Special procedure to be followed by Companies under Insolvency and Bankruptcy Code, 2016

[Kashish Gupta]

• The Central Board of Indirect Taxes and Customs (CBIC) has prescribed a special procedure for the corporate debtors who are undergoing Corporate Insolvency Resolution Process (CIRP) under the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) via Notification No. 11/2020–Central Tax dated 21^st March, 2020 issued vide G.S.R. 194(E) to remove bottlenecks, to streamline the Corporate Insolvency Resolution Process (CIRP) and to protect last mile funding in order to boost investment in financially distressed sectors and take care of the trade requirements. Further, these provisions have been clarified vide Circular Number 134/04/2020 – GST dated 23^rd March, 2020.

• It may be noted that recently the provisions related to cancellation of registration was amended to include the suspension thereof within its fold so that businesses do not hamper; still, the field of persons undergoing the CIRP was not properly addressed on account of the following reasons:

1. Once, a person undergoes the proceedings of CIRP, the resolution vests with the Interim Resolution Professional (IRP) / Resolution Professional (RP)
2. Insolvency and Bankruptcy Code, 2016 requires IRP/RP to run the business and operations of the entity as a going concern till the insolvency proceeding is over and an order is passed by National Company Law Tribunal (NCLT). Holding a valid GST registration and ability to generate E-Way Bill is crucial to carry on business of company as going concern.
3. As per provisions of GST law, a company cannot pay current dues while keeping old dues pending as section 39 prohibits filing of current period returns unless returns of old tax period are filed. Such non-filing leads to cancellation of registration under section 29(2) and blocking of E-Way Bill generation in terms of rule 138E of CGST/SGST Rules, 2017. All this hampers carrying on business as a going concern.

Recent decision by NCLT which lead to notification of special procedure under GST law

• In the matter of Videocon Group v. CGST Department, TS-54-Tribunal-2020(Mum)-NT, prayers were made that as far as GST compliances are concerned, the department may be directed not to take any coercive measures including the cancellation of the registration. Accordingly, NCLT directed CGST department to refrain from cancelling registration, re-open E Way Bill generation facility and accept GST payments.

• In the similar matter of KIRAN GLOBAL CHEM LIMITED, T.R. RAVICHANDRAN, RP FOR (KIRAN GLOBAL CHEM LIMITED) VERSUS THE ASST. COMMISSIONER (ST) KILPAUK ASSESSMENT CIRCLE & 12 ORS. [2019 (12) TMI 649 - NATIONAL COMPANY LAW TRIBUNAL - CHENNAI BENCH], NCLT held that tax authorities are operational creditors and as they may file claims before the RP instead of insisting the RP to pay pre-admission dues before accepting tax payments for the period of Corporate Insolvency Resolution Process (CIRP). Under GST law, no exception has been created to allow a person to pay tax and file return of current period pending default of the past period. Such exception should have been created visualising directions from courts and the same is intended to be created now.
• In the case of R. Ravichandran, RP vs. The Asst. Commissioner (ST) Kilpauk Assessment Circle & 12 Ors[2], the National Company Law Tribunal, Chennai Bench (NCLT), held that held that a Corporate Debtor can access its GST Portal for filing GST Returns generated after the commencement of the CIRP period before clearing the pre-CIRP dues i.e., its past liabilities. The NCLT observed that blocking the access to the GST Portal will result in barring the corporate debtor to generate bills related to GST. The NCLT also stated that if the corporate debtor is allowed to run on going concern basis then it should be allowed to pay taxes as well. The NCLT also held that the Tax Authorities fall within the ambit of Operational Creditors and they can recover the GST dues, for the period prior to the CIRP, by making a claim to the resolution professional against the corporate debtor as per the provisions of IBC.

• Accordingly, the said matter was discussed in the 39^th GST Council meeting that happened on Saturday, 14^th March, 2020 at New Delhi and it was decided to issue a clarification and necessary amendments in the law. Hence, the said amendments has been brought in to force and are explained below:

New Registration

• Effective date: With effect from date of appointment of IRP/RP
• Status: Company shall be treated as distinct person of the corporate debtor
• Registration: New Registration shall be taken in each of the states or union territories where the corporate debtor was registered earlier.
• Time period to take registration: The registered person shall take registration within 30 days of appointment of IRP/RP. In case IRP/RP has been appointed prior to 21^st March, 2020, then said 30 days shall be counted from 21^st March, 2020 i.e. registration shall be taken on or  before 20^th April, 2020.

