Resolution is not a re-birth of an entity – it is simply like nursing a sick entity back to health. It is almost akin to putting the company under a quarantine – immune from onslaught of creditor actions, while the debtor and/or the creditors prepare a revival plan. The objective is that the entity revives – in which case, it is out of the isolation, and is back as a healthy entity once again.
This process is not unknown in insolvency laws world-over. However, in India, revival under insolvency framework has taken a completely unique trajectory. First was section 29A, cutting the company from its promoter-lineage for all time to come. The next was section 32A – redeeming the company from the past burden of civil as well as criminal wrongs, thereby giving it a new avatar, with a new management.
Now, the initiation of a CIRP proceeding will be akin to a new birth to 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. This is the result of the new GST rule announced on 21st March, 2020. However, the new rules do not seem to have envisaged several eventualities, and we opine the intent of giving an immunity from past liabilities might have better been carried out by appropriate administrative instructions, rather than the new registration process.
Background and the new GST registration requirement
The 39th GST council meeting held on 14th March, 2020 addressed various issues relating to extension of time for annual returns, changes in GST rates and other measures. One of the important decisions presented in the meeting was relating to the rules pertaining to entities undergoing Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC). The GST Council has notified new rules providing a special process of a new registration for CIRP companies vide notification 11/2020  on 21st March, 2020.
The move of the GST Council in notifying the said rules can be seen as a resolution of the issues/ difficulties being faced by entities under CIRP, particularly the inability to claim ITC for the CIRP period without clearing all past tax liabilities. This difficulty arose from the setting of the GST rules whereby past tax liabilities have to be cleared before seeking any input tax credit or other benefit. Thus, the intent of the above notification may be noble: to permit the revival proceedings to continue without having to be burdened with past liabilities, which, obviously, become a claim to be filed along with those of other liabilities of the corporate debtor. It seems that there have been several representations in this regard.
Assume the following situation: X Ltd goes into CIRP and a resolution professional takes over. On the date of commencement of the CIRP, X Ltd had pending GST dues of Rs. 5 crores in a particular jurisdiction. Now, during the CIRP period, the RP still makes outputs; he makes purchases too. He pays GST on the inward supplies, and charges GST on the outward supplies. He wants to make a payment of the current GST liability. However, when he makes a payment, there is an issue since utilisation of the cash ledger is first done to clear the pending dues of the Corporate debtor, post which the regular return can be filed. Thus, the RP is neither able to comply with the requirement of GST returns, nor is able to pay the GST dues during the CIRP period. In essence, the burden of the past dues continues to spill over during the CIRP period as well.
In the case of R. Ravichandran, RP vs. The Asst. Commissioner (ST) Kilpauk Assessment Circle & 12 Ors, the National Company Law Tribunal, Chennai Bench (NCLT), held that held that a corporate debtor can access its GST Portal Account for filing GST Returns generated after the commencement of the corporate insolvency resolution process (“CIRP”) period before clearing the pre-CIRP dues. The NCLT observed that blocking the access to the GST Portal will result in barring the corporate debtor to generate bills related to GST. The NCLT also stated that if the corporate debtor is allowed to run on going concern basis then it should be allowed to pay taxes as well. The NCLT also held that the Tax Authorities fall within the ambit of Operational Creditors and they can recover the GST dues, for the period prior to the CIRP, by making a claim to the resolution professional against the corporate debtor as per the provisions of IBC.
To address the above issue, the GST Council has come up with the notification with the special procedure to be followed by corporate debtors undergoing CIRP.
Overview of the Notification
The Notification provides that the registered persons who are corporate debtors as per IBC undergoing the CIRP and the management of whose affairs are being undertaken by Insolvency Resolution Professional (IRP) or Resolution Professional (RP) shall follow the procedures as explained below from the date of appointment of the IRP/RP till the period they undergo CIRP:
- Registration :
Cases initiated under IBC post 21st March, 2020
With effect from the date of appointment of IRP / RP, the entities are required to be treated as a distinct person, that is, seek a separate 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.
Let us suppose X Ltd., is registered for GST purposes in multiple states/ Union Territories (UTs)
In all, this means registration in states/ UTs where the company sells its outputs and has regstrations.
