwhile registered person, subject to the conditions of Chapter V of the said Act and the rules made thereunder, except the provisions of sub-rule (4) of rule 36 of the said rules.
ANALYSIS
- Input tax credit can be availed by the Receiver of Goods / Servicers on the invoices issued using the GSTIN of the Corporate Debtor up to the date of New Registration obtained by IRP/RP or thirty days from the date of the notification i.e.21.3.2020 whichever is earlier. Subsequent to this, they cannot avail the credit.
- This provision is also a restriction on the vested right under 16(4) of the CGST Act where the right to take input tax credit is available up to the date of submission of the Annual Return or the return for the month of September in the subsequent year under Section 39.
- Can a notification curtail a vested right provided by the Act is the moot point?
AMOUNTS DEPOSITED IN THE CASH LEDGER
Any amount deposited in the cash ledger by the IRP/RP, in the existing registration, from the date of appointment of IRP/RP to the date of registration in terms of this notification shall be available for refund to the erstwhile registration
ANALYSIS
- Any amount deposited in the Electronic Cash Ledger by the IRP/RP in the existing registration from the date of appointment of IRP/RP to the date of registration in terms of the notification is available for refund to the erstwhile registration.
There seems to be a serious drafting error in this provision. What is the amounts were paid for discharge of the duties payable during the period of appointment of IRP/RP till the date of Registration – how can they be refunded to the old registration and who will pay the duties for such supplies – the IRP/RP?
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