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GST Provisions to be complied with by Insolvency Resolution Professionals

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GST Provisions to be complied with by Insolvency Resolution Professionals
By: Utkarsh Desai
May 20, 2020
All Articles by: Utkarsh Desai       View Profile
  • Contents

GST Provisions relating to Corporate Insolvency Resolution Process (CIRP) to be complied with by IRP/RP

Introduction to IBC

The Government introduced Insolvency and Bankruptcy Code in 2016. The Insolvency and Bankruptcy Code (IBC) aims to follow a time bound process to resolve insolvency. When a default in repayment occurs, creditors gain control over debtor’s assets and must take decision to resolve insolvency within 180 days period. To ensure an uninterrupted resolution process, the Code also provides immunity to debtors from resolution claims of creditors during this period. The code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all class to resolve insolvency.

When IBC is triggered?

The IBC is triggered when a company defaults in making payment to creditors or bank/financial institution. Once the resolution process is initiated, government appoints an Insolvency Resolution Professional (IRP) or Resolution Professional (RP) to administer the operations of the company. Once the IRP/RP has been appointed, the management of such entity (Corporate Debtor) and all the assets of such entity vests with such IRP/RP. The IRP/RP continues to run the business operations of the said entity as a going concern till the insolvency proceedings are over and an order is passed by the National Company Law Tribunal (NCLT).

Issues in GST Compliance faced by IRPs/RPs

Section 39(1) mandatorily requires every registered person to furnish monthly return on or before 20th day of the next month. In most of the cases, when a company is undergoing Corporate Insolvency Resolution Process (CIRP in short), it becomes very difficult to for such companies to file their tax returns and pay off tax liabilities, obviously because of liquidity shortfall. Therefore, it has been observed that when CIRP has been initiated, multiple periods GST returns are pending to be filed by such companies.

Further, Section 39(10) puts another restriction that a registered person shall not be allowed to furnish a return for a tax period if the return for any of the previous tax periods has not been furnished by him.

Further, when an IRP/RP is appointed, he is required to comply with all the applicable statutes from the date of his appointment. However, if GST Returns of earlier periods are pending to be filed, the IRPs/RPs were not able to file the returns even though they wanted to file the same, because of the restriction put up by Section 39(10).

Solution to the Issue

The government also took note of the above mentioned issue and to address this issue and also to prescribe procedures for entities undergoing CIRP and whose management has been taken over by IRP/RP, the government issued Notification No 11/2020 – CT dated 21st March, 2020. As per the said notification, following procedures has been prescribed.

Special Procedures

  1. Separate Registration

Registered Persons (referred to as the erstwhile registered person), who are covered within the meaning of Corporate Debtor as per the IBC 2016 undergoing the CIRP and the management of whose affairs are being taken over by the IRP/RP, shall be treated as a distinct person of the corporate debtor and the IRP/RP is required to obtain a separate registration.

The registration is required to be obtained within 30 days of the appointment of IRP/RP. It also provides that if the IRP/RP has been appointed prior to the date of notification, i.e. 21st March, 2020, then he shall be obtain registration within 30 days of this notification, with effect from the date of his appointment as IRP/RP

  1. Returns

The notification further state that the IRP/RP after obtaining registration, is required to file the first return under Section 40. The first return shall cover the period from the date on which he becomes liable to registration to the date on which registration has been granted.

  1. Input Tax Credit

The IRP/RP is allowed to take in his first return the Input Tax Credit on inward supply of goods or services received since his appointment but bearing GSTIN of the erstwhile registered person, i.e. the Corporate Debtor, subject to the conditions of Chapter V of the CGST Act, 2017 and the Rules made thereunder, except the provisions of Section 16(4) of the Act and Rule 36(4) of the CGST Rules, 2017.

Similarly, registered persons who are receiving supplies from the said class of persons, shall for the period from the date of appointment of IRP/RP, till the date of registration as required by the said notification or thirty days from the date of this notification, whichever is earlier, be eligible to avail input tax credit on invoices issued using the GSTIN of the erstwhile registered person, subject to the conditions specified in Chapter V, except that the provisions of Rule 36(4) shall not be applicable.

This means that the IRP/RP is allowed to take input tax credit on following basis:

  • Credit can be taken even if the GSTIN on invoice is of the corporate debtor or the erstwhile registered person
  • Time limit specified in Section 16(4) is not applicable in case of first return by IRP/RP. Therefore, the credit can be availed of by IRP/RP even though the time limit specified under Section 16(4) has passed.
  • The credit can be taken without complying with the provisions of Rule 36(4). Rule 36(4) provides that a registered person is allowed to take Input Credit of only 10% in excess of what is being reflected in his GSTR 2A. Since the tax invoices will be bearing the GSTIN of the Corporate Debtor, they will not be reflected in GSTR 2A of the said class of person.
  • Further, in case of outward supplies made by the said class of person, ITC shall be allowed to be taken from the date of appointment of IRP/RP till the date of registration, even if the invoices have been issued using GSTIN of the erstwhile Corporate Debtor and accordingly Rule 36(4) is not to be complied with by the recipient in such cases.
  1. Refund of Excess Balance lying in Cash Ledger

It may so happen that in order to discharge the tax liability, the IRP/RP may have deposited funds into cash ledger of the erstwhile registered person. But since as per this notification, IRP/RP is required to obtain fresh registration and then discharge his liabilities, the amount already deposited and lying in cash ledger of erstwhile registered person remains unutilized.