Now, if X Ltd gets into CIRP on 1st April, 2020, the IRP/RP will have to apply for a new GST registration for all the above registrations, within 30 days for commencement on CIRP.
As everyone knows, the first 30 days are also the period for transitioning from the IRP and the RP. Hence, it is not clear whether the IRP will do this job, or leave this for the RP, who may actually come into office only near-about the expiry of the 30-day period.
The registration dates back to the date of appointment of the IRP, that is, to the date of commencement of CIRP.
Cases under CIRP as on 21st March, 2020
Where the IRP/RP has been appointed prior to the date of this notification, he shall take registration within 30 days from the commencement of this notification, that is, by 20th April, 2020. The registration will date back to the date of his appointment as IRP/RP.
After obtaining registration, the person shall file the first return which shall be pertaining to period from the date of commencement of CIRP, till the date on which registration has been granted.
- Input tax credit(ITC):
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. Likewise, those persons who have acquired goods or services from the erstwhile registered period shall get input tax credit, subject to usual conditions.
There is nothing in the Notification about carried forward ITC of the erstwhile registration, as on the date of commencement of the CIRP. One would have expected that the carry-over of ITC with the corporate debtor is available for set off on the date of commencement of the CIRP, and therefore, this should have also been allowed to be availed by the newly registered entity. However, the Notification clearly mentions about “the supplies of goods or services or both, received since his appointment as IRP/RP”, which makes it clear that the benefit of the carry forward of ITC shall not be available to the new registration.
The Central Board of Indirect Taxes and Customs has issued a clarification dated 23rd March, 2020. While it seeks to address some of the concerns of CIRP entities – particularly about cancellation of registration, or taking of coercive steps by the Tax department for continuing GST defaults, it does not provide any clarity on any of the issues raised above.
The Notification of the GST Council has several gaps, and will create massive confusion.
First of all, 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. The new RP may come, say, on the 29th day of the initiation of the CIRP. The IRP had 30 days’ time for seeking new registration – which he may not have done so far. The RP will have barely a day. Therefore, the 30-day time itself is impractical.
The idea behind the Notification was to unburden the CIRP entity from the past liabilities. That could have better been done by an administrative instruction, rather than by seeking a new registration. Even if a new registration was considered logistically necessary, the same may have been optional. For instance, there may have been a carry forward of ITC, rather than unpaid taxes. Unfortunately, the Notification does not leave any discretion at all.
The opening para of the Notification talks about seeking new registration “from the date of the appointment of the IRP/RP till the period they undergo the corporate insolvency resolution process” (emphasis supplied), which seems to suggest that the new registration is a purely temporary measure, and pertains only to create a hiatus between the CIRP period, and the pre-CIRP or post-CIRP period. Does this mean that once the CIRP period is over, the erstwhile registration will once again come back to life? If that is the intent, then the very purpose of protecting the entity under CIRP from the burden of existing liability will not be fructified. If this is not the intent, then the notification should have talked about continuation of the new registration.
CIRP may result into several possible evolutionary possibilities:
- The entity may get revived under a resolution plan
- The entity may slip 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.
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. Surely there cannot be any consequence of such initiation in such cases. Hence, the IRP/RP’s office ceases immediately. In many cases, appeal orders are received after months of the initiation. So, in the meantime, the IRP/RP may have sought registration already. That new registration will now have to merge with the erstwhile registration. Once again, this is completely unnecessary burden.
The above notification may have been inspired by noble intent, but it leaves several issues unanswered.
 MA 1298/ 2019 in IBA/ 130/ 2019- https://nclt.gov.in/sites/default/files/final-orders-pdf/KIRAN%20GLOBAL%20CHEM%20LTD%20-%20MA1298%20IN%20IBA130_0.pdf
 It may be noted that prior to Amendment introduced in section 5 (12) read with 16 (1) vide IBC (Amendment) Bill, 2020, the date of appointment of IRP and commencement of CIRP did not necessarily coincide, and hence would have led to a gap in implementation of the GST registration requirements. However, given that w.e.f. 28.12.2019, the IRP shall be appointed on the same day as commencement of CIRP, the said loophole has been removed.