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Section 82 of the CGST Act (Tax to be first charge on property) state that ’Notwithstanding anything to the contrary contained in any law for the time being in force, save as otherwise provided in the Insolvency and Bankruptcy Code, 2016, any amount payable by the taxable person or any other person on account of tax, interest or penalty which he is liable to pay to the Government shall be first charge on the property of such taxable person or such person.

There are separate implications under GST law when the taxable person or any person is also adjudicated under insolvency and Bankruptcy code (IBC) Act 2016. This code is enacted through which the creditor can collect their dues through Corporate Insolvency Resolution Process (CIRP). The IBC law is applicable to corporate debtors which includes the company and LLP. The “corporate debtor” means a corporate person who owes a debt to any person. The Implication of GST and the procedure under the GST law for the corporate debtors is discussed vide Notifications and Circulars (CGST Notification – 11/2020 dated 23.3.2020, Circular No.134/04/2020-GST dt. 23.03.2020– and Circular No 138/08/2020)/ Circular No 187/19/2022-GST dated 27.12.2022.

If there are any tax dues which us unpaid by the company, then whether GST Authorities can proceed for recovery of tax prior to CIRP period. The section clearly state that the IBC law will prevail over the GST law. Therefore, the GST Authorities should submit the claim as operational creditors and make an application to the Adjudicating Authority (NCLT) for initiating the CIRP process. It was a legal practice that the tax dues were collected as preferential creditors and with the introduction of section 82, the GST Authority are also equated with operational creditors.

The government dues, including tax dues, are defined to be an operational debt under clause 21 of Section 5 of IBC. In the case of State Tax Officers Vs Rainbow Papers Limited 6.9.2022 Civil Appeal No 1661 of 2020 (SC), the Honorable Supreme Court reversed the decision of NCLAT which held that tax dues under the VAT proceeding would not constitute a secured debt under IBC law. It is held that the state is a secured creditor and section 3(30) of the IBC defines secured creditor to mean a creditor in favour of whom security interest is credited and such security interest could be created by operation of law. It is held that the secured creditor in the IBC does not exclude any government or governmental Authority and therefore, the tax department of the state squarely falls within the definition of “security interest” under Section 3(31) of the IBC Code and it becomes a secured creditor under Section 3(30) of the IBC Code.

The doctrine of clean slate will find its place in section 31 and 32A of the IBC Code. Section 31 has been amended in 2019 which state that Approval of Resolution plan shall be binding even on central government, any state government, or any local authority. Section 32A provides that corporate debtor shall not be prosecuted for an offence committed prior to commencement of corporate insolvency resolution process (CIRP) once resolution plan has been approved by Adjudicating Authority (AA). In simple terms, once the resolution plan is approved by the Adjudicating Authority, the resolution plan will be binding on all the stakeholders including Central and State Government. The “Adjudicating Authority”, for the purposes of IBC, means National Company Law Tribunal constituted under section 408 of the Companies Act, 2013.

Section 14(1)(a) provides that on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree, or order in any court of law. Section 14(1)(a) of the IBC prohibits institution and continuation of suits and execution of judgements against the corporate debtors during this period. During the insolvency process. Section 14 provides the space for the corporate debtors in the form of a moratorium. The aspect of whether a pending proceeding before GST authority is also a proceeding as provided in section 14 of IBC must be analysed from the judicial pronouncements from allied laws.  

During moratorium/CIRP being in force and not lifted, there would be complete embargo to initiate and continue proceedings against taxpayer before any other authority. Basically, the entire period during which moratorium is in force to be excluded. (Associate Décor Ltd Vs Deputy Commissioner of Commercial Taxes, Bengaluru 2022 (67) GSTL 534 (Kar)).

Even in case of Sundaresh Bhatt Versus C.B.I. & C. 2022 (381) E.L.T. 731 (S.C.) it is ruled that once moratorium is imposed in terms of Section 14 or 33(5) of IBC, 2016, Customs authority can only determine quantum of customs duty and other levies but cannot initiate recovery by means of sale/confiscation, as provided under Customs Act.

