JUNE 08,2020

By Kevin Shah, CA

1. RECENTLY, Government notified ¹ special procedure under GST Laws for those registered persons who are Corporate Debtors under Insolvency and Bankruptcy Code, 2016 ('IBC,2016') w.r.t. registration and availment of Input Tax Credit (ITC) under Central Goods and Service Tax Act, 2017 ('CGST Act'). This was followed by a Circular ² clarifying various issues in application of the said notification. In this note we deal with various issues between implications of the said notification in consonance with IBC, 2016. Now, the initiation of CIRP proceeding will be akin to a new birth of the company, at least for GST purposes. Therefore, irrespective of whether the revival process succeeds or not, at least for GST purposes, the entity becomes clean-slate entity.

2. As per IBC 2016, when a company goes under CIRP process, moratorium starts whereby all pending litigations and dispute whether in Court of Laws or before any quasi-judicial bodies comes to a halt and the Company gets immunity from any possible future litigations. The recent change ³ i.e. Section 32A of the IBC, 2016 comes as a savior to the Corporate Debtor under CIRP. The said section immunes the Corporate Debtor from any possible actions that the government agency might take against them to recover their pre-CIRP dues etc. The said section apart from giving immunity to the present management of the Company, gives a right of re-birth to the Companies under CIRP. In case of the GST Laws, the CGST Act ⁴ is very clear that each month's liability shall be paid to the credit of the Government and where there is any default in the payment or filing returns the GST Laws shall discontinue the registration of such defaulting registered person unless the default is made good. Considering the fact that tax payment and return filing are tagged together and in view of the above restriction on filing return for the current period, if return for the past period has not been filed, the prohibition is absolute. The Corporate Debtor needs to take shelter of Section 238 of the IBC, 2016 and then deal with tax authorities.

3. The present changes under GST is an outcome of the ruling ⁵, wherein the NCLT Bench, Chennai ordered the GST Authorities to revoke cancellation of GST registration of the Corporate Debtor and directed the Tax Authorities to allow the Corporate Debtor to pay post-admission GST dues and also allowed ITC to that extent. The GST Laws being silent in this context, the Corporate Debtor had to approach the NCLT taking the shelter of Section 238 of the IBC, 2016. The Bench was of the view that:

a. Tax Authorities falls within the ambit of the Operational Creditors under the provisions of IBC, 2016;

b. Tax Authorities can claim tax dues by filing a claim before the Resolution Professional like any other Operational Creditor;

c. The aim of the IBC, 2016 is resolution of the Corporate Debtor while keeping it a going concern;

d. That IBC, 2016 being an overriding Code, GST Act shall allow the Corporate Debtor to file GST Returns without insisting on pre-admission dues.

e. That the Tax Authorities shall not raise any objections on the pretext that since no provision has been made in GST Laws or in its software to accept such accounts, the same cannot be allowed.

4. However, the new rules do not seem to have envisaged several eventualities, and we are of the view that these might be again clarified. In the notes below we have clarified the same for your reference.

Decoding relevant Notification and Circular:

5. Registration ⁶:

IRP/RP as distinct person of the Corporate Debtor:

a. Prior to the Notification, where Corporate Debtor goes under CIRP, IRP/RP has to comply with GST Laws as per the existing registration of the Corporate Debtor. IRP/RP and Corporate Debtor/Registered Person was treated as one and the same. However, with this notification, the GST Laws now treats IRP/RP as distinct person of the Corporate Debtor. But the very concept has been confused with recent circular ⁷ wherein it is clarified that the said notification was issued to devise a special procedure to overcome the requirement of sequential filing of Form GSTR-3B and that it shall be applicable only in case where the taxpayer (Corporate Debtor) have defaulted in filing returns. So does that mean that IRP/RP shall be considered as distinct person only in case where Corporate Debtor has defaulted in filing returns? It seems that there is a disconnect between the notification and the circular so issued which has created confusion.

IRP/RP appointed after Notification:

b. In such cases, IRP/RP shall take registration in each of the States or Union Territories where the corporate debtor was registered earlier, within 30 days of the appointment of the IRP/RP. However, as per the recent circular ⁸ the time period for taking registration shall be extended to 30.06.2020 or within 30 days of the appointment whichever is later.

IRP/RP Appointed before Notification:

c. In case where IRP has been already appointed prior to issue of the above notification, the IRP shall obtain registration within 30 days from the date of issue of the above-mentioned notification. However, as per the recent circular 8 the time period for taking registration shall be extended to 30.06.2020 or within 30 days of the appointment whichever is later.

Can the proper officer cancel GST registration of entities who are under CIRP process for non-filing of GST returns?

d. As per FAQs, it is clarified that the GST registration of an entity for which CIRP has been initiated should not be cancelled, in case of non-filing of returns, under the provisions of section 29 of the CGST Act, 2017. The proper officer may, if need be, suspend the registration.

