APRIL 18, 2024

By Ms. Nupoor Agrawal, Partner and Mr. Kunal Nikumbh, Associate Partner, Lakshmikumaran & Sridharan, Attorneys

UNDER GST, a taxpayer has to undertake a number of compliances including filing of returns. Complying with such return filing requirement gets even more cumbersome for a company / Corporate Debtor who is going through insolvency proceeding,given the state of their financial and human resource situation. This article aims to deep dive into potential challenges that a Corporate Debtor may face under GST.

Compliance issues for the corporate debtor under GST

On commencement of CIRP proceedings, the foremost question faced by a corporate debtor from GST perspective is whether to continue filing GST returns through the existing GSTIN or to obtain a separate registration for the said purpose. In this regard, the CBIC had issued Notification No 11/2020 - Central Tax dated 21.03.2020 prescribing special procedure to be followed by a Corporate Debtor undergoing Corporate Insolvency Resolution Process (CIRP).

As per the aforesaid notification,a Corporate Debtor under CIRP who has filed all the previous GST returns can continue with the existing registration for all GST compliances. Whereas a Corporate Debtor who has not furnished its returns for any of the tax periods prior to the appointment of the insolvency resolution professional (IRP), shall have to obtain a new GST registration after appointment of IRP.

One may argue that the practical fall-out of the abovementioned requirement is that it not only differentiates between the Corporate Debtors who have filed all previous returns versus those who have failed to do so, but also indirectly differentiates inter-se between two Corporate Debtor(s)who have not filed previous returns,solely on the basis of date of commencement of CIRP proceedings. This can be better understood with the following example-

i) The due date of filing monthly GST return (GSTR-3B) for a particular month is 20th of the next month. Now, take a situation where a Corporate Debtor who has filed returns for all the tax periods (except for the previous month) and CIRP proceedings commences before the due date of filing GST return for the last month before CIRP. For example, if the moratorium is imposed w.e.f. 5th of a month, then since the Corporate Debtor may not have filed GST return for the last tax period before the moratorium period commenced, he would be mandatorily required to obtain a new registration, without having an opportunity to file GST return for the last tax period.

ii) On the other hand, if the Corporate Debtor enters the moratorium period after the due date of filing GST return for the last month before CIRP, he would have had the chance to file GST return for all the past periods and, accordingly, would not be required to obtain a new registration under the notification.

Thus, a strict interpretation of the aforesaid notification may result in different outcomes for the same class of Corporate Debtors (i.e. the ones who have not filed the GST return for last month before CIRP commencement).

Another point of concern for a Corporate Debtor is the utilization of accumulated input tax credit lying with him as on the date of commencement of CIRP. In cases where a Corporate Debtor who is required to obtain new registration, the aforesaid notification as it exists today, does not specifically provide any guidance on how to utilize the input tax credit lying in his old GST registration for making payment of output GST under the new registration. If the corporate debtor is not able to utilize the input tax credit lying with him as on the date of commencement of CIRP, it may lead to working capital issues for a company already grappling with CIRP proceedings. Since this issue has a direct bearing on the financial capacity of the corporate debtors, the assessees may consider making a representation to the GST Council seeking an appropriate clarification in this regard.

Further, on commencement of the moratorium period, a Corporate Debtor is not allowed to make payments towards any liability or debt accrued for the past period. In such case, one may wonder as to how a Corporate Debtor, in whose case moratorium is imposed mid-month, would file the GST returns for the said month – where part of the month falls under the moratorium period and part of it is prior to the moratorium. In such cases, the Corporate Debtor who is required to obtain a new registration can – (i) furnish the details of outward supply made during the first part of the month in Form GSTR-1 under the old GSTIN without making any actual payment vide Form GSTR-3B for the said part of the month; and (ii) Furnish both GSTR-1 and GSTR-3B by making payment of tax under the new GSTIN for the period after moratorium is imposed. The position may be slightly complicated for the Corporate Debtor who continues with the same GSTIN, since they would be filing a single return for the entire month but would not be allowed to pay tax for that part of the month which falls before the date of commencement of moratorium period.

Power of assessment during the moratorium period

Section 14 of the Insolvency and Bankruptcy Code prohibits institution of any suits or continuation of pending suits or proceedings including execution of order of any court, tribunal or any other authority, against the Corporate Debtor.

The NCLT, Kochi bench [IA(IBC)/141/KOB/2023 in CP(IBC)/06/KOB/2022 decided on 26.07.2023 – Mango meadows Agricultural Pleasure Land Private Limited] reprimanded the GST department for conducting raids at the premises of the Corporate Debtor and seizing documents and books of accounts while the Corporate Debtor was undergoing the moratorium period. In another case, the Karnataka High Court [As so Décor (2022) 1 Cen 174(Kar.)] held that any proceedings pursuant to any show cause notice or intimation notice issued to the Corporate Debtor shall be stayed/suspended till the disposal of the CIRP ongoing proceeding against the Corporate Debtor. A perusal of the above judgments shows that, the intention of the IBC seems to be clear, that once CIRP proceedings are initiated against a Corporate Debtor, the tax department would not have recourse to either conduct raids at the premises of the Corporate Debtor, nor pursue any recovery proceeding with respect to the tax dues against the Corporate Debtor.

This understanding seems to have seeped in through the earlier legislation governing the issue viz. the Companies Act, 1956. Under the erstwhile Companies Act, 1956, once the official liquidator was appointed, section 446 of said Act barred the initiation of fresh suit or legal proceeding as well as continuation of pending suit or legal proceedings, except by leave of the Court . While interpreting the said provision, the Supreme court and various High courts had time and again maintained that although the department may be allowed to carry out assessment proceedings against a Corporate Debtor in order to ascertain the tax liability, no recovery proceedings can be allowed during the insolvency proceedings, except with the leave of the court. The reasoning behind this stand taken by the courts was to allow the department to ascertain amounts due from the Corporate Debtor, but for which it would be impossible for the for the department to stake their claim before the resolution authority. Today, under the IBC, the restriction on initiation and continuation of legal proceedings is a blanket one, without any provision for obtaining leave of court. However, the nature of restriction under both the laws remains the same.

Having said that, the moot question is what should a corporate debtor do if he is served with an intimation notice or summons from GST department after the moratorium is imposed? While the answer to this may depend on independent examination of facts and nature of proceeding in each case, the interested assesses can make representation to the Finance Ministry for issuing guidance as to what extent the department officials can exercise their powers during the moratorium period.

[The views expressed are strictly personal.]