Under the Insolvency & Bankruptcy Code, statutory dues under the CGST Act, collected and payable by the corporate debtor may either remain unpaid or would be settled at a reduced value under the resolution plan approved by National Company Law Tribunal (NCLT).

This situation triggers Section 16(2)(c) of the CGST Act, 2017, requiring the recipient to establish that input tax has been paid to the government for availing ITC.

Also in multiple cases, the corporate debtor could be defaulting in filing of its returns, thus impacting the ITC to be availed by the recipient. [Section 16(2)(aa) of CGST Act, 2017]

This article is an attempt to highlight the eligibility of Input Tax Credit on supplies procured from a registered person undergoing corporate insolvency resolution process (CIRP).

ITC claim by registered persons procuring inward supplies from corporate debtors undergoing corporate insolvency resolution process (CIRP), could be analysed as under:-

ITC on inward supplies pertaining to the period before initiation of CIRP and insolvency commencement date of the supplier:-

Circular No. 134/04/2020-GST read with Notification No. 11/2020 – Central Tax clarifies that the Interim Resolution Professionals (IRP) / Resolution Professionals (RP) are under no obligation to file returns of pre-CIRP period and the dues pending prior to insolvency commencement date are to be treated as “operational debt” under IBC for which no coercive action for any recovery can be initiated against the corporate debtor (As moratorium would be in force). Also, proper officers have been empowered to suspend the registration of entities undergoing CIRP (Not to cancel the registration).

Such pre-CIRP dues are to be discharged only to the extent covered by the resolution plan approved by NCLT. Also, Section 31 of IBC clarifies that the approved resolution plan shall be binding on all stakeholders including Central & State government(s) to whom a debt in respect of the payment of dues arising under any law for the time being in force is / are owed.

Section 238 of IBC gives it the all-supreme power to override any other law (including CGST Act, 2017) and Section 32A of IBC grants immunity from prosecution to the corporate debtor for all offences committed prior to insolvency commencement date subject to certain conditions.

CBIC Circular expressly states that IRP/ RP are not obligated to file pre-CIRP returns. Consequently, recipient would be hit by section 16(2)(aa) ex-facie.

Taxpayers could take a stand that output tax (operational debt) due from the corporate debtor to the government would stand extinguished on approval of the resolution plan by NCLT, given the binding nature of the resolution plan (IBC overrides all other laws) and thus the taxes are not ‘unpaid taxes’ causing invocation of Section 16(2)(c). Section 16(2)(c) pre-supposes a legally valid and a sustainable claim and only non-payment of such claim would result in denial of ITC to recipient. But, when the claim itself has been extinguished, Section 16(2)(c) stands complied with. Government being a stakeholder of the resolution plan has accepted the haircut. It should be estopped from staking a new claim at the recipient’s end.

Revenue department may alternatively take a stand that, Section 16(2)(c) has been inserted by way of abundant caution by the legislature that taxes which are not realized by the government are not eligible for claim as ITC. Also, Circular 187/19/2022-GST read with Section 84(b) of CGST Act, clarifies that recovery can be initiated from the corporate debtor only for the government dues adjudicated under IBC and accordingly ITC is not eligible for that part of the dues which stand unpaid.

In the absence of a settled jurisprudence on the issue amidst conflicting judgements by different jurisdictional High Courts, the matter is yet to attain finality pending adjudication by the Hon’ble Supreme Court.

Section 15 of IBC, 2016 read with Regulation 7 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 clarify that, an operational creditor i.e., Central or State Government(s) for GST dues shall submit its claims with proof to the interim resolution professional.

Regulation 7(2)(b)(iii) also states that the existence of debt due to the operational creditor may be proved on the basis of financial accounts of the corporate debtor or an order of a court or tribunal that has adjudicated upon non-payment of a debt.

Sec 16(2)(aa) denies ITC to the recipient on the premise that when there is a default on the part of the supplier in reporting his outward supplies, government cannot have any track on the corresponding ITC being availed by the recipients. Only when the supplier makes an outward supply, recipient can have an inward supply. In the absence of non-reporting of outward supply, it is presumed that inward supply has not been obtained and ITC is denied. So, the presumption is that, government should become aware of the outward supply being made by the supplier first and ITC can then on be claimed by the recipient when the same has been communicated to him (through GSTR -2B).

