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Intent, purposes behind enactment of the GST regime and insolvency code (simplification, consolidated of laws, objects and reasons). the enactment of the insolvency and bankruptcy code 2016 (hereinafter referred to as IBC.) and the goods and service act 2017 hereinafter referred to as GST. Were hailed as watershed moments in the legislative history of economic law in India. The said laws were welcomed as much needed reforms in the sector of insolvency and tax regimes of the country. One of the main reasons behind the same was to preserve economic value and slow aim towards resolution or restructuring instead of directly restoring to the liquidation process .

The tax regimes of the country and were thought to increase to overall ease of doing business in India. One of the objectives that in the enactment of the insolvency and bankruptcy code 2016 was to consolidate the fragmented framework to the creditors and debtors of a distressed or sick corporate entity before the different judicial fora.

The GST Act was introduced in 2017 in order to simplify the regime of collection and calculation of indirect taxes. The GST Act 2017 also gave wide ranging powers to an authorised officer to arrest, prosecute, search and seize towards stringent collection of taxes and to prevent leakage. The main aim behind the same was to shift the point of payment of tax from the manufacture or sale to the point of supply and to incorporate a destination. It also approaches the levying of tax instead of the origin approach.

At first this note will be looking at whether the moratorium laid down under section 14 of the code would apply to proceeding instituted by the GST department. After this it would highlights the difficulties that may arise when the GST department decides to prosecute a corporate debtor under the GST Act 2017, as we know that this note aim to bring forth a legal grey area regarding the potential conflict that can arise between the GST department acting under GST Act and resolution professional acting under IBC, with respect to possession and custody of assets of a firm which is under going to resolution process, especially when the entity is being prosecuted by the GST department.


  1. Prosecution under GST Act when the corporate debtor is undergoing insolvency before the NCLT.

It has settled by the central board of indirect taxes and customs that no coercive will taken against the debtor of corporate sector. Leaving the aside the benefits and disadvantages of the said circular. With respect to dues for the period prior to the insolvency commencement date. The disadvantages of the said circular and the ambiguity regarding its retrospectivity. Or prospective what however conspicuous by its absence is the fact that the said circular does not exclude or negate coercive action being taken against erstwhile directors or other key personnel of the corporate debtor under the GST act. This clearly shows that even though a corporate debtor undergoing insolvency is protected and exempt from prosecution under the GST act 2017, the same is not true for erstwhile directors and other managers in the charge of corporate debtor. Thus, legal arises when coercive action has already been initiated against company and its debtors and thereafter, subsequently the entity is admitted for CIRP before NCLT.

  1. Treatment of Tax Dues Under the IBC

Tax dues under the IBC are treated as operational debt and the central government, state government or any other legal authority having such statutory claim and operational debt have been classified as operational creditor. The moratorium that sets in under section 14 of the IBC may be applicable to proceedings pending before tax authorities. The implication of such classification is that such dues are paid out lower in the order of priority and waterfall mechanism that is set out under section 53 of the IBC. It is settled principle of law now that the moratorium under section 14 of the IBC is applicable to orders passed by the income Tax Appellate Tribunals. However, whether the same would apply to a proceeding pending before the GST authorities still unclear.

The applicability of the moratorium in case of criminal proceeding however seems to be fairly laid down by various courts which have held that criminal proceeding being personal in nature, do not come under the ambit of the moratorium under section of 14 of the IBC. Thus, it can be safely presumed that prosecution under the GST act is not barred by the moratorium imposed under section 14 of the IBC. This reasoning follows from section 446 of the erstwhile companies act 1956 where the words suits and other proceeding. Were not held to include criminal proceeding.

C Custody of Books and Documents of the Corporate Debtor

When a company is undergoing CIRP under the IBC, an IRP/RP is appointed by the NCLT who oversees the day-to-day affairs of the custody all the books. Documents and assets of the company under resolution. That section 67 of the act specifically gives power to an authorised officer to inspect, search and thereafter seize any goods, documents, books or things which may be retained by such officer for so long as may be necessary for their examination and for inquiry or proceedings under the act. That section 65(5) gives a right to a person where whose custody to any documents are being seized to make any copy or to take extracts in the presence of an authorised officer unless, it prejudicially affects the investigation, in the opinion of the proper officer can inspect, search and seize goods, documents, books or things which will be inventoried and retained by him for so long as may be necessary.

That since criminal proceeding are unaffected by the moratorium under section 14 of the IBC the same can proceed simultaneously which might prove to be difficult. Furthermore, the trial being conducted and prosecuted by the GST department may become protracted and delayed due to such back and forth between documents. The right of speedy trail is a fundamental right of an accused as has already been held by the supreme court. This delay may get affected there is a need to frame rules regarding the standard operating procedures to be followed by the RP and the GST department when there is simultaneous CIPR and prosecution in order to address such issue.

The question arises that as to who will have custody of the books, assets and documents of a corporate debtor who has been admitted to CIRP after the GST department has already begun its search and seizure, and prosecution. As has already been highlighted above, both the RP and the authorised officers of the GST department have the power to retain custody of books of accounts and assets of the company.

