IMPACT OF GST UNDER IBC CODE

[Dr. Sanjiv Agarwal]

Since its inception, IBC has transformed by way of several amendments brought facing practical difficulties once the law was implemented. However, some gaps remain regarding the treatment and transparency under GST Law. IBC proposes a concept of ‘Resolution Plan’ wherein an applicant proposes a plan to take over the corporate debtor as a going concern. Further, the interim resolution professional is required to take necessary action to protect and preserve the value of property of the corporate debtor and manage the operations of the corporate debtor as a going concern.

The question of discharging of GST liability on such a transfer/sale as a going concern has not been addressed under IBC-may be it was not envisaged at that point of time. However, in the case of IN RE : M/S RAJASHRI FOODS PVT. LTD [2018 (5) TMI 1651 - AUTHORITY FOR ADVANCE RULING - KARNATAKA], the issue was discussed and the concept of going concern was interpreted as “A going concern is a concept of accounting and applies to the business of the company as a whole. Transfer of a going concern means transfer of a running business which is capable of being carried on by the purchaser as an independent business. Such transfer of business as a whole will comprise comprehensive transfer of immovable property, goods and transfer of unexecuted orders, employees, goodwill etc. In the instant case, the Applicant has not furnished any documentary evidence to establish that the Applicant is a going concern except their admission that its an ongoing business and the transaction proposes to transfer all the assets and liabilities to the new owner. It implies that the business will continue in the new hands with regularity and a nature of permanency.” The Authority held that the transaction of transfer of business of one of the units of the Applicant in the nature of a going concern does not amount to supply of service as per definition of supply u/s 7 of the GST law.

Notification No. 12/2017- Central Tax (Rate), dated 28 June, 2017 which provides for exemptions under GST also stipulates that no GST is payable on services by way of transfer of a going concern, as a whole or an independent part thereof. The same was the position under Service Tax regime also.

While ‘supply’ is defined in section 7 of CGST Act, ‘taxable supply’ means a supply of goods or services or both which is leviable to GST. The terms ‘supply’ has been defined in an inclusive manner and includes:

1. all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
2. import of services for a consideration whether or not in the course or furtherance of business .
3. the activities specified in Schedule I, made or agreed to be made without a consideration.

Further, activities or transactions specified in Schedule III and such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified. Such supplies shall be taxable subject to exemptions notified under the Act.

Another issue of concern is the taxation of services provided by Resolution Professional (RP). IBC provides no direction as to treatment of these services provided by an Insolvency Professional in the entire process but taxability has to be determined under tax laws. A RP is not only the captain of a sinking ship, he / she is also the captain that has to bring the ship to shore. GST law provides ‘Insolvency, and receivership services’ classified under the heading 9982 40 and are chargeable at the GST rate of 18%. Along with taxation rates for RPs, the other professionals that the RP hires in the insolvency process such as a lawyer, accountants, registered valuers etc. are also subject to levy of GST on such services as per the GST rates applicable to the services they provide. The same is true for liquidation and all the professionals hired in the liquidation process. 

The corporate debtor also gets Input Tax Credit (ITC) under the GST law u/s 16-17 of the GST Act, 2017. However, such ITC is subject to certain conditions and restrictions.  GST law also envisages that all past dues should be cleared in order to claim the benefit of Input Tax Credit (ITC).   Another controversy is on registration u/s 22-27 of GST Act. Every taxable person is required to be registered under the GST law. The issue is who should get registered. The corporate debtor, the petitioner, insolvency professional or the liquidator?

Central Board of Indirect Taxes and Customs (CBIC) had issued a Notification No. 11/2020-CT dated on 23rd March, 2020 for the procedure. Subsequently, a Circular No. 134/04/2020-GST was also issued to clarify the issues in relation to GST in the Insolvency Process.

The Notification provided for special procedures for corporate debtors, the management of whose affairs is being undertaken by an RP, which are to be followed from the date of the appointment of the RP. It prescribes that, ‘The said class of persons shall, with effect from the date of appointment of IRP / RP, be treated as a distinct person of the corporate debtor, and shall be liable to take a new registration (hereinafter referred to as the new registration) in each of the States or Union territories where the corporate debtor was registered earlier, within thirty days of the appointment of the IRP/RP’. It lays down the procedure for GST Registration w.r.t. the corporate debtor shall, with effect from the date of appointment of RP, be treated as a distinct person of the corporate debtor and IRP/RP shall be liable to take a new registration in each of the States or Union Territories in which the corporate debtor was previously registered, within thirty days of the appointment of their appointment.

In relation to the issues relating to Input Tax Credit (ITC) being faced by the Corporate Debtors and its customers, in case of it being a going concern, the Notification clarified that ITC on invoices received since the appointment of RP, but bearing the GST Identification Number (GSTIN) of the erstwhile Corporate Debtor, shall be available to the said Distinct Person, notwithstanding the time limit specified under the GST law for availing such ITC or the fact that such invoices do not appear in Form GSTR-2A of such person. With respect to the consumers, they shall be allowed to avail ITC on invoices issued using the GSTIN of the erstwhile corporate debtor. This shall be applicable for supplies received in the period between the date of appointment of RP and the date of registration of such Distinct Person, notwithstanding the fact that such invoices do not appear in Form GSTR-2A of such customers.

On registration, it provided for class of persons who shall follow specific procedure for registration from the date of appointment as RP or IRP from the date of appointment. Such persons with effect from the date of appointment of IRP / RP, be treated as a distinct person of the corporate debtor, and shall be liable to take a new registration (hereinafter referred to as the new registration)in each of the States or Union territories where the corporate debtor was registered earlier, within thirty days of the appointment of the IRP/RP. In cases where the IRP/RP has been appointed prior to the date of this notification, he shall take registration within thirty days from the commencement of this notification, with effect from date of his appointment as IRP/RP.

On the issue of returns being filed, it was reiterated that any amount deposited in the cash ledger of the earlier GSTIN by the IRP/RP is available for a refund from the date of appointment of IRP till the date of notification specifying a special procedure for corporate debtors undergoing insolvency.

With the providing of clarity on the procedural and registration aspects of the GST filing and return process, the questions that remain unanswered were shed light on through a Circular by providing answers to question like the treatment of GST pre and post CIRP. Some important aspects that the Circular clarified on are as follows:

• RP is not under an obligation to file returns pertaining to the pre-CIRP period. However, the RP shall be liable to furnish returns, make payment of taxes and comply with all other provisions of the GST laws during the CIRP period.

• 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 IRP/RP will be liable to furnish returns, make payment of tax and comply with all the provisions of the GST law during CIRP period.

• To avail ITC of invoices issued to the erstwhile Corporate Debtor in case IRP/RP has been appointed before issuance of the notification, are required to file their first return as per Section 40. They can claim ITC on such supplies subject to the conditions specified under Chapter V of the CGST Act and rules made thereunder.

• Any amount deposited in the cash ledger by the IRP/RP, in the existing registration, from the date of appointment of IRP / RP to the date of notification specifying the special procedure for corporate debtors undergoing CIRP, shall be available for refund to the erstwhile registration under the head refund of cash ledger.

The Government should intervene to provide provisions that shed light on the path to be taken while dealing with GST Laws pre and post CIRP and the Adjudicating Authority to fill the gaps and ensure harmony in the provisions.