Interplay of Section 31 of IBC and Section 16 of CGST Act
Table of Contents
The Insolvency and Bankruptcy Code (IBC), enacted in 2016, ensures to resolve the insolvency of corporate persons, partnership firms and individuals in a time bound manner. It also provides a “clean slate” for corporate debtors through Interplay of Section 31, extinguishing liabilities not included in an approved resolution plan. However, this principle conflicts with the Central Goods and Services Tax (CGST) Act, 2017, particularly regarding the treatment of pending tax liabilities, as tax authorities may seek to recover dues even after a resolution plan’s approval. The interplay between section 31 of the IBC and section 16 of the CGST Act is significant because section 16 mandates that tax authorities must issue intimation for any reduction in demand, which, when linked to IBC proceedings, requires the Central Board of Indirect Taxes and Customs (CBIC) to clarify the scope of “other proceedings” to prevent conflicting claims and ensure the resolution process is not undermined.
Section 31 of IBC – Binding Nature of Resolution Plans
Once approved by the Adjudicating Authority, the National Company Law Tribunal (NCLT), under Section 31(1) of the IBC, a resolution plan becomes legally bringing on the corporate debtor, its employees, members, creditors, guarantors, and other stakeholders, including the Central Government, any State Government, or any local authority. The primary objective of this binding nature is to provide finality to the resolution process, preventing the reopening of claims that are not part of the approved plan. This ensures the resolution applicant starts from the burden of pre-existing claims, which is essential for the revival of the corporate debtor. The claims not included in the plan are extinguished on the date of approval, and no proceedings can be initiated or continued regarding those claims.
Read more : What is Form G in IBC – Invitation for Expression of Interest
Section 16 of the CGST Act – Eligibility for Input Tax Credit (ITC)
Section 16 of CGST Act allows a registered person to claim ITC on the GST paid on inputs used for business, subject to specific conditions. Key requirements include possession of tax invoice, receipt of goods or services, tax actually paid to the Government, and filing of returns. ITC cannot only be claimed after the latest installment of goods is received if supplied in lots. In insolvency proceedings, resolution applications often face denial of ITC due to pre-CIRP tax defaults, as the credit is blocked until such liabilities are settled.
Conflict Between IBC and CGST Provisions
When a resolution plan extinguishes or reduces statutory dues, GST authorities may refuse ITC under Section 16 of the CGST Act, arguing that the reduction does not negate the underlying liability. This creates friction because the clean slate doctrine, enshrined in section 31 of the IBC, extinguishes all claims not included in the approved resolution plan, binding even tax authorities. The Supreme Court has held that government dues, including GST, are extinguished if not part of the plan, preventing post-resolution recovery actions. However, the conflict persists as tax authorities sometimes attempt recovery, challenging the full application of the clean slate principle.
Judicial Interpretations
After the approval of a resolution plan, all claims, including statutory dues, stand frozen and are binding on the corporate debtor, its creditors, guarantors, and other stakeholders, including the Central Government, State Governments, and local authorities. The Supreme Court in Ghanashyam Mishra & Sons v. Edelweiss ARC held that any debt not included in the approved resolution plan is extinguished, and no proceedings for recovery of such dues can be initiated or continued. Further, the court in Rainbow Papers Ltd. v. Gujarat Tax Department has created uncertainty regarding the treatment of government dues under other statutes, such as GST, where similar “first charge” provisions exist, as it may require such dues to be treated pari passu with secured creditors in the IBC’s payment waterfall. The National Company Law Appellate Tribunal (NCLAT) has recently reaffirmed that once a resolution plan is approved by the Committee of Creditors (CoC) and submitted to the NCLT, it cannot be modified or withdrawn, and the NCLT lacks the power to unilaterally alter the plan to accommodate late claims, including those from tax authorities. This principle was applied in a case where the NCLAT dismissed the Income Tax Department’s claim for outstanding tax, ruling that the claim was extinguished because it was filed after the resolution plans approved by the CoC. Despite this, an ongoing ambiguity persists regarding the eligibility of ITC for the successful resolution application post-resolution, as the law does not provide clear guidance on whether ITC can be claimed on the assets acquired under the approved plan.
Practical Implications
- For Resolution Applicants: Upon the approval of the resolution plan, any outstanding tax claims not included in the plan are extinguished, providing the successful resolution application with assurance of no legacy tax burden.
- For Tax Authorities: Statutory claims, including tax dues, must be submitted during the insolvency process, otherwise, they are legally extinguished upon approval of a resolution plan, and government authorities cannot pursue them afterward.
- For Operational Creditors or Employees: Section 31 ensures that once a resolution plan is approved by the NCLT, it becomes binding on all stakeholders, including operational creditors and employees, providing legal certainty and finality to their treatment under the approved plan.
- For Businesses: Compliance under Section 16 CGST is essential for businesses to claim ITC, as it mandates conditions like possession of a valid tax invoice, receipt of goods or services, payment of tax by the supplier, and timely filing of returns. However, once a payment obligation is extinguished due to the lapse of time or other legal reasons, the associated ITC cannot be reclaimed, even if the original conditions for claiming ITC were met.
Conclusion
The interplay of Section 31 IBC and Section 16 CGST reflects the tension between insolvency resolution and revenue collection. Supreme Court rulings have consistently upheld the primacy of the IBC’s objective of corporate revival and the finality of resolution plans, emphasizing that the moratorium and clean slate provisions are essential for attracting resolution applicants. A balanced approach is necessary to ensure that the revival of distressed entities under the IBC is not undermined by subsequent tax recovery actions, while also safeguarding the government;s legitimate revenue interests.
FAQ
Q1. Does approval of a resolution plan under Section 31 IBC override GST dues?
Yes, the approval of a resolution plan extinguishes GST dues not included in the plan, making them unenforceable against the corporate debtor or its successors.
Q2. Can ITC under Section 16 CGST Act be denied post-resolution?
Yes, ITC under this section can be denied post-resolution if the conditions for its availing, such as supplier having paid the tax to the government, are not, even if the credit was initially claimed.
Q3. What happens if GST authorities raise claims after plan approval?
If a resolution plan is approved under the IBC, GST claims for the period prior to the initiation of the CIRP are barred, as ruled by the Allahabad High Court, citing the finality of such approved plans.
Q4. Which law prevails in case of conflict – IBC or CGST Act?
The IBC prevails over the CGST Act in case of any conflict, as established by the Supreme Court’s interpretation that the IBC, being a special statute with a non-obstante clause under section 238 of the IBC.
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