Going by the analogy, public announcement of the corporate insolvency resolution process under Section 15 of IBC inviting claims inter-alia from operational creditors and the consequent submission of claims by the GST department either on the basis of the financial accounts of the corporate debtor or on the basis of an order of a court or a tribunal (where GST returns have not been furnished by the corporate debtor for the pre-CIRP period) shall constitute sufficient notice to the government regarding the details of outward supplies made by the corporate debtor.

Accordingly, Section 16(2)(aa) should not have any operation in denying ITC to the recipient. Though no mechanism has been prescribed for communicating the details of such outward supplies made by the corporate debtor not reported in the GST returns, but identified and submitted by the GST department as claims due to operational creditors, procedural lapse cannot deny a genuine substantive right conferred upon a person by the statute.

Accordingly, Section 16(2)(aa) cannot bar ITC to be availed by the recipient in such circumstances.

ITC on inward supplies pertaining to the period after insolvency commencement date but before approval of resolution plan when moratorium under Section 14(1) of IBC is in force:-

Section 25 of IBC, inter-alia states that it shall be the duty of the resolution professional in continuing the business of the corporate debtor as a going concern.

Circular No. 134/04/2020-GST clarifies that the corporate debtor who is undergoing CIRP is to be treated as a distinct person of the corporate debtor and shall be liable to take a new registration in each State or Union territory where the corporate debtor was registered earlier. The new registration granted to the IRP/ RP is for a limited timeframe till the approval or rejection of the resolution plan.

The IRP/ RP shall be liable for discharging output tax liability through the new registration on all supplies made between the date of obtaining the new registration till the date of approval or rejection of the resolution plan or the date of order of liquidation.

Since, the corporate debtor undergoing CIRP is treated as a distinct person of the corporate debtor, the above discussed conclusions shall have no applicability.

Accordingly, Section 16(2)(aa) and Section 16(2)(c) would be squarely applicable for the recipients procuring supplies from the corporate debtor. ITC on inward supplies during the period can be availed only when the the details of the invoices has been furnished by the IRP/RP in GSTR-1 of the newly obtained registration and the same is communicated in GSTR-2B to the recipient and tax on the same has been discharged to the government by the corporate debtor undergoing CIRP through Form GSTR -3B.

ITC on inward supplies pertaining to the period after approval or rejection of the resolution plan:-

In the event, that the resolution plan of the resolution applicant is approved by NCLT, the law is silent on the continuation of the new registration obtained by the IRP/RP or reverting back to the erstwhile registration. On the premise that the registration obtained during the CIRP process is only a temporary measure, it can be concluded that the corporate debtor would revert back to the original registration and the proper officer would have to revoke the suspension placed on the original registration.

Practically, the GST portal imposes a technical hindrance of prohibiting the corporate debtor from filing returns after the resolution date on account of default in filing of prior period returns (during the period of CIRP when the IRP/RP would have filed the returns under the new registration). In such circumstances, post insolvency resolution. the corporate debtor might consider obtaining a new third registration for supplies to be made thereon.

No special circumstances exist thereafter and accordingly Section 16(2)(aa) and Section 16(2)(c) would be mutatis mutandis applicable for the recipients procuring supplies from the corporate debtor post insolvency resolution.

The Bankruptcy Law Reforms Committee (BLRC) has expressed in its report that permitting tax recoveries would defeat the ultimate intention of rejuvenating a sick enterprise as the same impairs the productivity of assets and deters the overall resolution of the enterprise. The Insolvency and Bankruptcy Code, 2016 has accordingly been constructed on similar lines placing dues of Central and State Government(s) in the fifth position in the order of priority for distribution of assets behind unsecured creditors. (Section 53). Tax administrations must realize the object and purpose of the code and must not initiate coercive actions against taxpayers that are perverse in law.

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February 2024