GST on Companies under Insolvency Process

GST on Companies under Insolvency Process

The Insolvency and Bankruptcy Code, 2016 has been introduced on 28^th May 2016 to protect the creditors from the defaults of the company. In the Budget Speech of 2015, the then Finance Minister has said that “Bankruptcy law reform, that brings about legal certainty and speed, has been identified as a key priority for improving the ease of doing business. SICA (Sick Industrial Companies Act) and BIFR (Bureau for Industrial and Financial Reconstruction) have failed in achieving these objectives. We will bring a comprehensive Bankruptcy Code in fiscal 2015-16, that will meet global standards and provide necessary judicial capacity”. Therefore, IBC 2016 has been introduced to settle down the issues which were there in the earlier laws and to protect the interests of the creditors in the company.

The primary purpose of this new insolvency law is not to liquidate the companies, but to find a resolution plan to make a company going concern.

Process involved in Insolvency Code:

Instead of getting directly into the provisional aspects of IBC 2016, we’ll first understand what is the procedure involved in corporate insolvency resolution process (hereinafter referred as CIRP) and how exactly it works. The following is the glimpse of the process involved in corporate insolvency:

• The creditor will file an application before NCLT, when the minimum default of more than 1 lakh has incurred
• The NCLT after verifying the application accompanied with supporting documents, may accept or reject the application.
• Once the application is accepted, a resolution professional (RP) or interim resolution professional (IRP) is admitted by the NCLT who’ll take over the management of the company.
• The role of the resolution professional or interim resolution professional is to make continuous efforts to ensure that the company will continue to operate as a going concern, and he’ll take all the necessary steps to revive the company.
• The resolution professional is given a time of 180 days (which may be extended by another 90 days, if required) to find the resolution. If he fails to find the resolution by then, the company is liquidated to pay creditors.

Compliance with Other Laws

On 3^rd January 2018, Circular IP/002/2018 issued by “Insolvency and Bankruptcy Board of India” has clarified that:

1. “A corporate person undergoing insolvency resolution process, fast track insolvency resolution process, liquidation process or voluntary liquidation process under the Insolvency and Bankruptcy Code, 2016 (Code) needs to comply with provisions of the applicable laws (Acts, Rules and Regulations, Circulars, Guidelines, Orders, Directions, etc.) during such process.
2. It is hereby directed that while acting as an Interim Resolution Professional, a Resolution Professional, or a Liquidator for a corporate person under the Code, an insolvency professional shall exercise reasonable care and diligence and take all necessary steps to ensure that the corporate person undergoing any process under the Code complies with the applicable laws.
3. It is also clarified that the insolvency professional will be responsible for the non-compliance of the provisions of the applicable laws if it is on account of his conduct.”

Therefore, if the company under CIRP (corporate debtor) is registered under the CGST Act, 2017 it is responsibility of the RP or IRP to comply with all the provisions in the Act and the Rules thereunder.

What exactly was the issue?

On 5^th December 2019, in the case of “T.R. Ravichandran, RP vs The Assistant Commissioner of Service Tax MA/1298/2019”, the NCLT has held that ‘the GST portal should allow the corporate debtor to file its return generated after commencement of CIRP without insisting upon payment of past dues of GST during the pre-admission period’. Basically, the application is about to give an option to the resolution professional to pay the GST from the date of commencement of CIRP instead of insisting on payment of past dues.

In terms of section 49(8) of the CGST Act, 2017 “Every taxable person shall discharge his tax and other dues under this Act, or the rules made thereunder in the following order, namely;

•  self-assessed tax, and other dues related to returns of previous tax periods;
• self-assessed tax, and other dues related to the return of the current tax period;
• any other amount payable under this Act or the rules made thereunder including the demand determined under section 73 or section 74.”

Therefore, while discharging tax under GST first you should clear the dues related to previous tax periods and then come to the dues of current tax period. But, in order to ensure the going concern of a company, it is necessary to discharge the current liabilities first without getting into the past liabilities. Let me explain you this with the help of an example.

Mr. P is acting as a resolution professional of a company ABC Ltd. The ABC Ltd is having a revenue of Rs. 2,00,000 per month during the CIRP. But it has dues of past tax liability which amounts to Rs. 10,00,000. If the resolution professional starts paying the past tax liabilities, he might end up without any resolution plan as all the revenue company generates would have been paid off for taxes. Then the prime purpose of CIRP i.e. to make a company going concern, would lose its validity.

The same issue has been raised by the applicant in the above case. The summary of the case is as follows:

1. The application has been filed to seek permission to file the returns and pay GST liability from the date of commencement of CIRP disregarding non payment of arrears of past period.
2. But the respondent has stated that there is no provision in GST law to accept current dues before clearing past dues.
3. Any company once gone into CIRP, if at all the Corporate Debtor is to be run as a going concern, it can be obligated to pay the taxes from the date of initiation of CIRP. As to the dues of pre-admission period, the creditors, including Tax authorities, are entitled to make a claim against the Corporate Debtor.
4. Law is clear that the Tax authorities fall within the ambit of the Operational Creditor, as to the pre-admission claims are concerned, they are at liberty to make their claims before the RP instead of insisting upon the RP to pay the same before accepting the tax liabilities arising during the CIRP period.
5. We hereby direct the respondent to allow the corporate debtor to file returns generated after commencement of CIRP without insisting upon payment of past dues.

Amendment in GST Law?

The department has contemplated the matter and instead of amending the GST provision, it has come up with a special procedure. The process has been laid down in the Notification 11/2020 – CT. The summary of the said notification is as follows:

• The corporate debtor who is under the process of CIRP will be treated as a distinct person of the corporate debtor and shall be liable to take a fresh registration within 30 days of appointment of RP. If the RP or IRP was already appointed prior to this notification, he shall take registration within 30 days of this notification.
• The corporate debtor under CIRP shall file the first return from the date on which he becomes liable to registration till the date on which registration has been granted, as per section 40 of the CGST Act, 2017.
• The corporate debtor under CIRP is eligible to take input credit in its first return covering supplies since the appointment of RP or IRP but bearing the GSTIN of erstwhile registered person.
• Any amount deposited by RP or IRP in the case ledger of existing registration, from the date of appointment of RP or IRP till the date of registration, shall be available for refund to the erstwhile registration.

Dilemma with Post-CIRP period:

When we refer the Notification stated above, it states that “the class of persons who shall follow the following special procedure, from the date of the appointment of the IRP/RP till the period they undergo the corporate insolvency resolution process, as mentioned below”. Therefore, the notification itself says that the said procedure will be applicable from the date of appointment of RP till the period they undergo the CIRP. So, what happens after CIRP is not yet clear. Even the Circular 134/2020 issued by board has not talked about the post CIRP period.

But the said circular has given a chit that the existing registration of the corporate debtor should not be cancelled. Therefore, it can be opined that the existing registration will resume once the CIRP gets completed and the existing registration would file nil return for the period of CIRP. The temporary registration may get cancelled once the CIRP gets over.

If the resolution professional doesn’t come up resolution plan and NCLT orders for liquidation, then what happens under GST is another issue. Of course, the provisions under section 88 will be applicable. But still, a clarification on these matters could sort out the issues well.

Conclusion:

Instead of amending the provisions and creating the complexity, the introduction of special procedure can be welcomed. But the notification should have covered all the issues relating to the corporate debtors who are undergoing insolvency resolution process, especially regarding Post-CIRP period.