What happens in case where Registration is already cancelled?

e. 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 is advised that such cancellation may be revoked by taking appropriate steps in this regard. If the same is not within the period of revocation, then an appeal may be filed against such cancellation order.

KSAA Analysis

i. Well, the instant notification, though specifies IRP/RP as a different class of person than Corporate Debtor, the said class of person shall be expressly provided in CGST Act, 2017 ⁹. Currently, CGST Act ¹⁰ enables separate registration only in case where there is a separate place of business within a State or Union Territory. The CGST Act does not explicitly specifies for taking new registration in specific case of company undergoing CIRP. The present situation does not implicate that Corporate Debtor has a new place of business. An amendment to the Act and Rules shall be awaited on this.

ii. Further, the circular clarifies that in case where registered person enters CIRP, the erstwhile GSTIN shall be suspended and where it is cancelled, the same be restored in accordance with the law. However, as per CGST Act ¹¹, GST Registration can be restored only on payment of tax and filing of returns. On a conjoint reading of the provision alongwith the circular it is imperative that past returns need to filed for activating GST registration.

iii. Further, under IBC, IRP holds a temporary position until the new RP is elected. Therefore, 30 days' time limit under GST Laws to apply for new registration seems practically unreasonable. Further, the 30 days' time after initiation of CIRP is the time for the IRP to receive claims and call for meeting of the creditors. The IRP is not firmly footed into the process, as his own appointment is not yet ratified. In many cases, the IRP is succeeded by a new RP. Therefore, whether IRP should take registration or he should leave the same for the RP to do it is still a mystery. From compliance point of view, while taking new GST registration details of the authorised person is a mandatory field which needs to be given coupled with Aadhaar Verification. In this situation, IRP/RP has to take care of the additional compliance from GST perspective. The same was recently clarified through circular ¹² that in situation where IRP and RP are not same, details of the newly appointed RP shall be added by amending the Registration. Further it is clarified that in case the amendment is not happening because of the outgoing IRP not providing details, then the Jurisdictional authority shall assist for changing the authorised signatory. However, the same is unfounded in the notification and clarifying the same vide circulars would require additional instructions to be given to the tax authorities while executing the changes. We feel there might be administrative hurdles to this which shall go beyond the time period as prescribed under IBC, 2016 for completing the CIRP.

iv. Further, the intent of the notification is clear in a way that the new registration shall be valid till the CIRP Period. However, what happens once the CIRP is over? The said notification only tries to solve the problem at the current situation in terms of filing returns and claiming ITC in case of a taxpayer is a Corporate Debtor and has undergone CIRP. A deeper clarity on this aspect from the Government is expected.

6. Returns ¹³ :

a. Once the IRP/RP obtains the registration, he has to file the first return under section 40 of the Act. Thereafter, he shall make regular compliance for the registration obtained. T he period of filing the first return shall be the period from the date of commencement of CIRP till the date on which registration has been granted. However, it is clarified that IRP/RP are not under an obligation to file returns of pre-CIRP period.

CIRP commenced before issuance of Notification

b. In case where the CIRP is commenced before the issuance of the said notification, the Circular states that IRP/RP has to file returns for those invoices which are issued with erstwhile GSTIN

Our Analysis

i. It is to be noted here that GST Laws treats every distinct person as a separate taxable person and is liable to pay GST. The said notification when read with circular implies that the first return shall be filed for those invoices which were issued bearing the erstwhile GSTIN. This may create a situation of confusion as there is no express provision in the GST Laws, stating that invoices issued under erstwhile GSTIN can be filed with different GSTIN on the Portal.

7. Input Tax Credit ¹⁴:

a. The registered person shall be eligible to avail ITC for the supplies received during the period from the date of commencement of CIRP, even though such supplies are bearing the GSTIN of the erstwhile registered person, subject, of course, to the usual conditions for availing ITC under Chapter V of the CGST Act, 2017. Likewise, those persons who have acquired goods or services from the erstwhile registered period shall get input tax credit, subject to usual conditions. Further, it is also clarified that provisions of Section 16(4) of CGST Act, 2017 w.r.t. last date to claim ITC and Sub-rule 4 of Rule 36 of the CGST Rules, 2017 w.r.t. restriction on availment of ITC shall not be applicable in this case.

KSAA Analysis

i. The restriction, conditions, time-limit for availing ITC under GST is prescribed under Chapter V of the CGST Act, 2017. Chapter V of the Act, states that ITC of inputs held in stock and semi-finished and finished goods held in stock only can be availed in case where the invoices are issued before the effective date of registration, but the same shall be subject to the conditions under Section 16(1) of the CGST Act, 2017. However, the said Chapter V never speaks of availing ITC based on a different GSTIN i.e. in the present case erstwhile GSTIN. Since, the notification gives IRP/RP status of a distinct person than the Corporate Debtor, both the GSTIN shall be different in the eyes of the law though having same PAN and therefore, availing ITC having GSTIN of the Corporate Debtor while filing returns under the new GSTIN taken by IRP/RP cannot by implication serve the purpose of availing ITC in the books of Corporate Debtor. If the intent of the said notification is to give relief to the specific class of person then appropriate amendment shall be carried out.

