The GST-IBC Interplay - A Critical Analysis

“Unjust laws exist: shall we be content to obey them, or shall we endeavor to amend them, and obey them, until we have succeeded, or shall we transgress them at once?”

– Henry David Thoreau  

When a Company becomes insolvent, numerous issues arise. The Government enacted Insolvency and Bankruptcy Code, 2016 (‘the Code’) to address such issues and make the process smoother. Unfortunately, the Government often misses to stich various related laws well. One such issue cropping up these days is inter-play between the Code and Goods and Services Tax (‘GST’) laws. 

Recently, the Companies undergoing insolvency resolution, are in a fix due to restriction under Section 39(10) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’). The Companies are left with no choice except to move to Courts for seeking resolution[1].

Through this article, the authors attempt to delve into finer details of this issue. 

Distribution mechanism of assets sale proceeds under the Code 

The Code provides a mechanism for distribution of proceeds realized from disposal of assets during insolvency proceedings. Generally, a Company going for resolution, have liabilities higher than its assets. 

The Liquidator is an Insolvency Professional to whom the Code entrusts with all decision-making powers. Section 35 of the Code dealing with ‘Powers and Duties of the Liquidator’, also encompasses settlement of claims of creditors as one of the duties of the Liquidator. The Code also provides the order of distribution of proceeds realized from sale of assets irrespective of anything contrary contained in any other law. 

At the time of liquidation by way of sale of business as a going concern, the liability to discharge past dues does not shift to the Buyer. Infact, the Buyer only purchases the assets. The Liquidator continues to be responsible for discharging past liabilities. As a corollary, the Buyer is not legally liable to discharge past dues. 

Purpose of the Code 

In Budget 2015 speech, Shri. Arun Jaitley discussed the purpose of bringing the bankruptcy laws as a priority area for improving the ease of doing business in India. Based on this, the Bankruptcy Law Reforms Committee (‘BLRC’) was set up and its report lead to the enactment of the Code in May 2016. The objective of the Code is “to consolidate and amend laws relating to reorganization and insolvency of corporate persons, partnership firms, and individuals in a time bound manner”. 

The Code aids the business operations of the Company by codifying the process of insolvency resolution. A good insolvency law helps in timely realization of assets, systematic distribution of proceeds amongst the claimants and minimum disruption to the Company’s business. 

The Code has undergone several amendments since May 2016. This shows the serious intent of the Central Government in bringing timely changes depending on the number of issues arising from time to time. 

Post liquidation irritant - Interplay between IBC and GST laws 

Section 39(10) of the CGST Act bars a registered person from furnishing its return for a tax period if it has not furnished all the returns for previous tax periods. 

Is the restriction under Section 39(10) invalid? NO 

This restriction is indeed valid as the lawmakers are empowered to put such restrictions to ensure compliances under the GST laws. However, it is unfortunate that the GST laws do not contain specific provisions for payment of taxes in insolvency situations provided under the Code. The Government would have done well to align the Code and GST laws. 

Section 82 and 93 of the CGST Act - Do they show inherent inconsistency in the GST laws?  YES 

Section 82 and 93 of the CGST Act contains specific provisions where the GST laws have been aligned with the Code. These are: 

• Tax to be first charge on property(Section 82)
• Continuation of business after death of proprietor [Section 93(1)(a)]
• Discontinuation of business due to death of Proprietor, [Section 93(1)(b), (2), (3), (4]

Partition of HUF & AOP, dissolution of Firm, termination of Guardianship & Trust 

While the aforesaid provisions deal with specific situations, the lawmakers have failed to align GST return filing mechanism with the Code. 

Despite the Code providing a clear moratorium for the Buyers from paying dues (including GST) for the past period, the above restriction is forcing the Buyer not to file current GST returns as well. The Buyers have been left with no option except to challenge this restriction in the Courts being contrary to the Code. 

This issue will not only result into blockage of working capital of the Buyers but also defeats the entire foundation of insolvency resolution concept in India. Ultimately, it would add to difficulties in doing business as opposed to promoting ease of doing business in India. 

This very issue (if not addressed soon) is capable of derailing the unbeatable development of the Code in India. The Government should immediately introduce an exception in the GST laws to enable the Buyers to file present and future GST returns irrespective of payment of past GST dues.

The views are strictly authors’ personal and do not in any manner represent any advice. 

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[1]https://economictimes.indiatimes.com/news/company/corporate-trends/companies-in-a-fix-as-gst-ibc-rules-clash-may-move-court/articleshow/71089677.cms