Companies undergoing insolvency resolution are facing hardships due to probable clash of GST with IBC
By Rajat Mohan
The introduction of GST has been described as India’s biggest tax reform, and the Insolvency and Bankruptcy Code (IBC) is a landmark contemporary law that has just begun to be assessed for efficacy. While GST subsumed various indirect tax payments into one, reducing the compliance burden on the taxpayers, IBC reduced the number of days needed to liquidate a company. IBC is also expected to resolve the prevailing non-performing asset crisis, which would positively impact availability of bank credit in the long term.
Companies undergoing insolvency resolution are facing hardships due to probable clash of GST with IBC. Under IBC, there is a mechanism for distribution of assets during insolvency resolution. Companies going for resolution have crystallised liabilities that are much higher than liquid assets. Under the resolution plan, all creditors get a fraction of their outstanding dues in accordance with the mechanism in the code itself. Under IBC, assets are distributed in the order of priority as defined in the provisions of the code, irrespective of the provisions under any other legislation.
The Andhra High Court, in case Leo Edibles & Fats Limited vs The Tax Recovery Officer, held that the income-tax department cannot claim any priority on the ground that the order of attachment of assets is issued by them prior to the initiation of liquidation proceedings. Thereby, the same reasoning should be made applicable for indirect tax dues as well. Besides, no provision exists in IBC that requires setting aside assets exclusively for the payment of outstanding tax dues.
Under IBC, there is a moratorium; companies don’t have to pay past outstanding taxes after a defined point. In several cases, the direct tax department has not been able to claim past taxes from companies under the resolution process. Tax demands as high as several crores related to income tax or transfer-pricing adjustments have been put on hold. On the other hand, under GST, old tax dues need to be paid before we can walk towards present/future dues. GSTN has developed GST mechanics in such a way that taxpayers are required to declare and pay taxes up to date before they move towards filing of present-day compliances. This leads to genuine hardship for companies going through resolution.
Legally speaking, IBC is overarching and takes precedence over all other demands from tax departments or any other creditors. But Indian tax authorities work on a one-way communication—they desist to read and accept other legislations unless the same is upheld by a judicial body.
Indian conglomerates like Essar Steel, Bhushan Steel, Bhushan Power & Steel, Alok Industries, Monnet Ispat, Lanco Infratech and Jet Airways have been pushed by RBI towards NCLT for a resolution process. These companies have debt worth billions of dollars, besides other contractual and government payables. Now these companies are under IBC rules, which cannot be overlooked even if they are locking horns with the tax department. These companies are already under financial and legal stress, and cannot afford to flout IBC regulations. Thus, companies going through a resolution scheme and insolvency professionals may, in the future, plan to challenge gaps in GST law and an order shall be taken from the judiciary before tax authorities begin to attach the bank accounts of such companies.
Reforms are also required under GST law so as to optimise the benefits to ailing companies and bring the same in line with IBC. One more GST-related issue needs to be clarified by tax authorities, i.e. tax-neutral status of transfer of business in special circumstances as a going concern. But there is a need for a special circular on transfer of business under the ‘resolution plan’, clarifying the circumstances under which no GST would be made applicable to such transactions.
The key motive behind introducing IBC was early corporate debt resolution in a timely manner and value maximisation of the assets to promote entrepreneurship, availability of bank credits and due payment to creditors. Corporate assets, private or public, are national assets that need to be saved so they can contribute to national income and generate jobs. IBC and GST disagreement needs to be addressed by way of formal communication from the ministry of finance and the ministry of corporate affairs to promote ‘ease of doing business’ and save corporates from extinction.
The author is senior partner, AMRG & Associates. Views are personal.