8. Payment ¹⁵:

a. Any payment of tax by the IRP / RP in the existing registration from the date of appointment of IRP/RP to the date of registration under the above mentioned notification shall be available as refund under the head refund of cash ledger, even though the relevant FORM GSTR-3B / GSTR-1 is not filed for the said period. The instructions contained in Circular No. 125/44/2019-GST dt. 18.11.2019 stands modified to this extent.

9. Dues under GST for pre-CIRP period ¹⁶:

a. As per the circular, no coercive actions need to be taken against the corporate debtor with respect to the dues for period prior to insolvency commencement date. 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.

Our Analysis:

i. This should not be a surprise as GST Laws ¹⁷ specifically states that where it is inconsistent with IBC, 2016, recovery of any tax dues shall be as per the provisions of the IBC, 2016. This means that tax authorities' losses their right of first charge on the property for recovery of tax dues once the registered person enter CIRP. Accordingly, Tax Dues would be treated as per Section 53 of the IBC, 2016 which ranks the payment of tax dues in 5th position after financial creditors and secured creditors. The settlement of tax dues is the least priority for the purpose of IBC, 2016.

10. Conclusion:

a. This may be a notification w.r.t addressing a special procedure for complying with GST Laws however, there are many issues as discussed above which needs to be addressed either by way of some clarification or by way of order by respective judicial authorities. Such issues are that what happens when CIRP result into any of the following:

- The entity gets revived under a resolution plan: How the instant registration taken will be surrendered and what will happen to the ITC lying in the Electronic Credit Ledger of the Corporate Debtor;

- The entity goes into liquidation;

- The CIRP proceedings may get withdrawn following the process of sec. 12A;

- The CIRP initiation itself may get reversed by NCLAT or further appeals.

b. The Notification has not envisaged what will be the consequences in each of the above situations. For example, if the CIRP proceedings get withdrawn, does it mean the erstwhile registration will once again come back to life? In that case, what will happen to the new registration? Even worse will be the case where the initiation of CIRP itself is quashed on appeal. In that case, the initiation process itself is completely erased out, so that there was no CIRP  ab initio. In such a situation, the IRP/RP's office ceases immediately and in many cases, appeal orders are received after months of the initiation. All such issues are situational based and needs to be addressed appropriately.

(The views expressed are strictly personal.)

¹ Notification No. 11/2020-CT dated 21.03.2020

² Circular No.134/04/2020-GST dated 23.03.2020

³Vide Insolvency and Bankruptcy (Amendment) Ordinance, 2019 dated 28.12.2019

⁴ Section 39(10) of the CGST Act, 2017 r/w Section 39(7) of the CGST Act, 2017

⁵ Kiran Global Chem Ltd. - 2019-TIOLCORP-12-NCLT

⁶ Notification No. 11/2020-CT dated 21.03.2020 (Pt. No. 2) r/w Circular No. 134/04/2020-GST dated 23.03.2020 (Pt. No. 2 & 4)

⁷ Circular No. 138/08/2020-GST dated 06.05.2020 (Pt. No. 2)

⁸ Circular No. 138/08/2020-GST dated 06.05.2020 (Pt. No. 1)

⁹Section 25 of the CGST Act, 2017

¹⁰ Section 25(2) read with Rule 11 of the CGST Act, 2017

¹¹Section 29 of the CGST Act, 2017

¹²Circular No. 138/08/2020-GST dated 06.05.2020 (Pt. No. 3)

¹³ Notification No. 11/2020-CT dated 21.03.2020 (Pt. No. 3) r/w Circular No. 134/04/2020-GST dated 23.03.2020 (Pt. No. 3 & 5)

¹⁴ Notification No. 11/2020-CT dated 21.03.2020 (Pt. No. 4) r/w Circular No. 134/04/2020-GST dated 23.03.2020 (Pt. No. 6 & 7)

¹⁵ Notification No. 11/2020-CT dated 21.03.2020 (Pt. No. 5) r/w Circular No. 134/04/2020-GST dated 23.03.2020 (Pt. No. 8)

¹⁶ Circular No. 134/04/2020-GST dated 23.03.2020 (Pt. No. 1)

¹⁷Section 82 of the CGST Act, 2017: "Notwithstanding anything to the contrary contained in any law for the time being in force, save as otherwise provided in the Insolvency and Bankruptcy Code, 2016, any amount payable by a taxable person or any other person on account of tax, interest or penalty which he is liable to pay to the Government shall be a first charge on the property of such taxable person or such person."