Old Registration

• No Cancellation. It has been clarified that GST registration of an entity for which CIRP has been initiated should not be cancelled under the provisions of section 29 of the CGST Act, 2017.
• Suspension can be done. The proper officer may, if need be, suspend the registration.
• Revocation of already cancelled registrations. In case the registration of an entity undergoing CIRP has already been cancelled and it is within the period of revocation of cancellation of registration, it has been advised that such cancellation may be revoked by taking appropriate steps in this regard.

Return by new GSTIN

• First Return: First return under section 40 shall be filed for the period starting from effective date of registration (i.e. appointment of IRP/RP) till the date of grant of registration.
• Regular Returns: Regular periodic returns (i.e. GSTR-1 by 11^th day of month succeeding the tax period and GSTR-3B by 20^th day of the month succeeding the tax period) under section 37-39 shall be filed for the period starting from grant of registration till end of CIRP period.
• In accordance with the provisions of IBC, 2016, the IRP/RP is under obligation to comply with all legal requirements for period after the Insolvency commencement date.
• The IRP/RP are not under an obligation to file returns of pre-admission/CIRP period.

Input Tax Credit by new GSTIN

• First Return: ITC shall be allowed even if the invoices are addressed in the name of old registration and bearing the earlier GSTIN of the corporate debtor. It shall be availed in first return to be filed under section 40. The provisions regarding section 16(4) of the CGST Act, 2017 i.e. the time limit to avail credit and rule 36(4) of the CGST Rules i.e. availing credit to the extent of 110% of eligible credit shall not be applicable.
• Regular Return: The credit for the period following period covered in first return, shall be availed in regular returns and provisions regarding section 16(4) of the CGST Act, 2017 and rule 36(4) of the CGST Rules shall not be applicable.
• For availing ITC, all general conditions, notifications and rules shall be applicable except to the extent as stated above.

Input Tax Credit by recipient of supplies from Corporate Debtor

• In respect of supplies reported in first return: This covers the input tax credit for the period starting from appointment of IRP/RP till the date of grant of registration or 30 days from the date of notification, whichever is earlier. The credit shall be available even if old GSTIN is mentioned on the invoices. Further, provisions rule 36(4) of the Rules shall not be applicable.
• In respect of supplies reported in regular returns: The registered customers of corporate debtor would get the ITC from the date of new registration only if the new GSTIN is used for raising the invoices. For such period, provisions of rule 36(4) shall also be applicable on them.

Refund of the balance lying in electronic cash ledger

• Refund of cash deposited in electronic cash ledger of erstwhile registration is allowed.

• Said deposit should be made between the periods starting from appointment of IRP/RP till the date of grant of registration in terms of this notification.
• Said refund shall be claimed by erstwhile registered person.

Recovery of dues for pre-CIRP period

• Prohibition on institution of suits or continuation of pending proceedings: Section 14 of the IBC mandates the imposition of a moratorium period, wherein the institution of suits or continuation of pending suits or proceedings against the corporate debtor is prohibited.
• No coercive action to be taken: In accordance with provisions of IBC and legal pronouncements on the issue, no coercive action can be taken against corporate debtor with respect to the dues for period prior to insolvency commencement date.

• Department may file claims before NCLT: The dues of the period prior to the commencement of CIRP will be treated as ‘operational debt’ and claims may be filed by the proper officer before the NCLT in accordance with the provisions of the IBC. The tax officers shall seek the details of supplies made / received and total tax dues pending from the corporate debtor to file the claim before the NCLT.

Present notification seems to bridging the gap between pre-CIRP and post-CIRP period

• The opening para of the Notification speaks about seeking new registration “from the date of the appointment of the IRP/RP till the period they undergo the corporate insolvency resolution process”, which portrays to suggest that the new registration is a temporary plan and pertains only to create an interruption between the CIRP period and both the pre-CIRP or post-CIRP period.
• Therefore, the manner in which compliances would be ensured by registered person under normal registration once this period would end is still unanswered.

Conclusion

The move of the GST Council can be viewed as an intention to resolve the difficulties being faced by the entities under CIRP, especially the inability to claim input tax credit for the CIRP period on account of cancellation of registration by the GST department. This adversity arose from the provisions of GST law which though provides for suspension of registration but left the no sigh of relief for registered persons undergoing moratorium period under IBC. Thus, the present notification has come with noble intentions; to allow the revival proceedings to continue further without any impact on ensuring routine compliances by the company.

(Assisted by: Ms Sanskriti Naruka, a student of Institute of Chartered Accountants of India)