Special Procedure for Corporate Debtors Undergoing CIRP

A corporate debtor undergoing CIRP and whose assets are managed by IRP or RP should follow the below procedure. The period of compliance shall begin from the date of appointment of IRP/RP till the date on which they undergo corporate insolvency resolution process.

  1. Obtain a new registration under the GST Act.

From the date of appointment of IRP/RP, such entities are treated as different persons. They are liable to obtain new registration under each State/Union Territory where it was earlier registered.

  1. File returns under Section 40

Such persons are liable to file their first return as per Section 40 of the CGST Act. The IRP must file the applicable returns such as GSTR-3B during the period beginning from the date on which the company becomes liable for new registration till the date on which registration is granted.

  1. Claim ITC

Such persons can avail Input Tax Credit (ITC) on all invoices bearing earlier GSTIN covering both goods and services. ITC can be availed as per the conditions specified under Chapter V of the CGST Act. There are two restrictions imposed under the CGST Act on claiming ITC. These are as follows:

  • Section 16(4): It puts a restriction on availing ITC if such taxpayer has delayed filing GSTR-3B for tax periods from July 2017 to March 2018.

  • Rule 36(4): It stipulates a cap of 10% provisional ITC. Even a registered person receiving goods from such companies can claim ITC on invoices bearing the earlier GSTIN in compliance with the conditions specified under Chapter V of the GST Act.

4. Applying for Refund

Any amount deposited in the cash ledger of the earlier GSTIN by the IRP/RP is available for a refund from the date of appointment of IRP till the date of notification specifying a special procedure for corporate debtors undergoing insolvency. Such refund is available even if GSTR-3B/GSTR-1 returns are not filed for the said period.

Corporate Insolvency Resolution Process begin; Interim Resolution Professional takes charge; Moratorium sets in

When Corporate Debtor is acknowledged into the Corporate Insolvency Resolution Process, the NCLT will disclose a declaration for the accommodation of cases by leasers likewise Interim Resolution Professional is selected inside 14 days to assume control over the charge or the board of the organization. Though the directorate is to be suspended and the board stops to have any authority over the exercises of the organization until the finish of CIRP, and according to Section 14 of code, the ban will influence up to the culmination of CIRP. The reason for ban incorporates keeping the corporate account holder's resources together during the CIR cycle and guaranteeing that the matter of corporate debt holder might be proceeded as going concerned while the lenders of corporate indebted people admire take a view on the goal of default. While at season of ban takes a section, which precludes the accompanying.

  • Transfer of any assets of the corporate debtor during the period of moratorium.

  • Execution of security interest.

  • Continuing or beginning of any legal proceedings on the corporate debtor.

  • Recovery of property as an owner.

  • Discontinuing or termination of the supply of essentials goods and services to the Corporate Debtor.

At the moratorium of ban or after moratorium became effective under area 14 of IBC, 2016, mediation procedures can't be conjured or proceeded against corporate account holder to the extent Performance Bank Guarantee (hereinafter alluded as PBG) is worried, there no limitation set up on PBG during moratorium though security premium referenced in proviso (c) of section 14 of IBC, 2016 does exclude PBG the recuperation part referenced segment express that, Security and Exchange Board of India isn't allowed to recuperate or sell any resources of corporate borrower till the time moratorium period exits. the stockpile of fundamental merchandise is not suspended or ended during the moratorium.

any assets of corporate debtor till the time moratorium period exits the supply of essential goods are not suspended or terminated during the moratorium.

Role of Interim Resolution Professional U/S- 16-20 of the IBC, 2016

After the appointment of Interim resolution professional (hereinafter referred to as IRP) Under section 16(1) of IBC,2016, as the name suggests interim the professional is appointed for a very short period not exceeding 30 days from the date of appointment. IRP will have to act as per the direction of code stated in section 18, the IRP shall receive claim and after collecting all claim of creditors received against the Corporate Debtor and determining the position of the corporate debtor as financially, constitute a Committee of Creditors, IRP will have control over assets and financial details of the corporate debtor, He will verify all claims submitted by various creditors either he can reject or admit claims.

In case of SBI financial creditor vs SKC Retails Ltd & Others. Financial creditor who is member of Committee of Creditors, filed appeal setting that COC is not liable to pay the fees of the IRP, whereas appellate tribunal said that applicant who suggests the name of resolution professionals to be appointed pays the expenses, which is later reimbursed by the COC.


There is much needed gap regarding the procedure to be adopted by the GST department when a company is undergoing insolvency. It is need of the hour to lay down rules and guidelines regarding smooth functioning of the GST department along with the resolution professional to ensure that the prosecution is effective and do not remain a dead letter. Furthermore, the accused right to fair trial should not get defeated due to tussle between the GST department and the resolution professional. Such grey areas can defeat the entire purpose of enactment of both the IBC and the GST Act.

By: Shivangi Yadav


Amity Law School, Jaipur

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