JANUARY 28, 2020

By Ankita Shah, Associate Director, & Nidhi Gada, Senior Associate, Mazars India LLP

AS the Union Finance Minister gets ready to present the budget for fiscal 2020-21, the pre-budget consultations with the representatives of different industry sectors could find their way into FM's budget speech on 1st February, 2020.

One of the key issues that Industry Captains want the FM to address is the alignment of the Goods & Services Tax ('GST') Law with the Insolvency and the Bankruptcy Code, 2016 ('the Code').

The Code provides for the order of distribution of the proceeds from sale of assets and the manner in which the past tax dues will be paid. While the Code is enacted to provide a legal framework for timely resolution of insolvency and bankruptcy proceedings which would promote entrepreneurship and is seen as a panacea plaguing the beleaguered domestic industry, it is the inability to pay taxes and non-availability of input tax credits under GST that is threatening to take the charm out of a radical business reform introduced in recent times in India.

Section 238 of the Code states that in case of any inconsistency, the Code will override other laws:

"The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law."

However, it is pertinent to note that in its present form, the GST Law does not provide for any specific provision pertaining to payment of taxes to facilitate businesses facing insolvency and bankruptcy proceedings.

As per section 39(10) of the Central Goods and Services Tax, 2017: "A registered person shall not be allowed to furnish a return for a tax period if the return for any of the previous tax period/s have not been furnished by him". Since return filing and tax payment is closely linked under GST, taxpayers are not allowed to discharge their current GST dues unless past GST dues are discharged. It is this provision that is causing the most discomfort to companies opting for resolution under the Code.

In its recent judgment,¹ the National Company Law Tribunal, Chennai, directed the GST Authorities to allow the Corporate Debtor to access the GST portal to discharge the current tax dues without requiring it to discharge the tax dues pertaining to the period prior to commencement of the Corporate Insolvency Resolution Process.

The Tribunal held that, " As to the provisions of GST Act, since section 238 of the Insolvency and Bankruptcy Code having categorically mentioned that IBC will have over riding effect on all other laws which are in contravention to the provisions of the IBC, R1 cannot raise an objection saying since no provisions has been made in GST or in its software to accept such accounts, the business happening in the market after initiation of CIRP through debtor company will come to stand still and in such situation no company under CIRP can function as a going concern. "

While the Tribunal Order only has persuasive value on the GST Commissioner having jurisdiction over the Petitioner in the case cited, this order clearly demonstrates the present and clear need to undertake an amendment in the GST Law to incorporate a proviso under Section 39(10) that could make an exception in case of a registered person who has opted for proceeding under the Code so as to allow such persons to discharge their current tax dues without compelling the taxpayer to discharge the past tax dues, so as to align the GST law with the Code.

If the amendment in the GST Law as discussed above, comes in the form of FMs proposal in the Union Budget 2020, it would be seen as timely and pro-active on the part of the Government.

(The views expressed are strictly personal.)

¹ T.R. Ravichandran, RP vs The Assistant Commissioner (ST) & Ors (MA/1298/2019 In IBA/130/2019)