Analyzing the Integration of GST & IBC Provisions & its impact on IRP/RP

Ashish Mittal, GST Consultant & Siddharth Kumar, Tax Consultant

Background:

After a long journey of almost a decade in year 2016, finally the Insolvency and Bankruptcy Code, 2016 (hereinafter referred as "IBC") was introduced in the country with lot of expectation to resolve disputes of Creditors (means the Financial & Operational creditor as defined under Sec. 5(8) & Sec. 5(20) of IBC respectively) and Debtors (means the corporate debtor as defined in IBC under Sec. 3(7) i.e. Companies & LLP and individual debtors under Sec. 79(12) of IBC) through a single law called IBC, thereby subsuming or reducing the boundaries of other laws. The main objective of IBC was to revive the solvency of the Debtors against whom or who has filed an application through professionals such as CA/CS/CWA/Advocates so as to avoid unnecessary liquidation thereby ensuring timely and proper discharge of debts owned by the debtors.

To oversee this mechanism a process named as Corporate Insolvency Resolution Process (hereinafter referred as "CIRP") was introduced wherein affairs of the Debtor would be managed by professionals who has been termed as Interim Resolution Professional/ Resolution Professional (hereinafter referred as "IRP/RP") under the IBC.

Several hindrance were faced by IRP/RP with regards to the compliance of Goods & Service Tax (hereinafter referred as "GST") provisions which is discussed in the next para, to resolve the same, CBIC has notified a special procedure vide Notification No. 11/2020-CT dated 21-03-2020 which is further amended by Notification No. 39/2020-CT dated 05-05-2020 read with Circular No. 134/04/2020-GST dated 23-03-2020 & Circular No. 138/08/2020-GST dated 06-05-2020. In this Juncture an attempt is made to discuss the issues and special procedure adopted by the CBIC under GST which need to be complied by the IRP/RP.

Why the need for special procedure arose?

IBC since its implementation has got a positive response and a big welcome by the industry which is clearly evident from the number of cases filled under IBC. Now once the application is accepted by the Adjudicating Authority, the complete affairs & management of the debtor along with all assets and liability to comply with varied laws is transferred to IRP/RP who thereafter becomes duty bound and responsible for all compliances. Now issues which arose under GST before the IRP/RP are listed herewith:

1. The GST Portal & law do not permit to pay the dues of current or future period until all the past dues have not been discharged. Now a debtor undergoing CIRP in most cases have also defaulted in discharging the dues towards GST, and IRP/RP is duty bond for payment of GST net liability i.e. After adjusting Input Tax Credit (in short "ITC") arising during the CIRP period i.e. from the date of commencement of CIRP till its completion.

2. As per the definition of Operational Creditor, GST authorities are covered under the definition, Further Sec. 238 of IBC has categorically has given power to IBC to have an overriding effect over any other law. So in the matters of M/s Kiran Global Chem Limited, represented by RP T.R. Ravichandran, Vs Asst. Commissioner (ST) vide order no. MA/1298/2019 in IBA/130/2019 dated 05-12-2019, the Hon'ble Tribunal had held that the debtors must be allowed to discharge only net GST liability after Availment and utilization of ITC only for the CIRP period, and any prior liability shall be discharged in accordance with the provision of IBC which ibid is mentioned in Sec. 53 of IBC i.e. distribution of Asset, which defines the order or priority to discharge the pending dues.

3. At the commencement of CIRP process, a moratorium period is declared under Sec. 14 of IBC, wherein all the proceeding's, cases, recovery etc. is stopped, but essential business activity as per the opinion of IRP/RP shall continue. So sometimes business is carried on by the IRP/RP, but due to past dues and earlier defaults i.e. before commencement of CIRP, wherein returns are not filled & tax is not deposited by the debtors due to which, further supply and invoicing transaction is disturbed. Further restriction on generating e-way bill under GST also arises, due to which the planned action of the IRP/RP to revive the business suffers. In the matter of M/s Hind Tradex Ltd. Vs. M/s Lakshmi Precision Screws Ltd. CP (IB) No.155/Chd/Hry/2018 dated 18-07-2018 the Hon'ble tribunal has directed GST authorities to accept the manual filing of returns and payment of tax liability during the CIRP period.

