Impact of Corporate Insolvency Resolution Proceedings on Transitional Credits under GST: A Legal Analysis
Devashish Jain
5th Year, B.A. LL.B. (Hons.), Hidayatullah National Law University
Introduction
The intriguing intersection of Insolvency & Bankruptcy Code (hereinafter as IBC) and the Goods and Services Tax (hereinafter as GST) has always drawn the interest of legal scholar. The issues are mostly concerning to credit ledger balance, demands of authorities, assesses’s claim, etc. A recent case before the High Court of Jharkhand, involving M/s ESL Steel Limited, (2023) ibclaw.in 576 HC delves into the complexities of claiming transitional credits by the latter management after Corporate Insolvency Resolution Process (hereinafter as CIRP). In this case, interestingly the Court adopted the reciprocal approach of clean slate theory and has denied the right of Assessee. With this abrupt change in the legal landscape, this article aims to provide a critique of this case, exploring its implications within the framework and spirit of GST and Insolvency Laws.
Interlink of GST and Insolvency Laws
The interplay between GST and insolvency laws in India presents a multifaceted legal landscape, shaped by statutory provisions, judicial interpretations, and regulatory guidance. This part aims to unravel the intricacies of this intersection, examining the relevant sections, judgements, and procedural implications to provide a coherent understanding of both the laws.
Tax as First Charge: Section 82 of CGST Act
Section 82 of the CGST Act establishes the precedence of government dues, including taxes, as the primary charge on the assets of a taxable entity. However, it’s important to mention that Insolvency Laws takes precedence over GST laws, as clarified by Section 238 of the IBC, which designates it as a special legislation. Therefore, during insolvency proceedings, GST authorities must adhere to the provisions of the IBC, treating tax dues as operational debts.
Implications under IBC: Proceedings and Moratorium
Under the IBC regime, corporate debtors are afforded protection through a moratorium period, as stipulated under Section 14(1)(a), which prohibits the initiation or continuation of legal proceedings against the debtor, including tax-related actions. Judicial pronouncements, such as the Associate Décor Ltd case (2021) ibclaw.in 311 HC, underscore the comprehensive nature of the moratorium, extending its protection not only to the recovery of taxes but also to audit and adjudication proceedings under GST laws.
Treatment of GST Dues: Operational Debt under IBC
GST dues are categorized as operational debt within the IBC framework, ensuring their inclusion in the resolution process. The case of State Tax Officers vs Rainbow Papers Limited reaffirms the status of tax authorities as secured creditors under the IBC, with tax dues being classified as secured debts. This recognition grants tax authorities a distinct position in insolvency proceedings, aligning with the objective of equitable distribution of assets.
Despite these legal and judicial developments, practical challenges still persist, demanding continued synchronization between GST and insolvency laws. Addressing issues related to registration, compliance liabilities, and transitional arrangements is imperative for a robust integration of GST and insolvency frameworks. Among these myriad of issues, the judgement of H.C. in ESL case grapples with the issue of claiming Input Tax Credit (herein after as ITC) by management subsequent to the CIRP, which has been dissected below.
The Concept of Input Tax Credit & Transactional Credit
Before delving to the legal implications of ESL judgement, it is imperative to focus on the concept of Input Tax Credit and Transitional Credit. ITC is a mechanism where a registered individual pays GST on purchases of goods or services, commonly referred to as inward supplies, for business purposes. These inputs are then utilized in the production of goods or provision of services, which are subsequently sold. When GST is collected on these outward supplies, the total amount isn’t entirely payable to the Government. Instead, it is reduced by the amount of tax previously paid on inward supplies, subject to specific conditions. This adjustment of tax paid on inward supplies against tax collected on outward supplies is known as Input Tax Credit. The scope of ITC extends beyond just input goods and services to include capital goods as well. The availability of ITC is reflected in the electronic credit ledger maintained by taxpayers on the GST common portal.
Rationale of ITC
The purpose of the credit system in indirect taxation is to reduce the cascading impact of taxes on taxes. It allows for the offset of taxes paid on inputs used in the production of goods or provision of services. With the implementation of GST, credits for goods and services are now accessible throughout the entire supply chain, with only a few exceptions.
Transitional Credit
As we are aware about, that in 2016 government decided to implement GST, consolidating multiple taxes into one. Hence Section 140 of CGST Act enable the taxpayers to transition and claim their unutilized credits from the pre-GST regime into the GST regime.
CIRP Proceedings and Transitional Credit
In the realm of intersection of GST and IBC, one of the issues before the H.C. in the case of ESL Steel Ltd. vs. Principal Commissioner, Central Goods & Services Tax & Central Excise was whether the assesses, under new management after the resolution plan approval, could avail itself of transitional credits for the period before the change in management.
In this case, NCLT Kolkata instigated insolvency proceedings against M/s ESL Steel Ltd. (Corporate Debtor). The resolution plan presented by M/s Vedanta Limited was approved from the NCLT on 17.04.2018. Preceding the resolution plan’s approval, the former management of the Corporate Debtor filed an Original TRAN-1 to claim ITC on 27.09.2017. However, due to technical glitches on the GST Portal, the Corporate Debtor failed to disclose and transition CENVAT Credit on Capital Goods received in July and August 2017.
Following a Supreme Court directive in the case of Union of India vs. Filco Trade Centre Pvt. Ltd the Corporate Debtor revised its TRAN-1 to claim the ITC. Instead of accepting the revised TRAN-1, the Additional Commissioner, CGST & Central Excise issued a Demand-cum-Notice, instructing the Corporate Debtor to provide a response regarding the imposition of ITC totalling Rs. 6,02,34,616/-, inclusive of interest and penalties. Subsequently, the Additional Commissioner upheld the demand of Rs. 6,02,34,616/- under Section 74(9) of the CGST, citing improper availment of transitional credit during 2017-18.