In case of National Plywood Industries Limited v. Union of India and Ors.[2], WP(C) 1059/2020, the Gauhati High Court, while dealing with a writ petition challenging the adjudication of a show cause notice under the Central Excise Act, 1944 post initiation of the CIRP, observed that the moratorium prescribed under section 14 of the IBC not only applied to execution of an order or a judgement but also to institution or continuation of suits or proceedings.

In simple terms, the Initiation of any suit or proceeding is debarred under Section 14 of IBC by imposing moratorium period and therefore no coercive action can be taken by officers with respect to such dues. If the moratorium is invoked after the SCN is issued the same shall be hit by the bar under section 14(1)(a) of IBC. The basic objective of the law is that company under CIRP should be able to carry on its business and activities so as to preserve the value until handed over to the successful resolution applicant. If the company is again burdened with further proceedings, then that may not serve the purpose of the law. There should be clarity on the aspect as whether the moratorium bars not only the recovery of tax but also proceedings of audit and adjudication of tax under the GST law with reference to section 14(1)(a) of IBC.

The CIRP process applies when the dues are more than one lakh, and it is increased to one crore for MSME Sectors. The Financial creditor/operational creditor can initiate CIRP, and the management of company assets are transferred to Resolution Professionals. The ‘Resolution Professional’ means an insolvency Professional appointed to conduct the CIRP and includes an interim-resolution Professional. Therefore, during the CIRP process, the Resolution Professional (RP) must follow the prescribed procedure for compliance. The IRP/RP will be treated as the distinct persons as the entire responsibility of running the business and legal compliance is shifted to them. If IRP/RP changes in between then change in registration details, it will be only non-core amendment and will not be considered as distinct entity.

The GSTN portal is not designed specifically for pre CIRP period and post CIRP Period. There was anomaly between the GST laws and IBC laws wherein there is no mechanism to deposit the taxes without depositing the taxes for earlier period. This issue was discussed in 39th Council meeting on 14.3.2020 and the special procedure was specified for registered person who are corporate debtors and are undergoing CIRP to comply with GST laws. The GST dues during pre-CIRP shall be treated as operational debts and dealt with under the provisions of IBC.

In case of Abhijit Guhathakurta, R.P. (for Videocon Industries Limited and Ors.) v. Central Goods & Services Department, the Mumbai bench of the NCLT had observed that the GST law did not restrict deposition of GST in a particular month if prior GST dues were not paid, though the GSTN portal restricted the same. The NCLT directed the revenue authorities to accept manual filing of returns, restore the E-Way bill facility of the corporate debtor, not cancel the GST registration, or take any coercive steps for recovery of dues.

The GSTN Portal introduces new functionality of registration of IRPs/RP appointed to undertake CIRP for corporate debtors on GST Portal in each State. The date of commencement of business for IRP/RPs will be date of their appointment and their compliance liabilities will also come into effect from the date of their appointment. If there is change in IRP/RP after initial appointment would be deemed to be change of authorized signatory and not an appointment of a distinct person requiring a fresh registration.

The tax officials should ascertain all the details of supplies made/received and tax dues on the same before filing a claim with the NCLT. The existing registration should not be cancelled and in case it is cancelled then the application for revocation of registration is required and therefore due to CIRP process, the proper officer may suspend the Registration. An IRP/RP is liable to comply with legal requirements for the period after the commencement of CIRP. They are not required to file returns for the period for the transactions for Pre CIRP-Period. If the returns are filed for the period prior to appointment of IRP/RP, then new registration is not required to be taken by corporate debtor.