4. Further, although the recovery proceedings are being stopped by the moratorium period under Sec. 14 of IBC but authorities tried to start recovery of the pending dues, and even initiated cancellation of existing registration under Sec. 29 of Central GST Act 2017 (hereinafter referred as "CGST Act 2017") which was also another major issue faced by IRP/RP. In matter of M/s Videocon Industries v. CGST Department, MA-4048/20197 dated 27-01-2020 Hon'ble tribunal of Mumbai has also restrained the Department from cancelling the registrations of the debtor undergoing CIRP.

Thus, due to arrears of GST, issue in fresh invoicing and passing on ITC to the recipient, non-generation of e-way bill and actions taken by authorities for recovery and cancellation of registration, has caused a lot of difficulties to IRP/RP to revive the business. At this juncture there was a need to address these issues either by allowing above facilities on existing portal, or by manually implementing the same, or developing a special mechanism to tackle the above situation. This issue repeatedly came before the GST Council, which in its 39th Meeting dated 14-03-2020 has addressed these issues through a recommendation of special procedure for these Debtors undergoing CIRP so that the provisions of GST Law is duly complied with.

Special procedure introduced:

CBIC vide aforementioned notifications read with circulars have introduced the new procedure for 'debtors undergoing CIRP' wherein these debtors would be considered as a separate class of persons distinct from corporate debtors. The govt. has exercised the power conferred under Sec. 148 of CGST Act, which states that,

"The Government may, on the recommendations of the Council, and subject to such conditions and safeguards as may be prescribed, notify certain classes of registered persons, and the special procedures to be followed by such persons including those with regard to registration, furnishing of return, payment of tax and administration of such persons"

The govt. exercising the above vested power has introduced special procedures with regards to registration, filing of returns, and payment of tax for debtors going undergoing CIRP to be complied by IRP/RP thereby treating as a distinct person.

A. New Registration for Corporate Debtor:

a. Non-defaulters: The debtors who is being regular in discharging its liability and filling of GST returns at the commencement of CIRP shall not be covered under the Special Procedure. The IRP/RP shall continue the compliance w.e.f. from commencement of CIRP. The intent is quite clear that if IRP/RP is facing issue due to default or non-clearance of dues by debtors then only special procedure would be applicable on them. Govt. do not want to segregate them, they just want the ease of implementing provision of IBC.

b. Defaulter: The debtor who has defaulted in complying with the GST provisions shall be considered as distinct person:

i. CIRP commencing after issuance of this Special Procedure: The IRP/RP appointed after this special procedure is enforced shall obtain fresh registration in all states and union territories in which the debtors is having GST registration, and the IRP/RP shall do all the compliances.

ii. CIRP commenced before issuance of this Special Procedure: For the debtors going under CIRP before this special procedure is introduced then fresh registration in all states and union territories in which the debtors is having GST registration, shall be obtained IRP/RP within 30 days of its appointment or 30th June 2020 whichever is later. (Transition Provision)

B. Existing Registration for Corporate Debtor: Now the question arises what about the existing registration of the debtor, CBIC has clarified through the circular that original registration shall not be cancelled, although the authorities may suspend it temporarily.

C. What action required if there is Change in IRP/RP: The IRP appointed under IBC required to form & conduct meeting of Committee of Creditors (hereinafter referred to as "COC") within 7 days of forming COC. The COC have the power to appoint through at least 66% IRP or any other person as RP. Further IRP/RP may be changed by COC. The issue came that what if the IRP/RP is changed, CBIC clarified that no fresh registration is required only amendment in non-core field is required and change in authorised signatory is only required.

D. What about Liability due before commencement of CIRP: The outstanding tax liability or any pending returns shall not be required to be filled by IRP/RP. The amount outstanding towards the Govt. shall be treated as operational debt under IBC, and the Govt. has to file claim before the IRP/RP and the dues would be discharged in accordance with Sec. 53 of IBC. It is also clarified that no coercive action will be taken for recovering the outstanding dues during the moratorium period.