Judgement:
The H.C. observed that the Additional Commissioner had unlawfully confirmed the demand under Section 74(9) of the CGST 2017, citing irregular availment of transitional credit during the 2017-18 period. However, the court found that, the Corporate Debtor, could not claim ITC for liabilities prior to 17.04.2018, the date when the NCLT approved the resolution plan.
This decision was based on the Supreme Court ruling in Ghanashyam Mishra and Sons Pvt. Ltd. vs. Edelweiss Asset Reconstruction Company Ltd, wherein the S.C. emphasized that no recovery or proceedings could be pursued against the Corporate Debtor for dues prior to the approval of the resolution plan. Consequently applying the reciprocal approach, the court dismissed ESL Steel’s ITC claim for the period before the NCLT’s approval of the resolution plan. As the liabilities for Central/State taxes prior to the resolution plan approval were not recoverable and were extinguished, the available credit to the taxpayer gets also extinguished.
Further, the court clarified that since the liability of the previous management couldn’t be passed on to the current management, the credit accessible to the former wouldn’t be available to the latter. This was because the current management wasn’t a taxpayer during the period when inputs or capital goods were acquired.
Legal Implications of CIRP on Transactional Credit
The case would have serious implication on the claims of corporate debtor under GST regime. Here’s a detailed discussion on the mentioned points:
- Extinguishment of Past Obligations under CIRP:
The judgment upholds the clean-slate theory, which essentially means that once a Resolution Plan is approved by the NCLT, all past obligations of the company are considered extinguished. This includes all the liabilities or dues before the approval of the resolution plan by the NCLT.
- Applicability of Transitional Credit during the Resolution Period:
The central issue in this case revolves around the wrongful availment of transitional credit by the assessee after the resolution plan. The assessee revised its TRAN-1 on to avail ITC against the invoices of Capital Goods. The court clarifies that while the petitioner cannot be held liable for past dues, applying the reciprocal approach, it is also not entitled to claim transitional credit for the period before the approval of the resolution plan.
- Restrictions on Current Management’s Access to Transitional Credits:
The judgment underscores that the current management, post-resolution plan approval, cannot access transitional credits related to the period before the plan’s approval. Although the court acknowledges the extinguishment of past obligations, it restricts the current management’s access to transitional credits. Consequently, the demand confirmed by the respondent is nullified, yet the petitioner is not entitled to the transitional credit in question.
Critical Analysis: Clarifying Transitional Credit Availment & Clean Slate Theory
In the recent judgment concerning ESL Steel’s transitional credit claim prior to the approval of the resolution plan by the NCLT, the court’s decision appears to deviate from the spirit of both the IBC Law and the GST framework. The court applied a reciprocal approach of the clean slate theory, asserting that the new management cannot benefit from the earlier period’s ITC prior to the NCLT’s approval of the resolution plan on April 17, 2018.
The clean slate doctrine, firmly established within the framework of the IBC, that once a Resolution Plan is approved, no claim, satisfied or unsatisfied, would survive. This doctrine finds its roots in Section 31(1) of the Code. Despite its certainty, evolving jurisprudence has led to interpretations that could potentially be exploited by creditors.
The S.C., in the case of Essar Steel India Limited vs. Satish Kumar Gupta and Ors. (2019) ibclaw.in 07 SC, had firmly stated that only those claims made before the start of the insolvency proceedings would be reviewed by the Resolution Professional and would be included in the approved Resolution Plan. This ruling effectively wiped out any claims not covered in the approved plan, giving the Corporate Debtor a fresh start.
Subsequently, in Ghanashyam Mishra case (2021) ibclaw.in 54 SC, the S.C. crystallized the ‘clean slate’ doctrine, emphasizing the intent to provide a fresh start to the corporate debtor. However, it’s crucial to note that while past liabilities may be extinguished under the clean slate doctrine, past credits due to the company don’t necessarily get expunged automatically.
While the S.C. has consistently upheld the clean slate doctrine, subsequent decisions like the one in ESL could create ambiguities, particularly when unresolved claims are under adjudication at the time of CIRP. It remains to be seen how such decisions will be interpreted by S.C. and applied in future cases, as they may pose challenges to the fundamental principles of the IBC. Therefore, it’s imperative for the court to revisit such aspects and rectify any potential errors to uphold the integrity of the IBC and ensure justice for all parties involved.
The way forward regarding transitional credit availment could be as follows:
- Financial Statement Asset: If the credit was already availed and present as assets in the financial statement of the CD before the commencement of CIRP, it should be considered a legitimate asset of the CD.
- Lack of Dispute: If the Department had not raised any dispute or claim against the transitional credit either before or during the CIRP proceedings, it cannot be denied on frivolous grounds post-resolution.
Hence, it is imperative that the court revisits this aspect of the judgment and rectifies the error to ensure that justice is served and the rights of the petitioner are upheld.
Conclusion
The ESL Steel case marks a significant chapter in understanding how GST and insolvency laws intersect, especially regarding transitional credits during CIRP. While the court’s adoption of the clean slate theory aims regarding the liabilities of the corporate debtor tries to give companies a fresh start post-resolution, but its impact on transitional credit claims raises important questions. As legal frameworks evolve, it’s essential for courts to strike a balance between insolvency laws and fair treatment for all involved. Looking ahead, there’s hope that the Supreme Court will provide clarity on this issue, ensuring equitable treatment for all stakeholders involved and upholding the spirit of GST and Insolvency Laws.
