Road to an IBC friendly GST
1. Brought in May, 2016 the Insolvency & Bankruptcy Code, 2016 (IBC) was brought in to consolidate laws relating to reorganization and insolvency resolution of LLPs, corporate persons, etc. After 3 and a half years of having been passed as a legislation, it has made significant progress in maximizing value of distressed assets and improving resolution times for organizations under insolvency. Halfway through 2019, the recovery rate for cases resolved through IBC has been 43%, a 17% increase as compared to 26% recovered in 2018 through pre-IBC mechanisms. Till January, 2019, 4452 cases where the total amount settled is pegged at 2.02 lakh crores, were disposed of at pre-admission stage under the IBC mechanism. This demonstrates the shift in the narrative of companies in distress. No longer the creditor is left chasing the debtor. Balance of power has been shifted from the borrower to the creditor by introduction of IBC. The Supreme Court has upheld constitutional validity of IBC in Swiss Ribbons Pvt. Ltd v. Union of India  101 taxmann.com 389/152 SCL 365 (SC) thereby clearing the way for its unimpeded implementation. Scope for improvement
2. The above facts demonstrate that IBC has made significant progress in maximizing value of assets of organizations under distress. Having said that, areas remain which require improvement. For instance, the average resolution time of 324 days is still slower than the 270 days prescribed in the Code. Even though the IBC legislation through section 238 categorically states that IBC shall override any other law inconsistent with provisions of IBC, practical challenges with respect to other laws have not only slowed down resolution processes but in many cases, have impeded the actual procedure. There exists a need to streamline other laws in accordance with IBC thereby smoothening out the resolution processes. The Goods and Service Tax (GST) is one of those laws the streamlining of which has become necessary in light of issues faced by organizations under IBC resolution. This author in article published in Corporate Professionals Today1 has provided an overview of different aspects relating to GST liability of companies under liquidation. The following paragraphs offer in depth analysis of the key issues being faced by such companies with regard to GST and suggestions on how to resolve the problem areas. GST vs IBC
3. Under IBC, once a Corporate Insolvency Resolution Process (CIRP) has been triggered, the management of such Corporate Debtor (CD) and its assets vests with the Insolvency Professional (IP). The Interim Resolution Professional (IRP) becomes duty bound and responsible for all compliance with laws. Following are the key areas in GST where difficulties have arisen for companies under CIRP - (i) Payment of GST dues of CIRP period – The Corporate Debtor has to pay net GST liability from the date of commencement of CIRP till its completion. However, the CD is unable to do so because the GST portal does not allow payment of dues of such period unless arrears are paid for the period prior to commencement of CIRP. This issue was raised in the National Companies Law Tribunal (NCLT) in matter of T.R. Ravichandran, RP (Kiran Global Chem Ltd.) v. Asstt. CST2 where the Division Bench held that the CD must be allowed to pay net GST liability for CIRP period without having to pay arrears for period prior to the CIRP. It was made clear in the order that the GST authorities must allow availment of ITC (Input Tax Credit) when liability is calculated. Argument of revenue that no provision exists under GST law to accept payment of GST without clearing previous arrears was rejected by the NCLT because if such argument is accepted the purpose of CIRP of maintaining the CD as a going concern would be defeated thereby making the entire process meaningless. This is also an issue since under GST law, if tax is not paid for a period, payment of subsequent period can only be made once penalty on arrears is also paid. (ii) Cancellation of Registration and License – As per section 29(2)(c) of CGST Act, registration of a person may be cancelled if no returns have been furnished for consecutive period of 6 months. In certain cases, before the CIRP is triggered, due to business being under stress the CD has not furnished returns for 6 months in a row and as a result cancellation orders of their registrations are passed. This makes payment of net GST liability impossible for period of CIRP. In addition, without a valid GST license, the CD would be unable to issue proper invoices bringing the entire business to a standstill. (iii) Moratorium – As per sections 13 and 14 of IBC, post admission of application of CIRP, a moratorium period is declared vide Insolvency Commencement Order inter alia prohibiting institution of suits or continuing of pending suits or proceedings against that CD including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority. However, practical reality being faced by many CDs under CIRP is that they are receiving notices of coercive action being taken against them by GST authorities. Such actions include cancellation of GST registration/license, demanding deposit of GST dues prior to Insolvency commencement date, not allowing GST returns to be filed for CIRP period, levying penalty for non-compliance, etc.
4. Possible Solutions (1) Streamline GST portal – Need of the hour is to create suitable mechanism within the GST portal for persons undergoing CIRP to pay dues for specific period of CIRP without having to pay arrears pertaining to prior period. Suitable amendments to GST law are required to ensure CDs are able to file GST returns in CIRP period thereby maintaining their status as a going concern. (2) Non cancellation or reversal of cancellation – Suitable amendments to section 29 of CGST Act may be made wherein special exception is carved out providing for non-cancellation of registrations of persons who didn't file return for 6 consecutive months but are able to show, in a reasonable timeframe, that they are now under CIRP. In situations where cancellation order is passed, it may be revoked under section 30 of CGST Act which allows for revocation of cancellation order. It would be helpful if via amendment the time limit for application for revocation of cancellation order is increased from existing 30 days to a larger period for persons undergoing CIRP. (3) Implementation of Moratorium – It is imperative that through suitable amendments to GST laws, immunity is granted to CDs from any penalty or prosecution in respect of non-compliance under GST laws thereby respecting mandate of section 13 and 14 of IBC. Furthermore, any penalties imposed on CD on account of delayed filing of returns or payment of tax dues should be waived to uphold the true spirit of moratorium under IBC. This will also be keeping in line with Section 238 of IBC which gives provisions of IBC overriding affect overall other laws. (4) Timely filing of proof of claim – Resolution procedure under IBC would speed up if GST authorities would file proof of claim with respect to pending dues of the CD pertaining to period prior to Insolvency Commencement Date with IRP in a time bound manner. (5) Outreach program – The above mentioned suggestions, implemented through amendments in legislation will not solely be enough. Actual implementation of these changes has to be done by the GST officers. It is suggested that suitable circulars are issued and awareness spread among officers actually implementing the law regarding situations faced by CDs undergoing CIRP so that their issues are resolved in an efficient and time bound manner. Conclusion
5. IBC in its own has been a remarkable legislation in maximizing value of assets under distress and providing for resolution of organizations in insolvency. However, no law exists in a vacuum and the effectiveness and efficiency of IBC also depends on how much other laws work in consonance with it. Better functioning of IBC through a streamlined GST is not only beneficial to the CDs but also to the Government. Cancellation of registration leads to loss of revenue for the Government as CDs are unable to pay dues with respect to CIRP period. In addition, without a valid GST registration no invoice can be issued which brings business of such CD to a standstill. If roadblocks pertaining to GST are resolved, not only would resolution processes become faster, implementation of procedures under IBC would also become smoother, and Government would start getting revenue from such organizations and, thus, it would benefit all parties involved.