With the initiation of CIRP and appointment of IRP/RP will make the taxpayer (corporate debtor) as a distinct person of the taxpayer. They should apply for new registration under the GST Act within 30 days of their appointment. The time limit of 30 days is from the appointment of IRP/RP or by 30.6.2020 whichever is later (Notification No. 39/2020-C.T., dated 5-5-2020]. Upon obtaining a fresh registration, IRP/RP has to comply with all the provision of GST law in relation to filing of returns, payment of tax and other provisions. The First return under section 40 has to be filed for the period from the date of becoming liable to take registration till the date of granting of registration.

During the CIRP process, the RP/IRP can claim ITC on invoices which are bearing earlier GSTIN in their first return without complying with Section 16(4). The IRP/RP can claim input tax credit on invoices which bear new GSTIN in returns to be filed only after complying with Section 16(4) of GST Act 2017.

The cash deposited by IRP/RP, after appointment till obtaining new registration, in the earlier GSTIN shall be awarded as refund from cash ledger even though returns are not filed under the earlier registration. There is no clarity for excess credit in old registration or excess cash in cash ledger in the old registration. The law has clarified only for the refund for the interim period from the appointment of RP/IRP till the new registration.

The registered person receiving supplies from such corporate debtors is eligible to claim Input Tax Credit on invoices bearing earlier GSTIN as per the conditions specified under Chapter V of the CGST Act. They can claim for the period from the date of appointment of IRP/RP till the date of a new registration or within 30 days of issuance of the notification, whichever is earlier. In other words, the recipient of supplies can claim input tax credit on the invoices bearing earlier GSTIN for the supplies pertaining to the period of appointment of IRP/RP till GST new registration. And for the supplies made in the new GSTIN the recipient of such supply has to comply with CGST Rules, 2017. Due to the above specified procedures, if the corporate debtor applies for new registration, then they have to apply new registration for all the entities located in different states.

The procedure for corporate debtor under liquidation is not specified and also the procedure for continuation of GSTIN after resolution during CIRP is not specified. The Input tax credit will be disallowed in the corporate debtor on account of its suppliers, being operational creditors in pursuant to the resolution plan. There should be clarity in GST process for transitional cash ledger and credit ledger balance for pre- CIRP and post CIRP process and should enable for the simplified process under the GST law.

In various Judicial pronouncements, the NCLT had directed the revenue authorities to permit the corporate debtor to file the GST Returns and discharge the GST from the date of CIRP without insisting upon payment of past unpaid dues. Even it has directed to accept manual returns, restore the E-waybill facility of the corporate debtor and not to cancel the registration and should not initiate coercive steps for recovery of dues.

The charge can be created under section 82 only when the taxable person or any other person is liable to pay tax or interest or penalty to Government. Whether ‘other person’ include transferee, amalgamating company, legal representative, member of Partioned HUF, Partners, guardian, trustee etc must be analysed independently as referred in chapter XVI of the CGST Act.

The Recent Circular No. 187/19/2022-GST dt. 27.12.2022 has clarified that the proceedings conducted under Insolvency and Bankruptcy Code (IBC),2016, also adjudicate the government dues pending under the CGST Act or under existing laws against the corporate debtor and it would be covered under the term ‘other proceedings’ in Section 84 of CGST Act. Therefore, in cases where a confirmed demand for recovery has been issued by the tax authorities for which a summary has been issued in FORM GST DRC-07/DRC 07A against the corporate debtor, and where the proceedings have been finalised against the corporate debtor under IBC reducing the amount of statutory dues payable, then the jurisdictional Commissioner shall issue an intimation in FORM GST DRC-25 for reducing such demand. In simple terms, the tax officer should abide by the NCLT order in insolvency cases and recover only that much GST dues as has been finalised by the Tribunal. As the proceedings conducted under IBC also adjudicate the government dues pending under the CGST Act or under existing laws against the corporate debtor and the same appear to be covered under the term ‘other proceedings’ in Section 84 of CGST Act.

The recent amendment will certainly reduce the litigations but still there are certain practical instances which needs to be addressed by the GST Authority to synchronise the implementation of GST law with the concurrence of IBC law.

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