E. Returns Under GST:

a. The IRP/RP after obtaining the fresh registration shall file the first return under Sec. 40 of the CGST Act 2017, for the tenure when the CIRP began till the date of obtaining the registration.

b. The IRP/RP shall forthwith be responsible to file all the returns, pay taxes etc. i.e. he has to ensure all compliances in timely manner in accordance with the GST Law.

F. Special Procedure for ITC Availment: One of the major controversy is with regards to the ITC, which is also dealt with in the said notification and further clarified in circulars issued for the period of commencement of CIRP till the date of registration.

a. What if Invoice raised on earlier GSTIN: Only for the first return, if the Invoices is issued on erstwhile GSTIN by the supplier but the supplies pertains to the period after commencement of CIRP till date of registration then, in the first return all such ITC can be duly claimed. Further relaxation in complying with the time limit as prescribed under Sec. 16 (4) of CGST Act 2017 and matching of invoices with GSTR-2A as per Rule 36(4) of the CGST Rules 2017.

b. What about supplies made through earlier GSTIN: During the period starting from date of commencement of CIRP till the date of new registration, if any supplies is made quoting erstwhile GSTIN, then the registered person receiving such supplies shall be eligible to claim ITC of the same even without complying Rule 36(4) matching with GSTR-2A.

G. Refund Under GST: Any amount deposited by IRP/RP before this notification gets effective in cash ledger of erstwhile GSTIN i.e. earlier GSTIN of the debtor shall be available for refund for the period starting from the date of appointment of IRP/RP till the date this Notification gets effective.

Thus the difficulties faced by the IRP/RP while carrying of the management of Debtor undergoing CIRP has been dealt with and an alternate mechanism to ensure the smooth running of the business of the Debtor during the CIRP as per the IRP/RP has been facilitated.

Issues & pratical difficulties in special procedure

Having a glimpse over the special procedure introduced by the govt. it is noteworthy to mention that the govt. is willing to reduce unnecessary litigation as well as to comply with various tribunal judgments. But the fact that implementation of the same would not be an easy task and there is a lack in drafting the supra stated special procedure. Some issues and legal flaw along with practical difficulties is listed herewith:

Flaws in the Special Procedure:

1. The special procedure do not prescribes or provide any clarity regarding what will happen after the CIRP period ends. Whether the GST registration so obtained would be continued or automatic cancelled or surrendered or whether cancellation application can be made. This issue need clarification on urgent basis, as now the IBC code prescribes a maximum period of 330 days including all extension under which the CIRP shall be completed by the IRP/RP.

2. Once the CIRP is completed what about the unutilized ITC available in the Electronic Credit ledger, how the same would be transferred, if not allowed to be transferred then it would be an additional burden on the debtor.

3. One more pertinent question arises here is that, the above special procedure only covers IRP/RP, so if the debtors goes into liquidation, liquidator would be appointed, Who would also face similar issues, which again would be a matter of concern to be addressed.

Practical Difficulties:

1. IRP/RP is a person who is being entrusted with various roles and responsibilities under IBC. Now an additional burden is being put on his shoulder to obtain additional registrations in each and every states and union territory in which debtors has registration within a period of 30 days of his appointment which in itself a hardship on the IRP/RP as various limits under the act also needed to be complete within short span of time, which would definitely increase the burden of IRP/RP.

2. Once IRP/RP gets the new registration then he must need to communicate the new GSTIN to all the suppliers, vendors, transporters, etc., which otherwise would affect the seamless flow of ITC and disturb the day to day operations. Apart from that other functional aspects such as replacement of letterheads, stationery, etc. with new GSTIN would need to be done

Many other issues and difficulties are there in implementing, acceptance of application put an obligation on IRP/RP to obtain new registration but the same may be challenged and revoked by the appellate tribunal then the entire effort and cost shall stand in vain. Thus, more clarity is required by the government.

Conclusion

On the quotient of above issues, special procedure and practical difficulties in implementing the new procedure it is wrong to say that government is not making efforts to smooth the proper implementation of these two new laws but a quick intervention with resolutions must be brought in by the authorities for better application of law. Thus few clarification is still needed to be addressed by the government in this regards.

The authors of this article can be reached on his email id: ashishmittal5555@gmail.com or sid93.kumar@gmail.com

[Date: 28/12/2020]

(The views expressed in this article are strictly personal)