Therefore, a mechanism to grant Refund from Cash Ledger has been made available. This means that the IRP/RP can take refund of cash if any deposited by him in the erstwhile GSTIN. Further, this Refund will be granted even if the returns of the erstwhile registered person have not been filed.

Some important definitions are reproduced here for better understanding:

  1. Corporate Debtor – Section 3(8) of IBC

Corporate Debtor means a corporate person who ows a debt to any person

  1. Resolution Professional – Section 3(27) of IBC

Resolution Professional means an insolvency professional appointed to conduct insolvency resolution process and includes an Interim Resolution Professional

Recent Clarifications of Matters related to timelines to be followed by IRP/RP

The CBIC has issued a Notification No 39/2020 – Central Tax dated 5th May, 2020 and a Circular No 138/08/2020 – GST dated 6th May, 2020 extending certain timelines on account of difficulties arising out of Covid 19 Pandemic. The same is explained here under:

Issue No 1: Time limit of 30 days for obtaining Fresh Registration by IRP/RP

Notification No 11/2020-CT dated 21st March, 2020 prescribed that the IRP/RP has to obtain fresh registration within 39 days of his appointment. However, on account of lockdown announced by the government due to Covid 19 Pandemic, IRPs/RPs are facing difficulties in complying to this timeline.

As a result, it has now been clarified that the IRPs/RPs can obtain separate registration

  • Within 30 days of appointment of IRP/RP or
  • By 30th June, whichever is LATER.

Hence, a relaxation up to 30th June has been given vide Notification No 39/2020-CT dated 5th May, 2020.

 

Issue No 2: Whether Fresh Registration is required even when the CIRP has filed all its returns?

The Notification No 11/2020-CT dated 21st March, 2020 requires IRPs/RPs to obtain fresh registration in each case once his appointment is made. This was mainly because of the fact that in most cases, companies undergoing liquidation have generally not filed their returns within the due dates. As a result, if all these returns are filed, the CIRP has to pay heavy late fees, interest and penalty. To avoid this, the above mentioned notification mandatorily requires IRP/RP to obtain fresh registration on his appointment.

However, certain queries were raised that what if the company has filed all its returns within the due dates? Then also IRP/RP is required to obtain fresh registration? It has been clarified that in case of companies who have filed all their returns within the due date (GSTR 3B and GSTR 1 both) and not a single return is pending as on the date, then in such cases IRPs/RPs are not required to obtain separate registration. The condition prescribed here is that all such returns should have been filed prior to the appointment of IRP/RP.

Issue No 3: Non ratification of IRP appointed and separate RP has been appointed

All the notifications and circulars issued relevant to the CIRP uses the word IRPs and RPs interchangeably. Sometimes, it may so happen that the Corporate Debtors does not ratify the IRP appointed by the Central Government and they may appoint another RP to carry out the liquidation proceedings. In such cases, the IRP and RP both will be different. An issue arose as to both the IRP as well RP in such cases are required to obtain separate registration?

In this regard, it has been clarified that in cases where the appointment of IRP has not been ratified by the company and some other RP is appointed midway, the newly appointed RP is only required to change the authorized signatory by filling an amendment in non-core field. Since non-core amendment does not required approval of tax officer, the change will be effected immediately.

However, it should also be noted that above non-core amendment can only be filed if the GST Portal credentials have been shared with the newly appointed RP. In case, the credentials have not been shared, then the RP may approach the jurisdictional tax officer and get his name added as an authorized signatory and accordingly, can get the fresh credentials.

Conclusion

Prior to Notification No 11/2020, there was no specific procedure prescribed for Corporate Debtors undergoing Insolvency Proceedings. Due to which, there was a lot of hue and cry as to how these companies would comply with the GST provisions. However, after issuance of Notification No 11/2020, there is a well-defined procedure for and further, the government has also given certain relaxations keeping in mind the difficulties faced by taxpayers at large on account of announcement of lockdown as result of Covid 19 pandemic.

However, one area where there is still not much clarity is payment of taxes in case the IRP/RP is not able to collect and make payment of GST. The liability to pay GST arises immediately as and when there is a supply. Further, the entire CIRP process is to be completed within 180 days from the date of appointment of IRP/RP as per IBC, 2016. Therefore, it means that the IRP/RP has to file all the returns, irrespective whether he has collected the taxes on supplies made or not. Therefore, in my opinion, IRP/RP will face difficulties in such situations. 

 

Article Written By

CA Utkarsh Desai    

 

By: Utkarsh Desai - May 20, 2020

 

 

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