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MUMBAI: Several companies that have successfully bid and taken over operations of a defaulting company under the Insolvency and Bankruptcy Code (IBC) find themselves stuck in litigation for past GST dues, despite the law granting them full protection.
Tax experts note that the Central Board of Indirect Taxes and Customs issued a circular in December 2022, and tax adjudicating authorities were instructed to recover only the reduced amount of liability as was decided during the proceedings relating to the insolvency resolution process. Further, the existing dues of the defaulting company, which were not part of the approved plan stood extinguished.
Bipin Sapra, indirect tax partner at EY-India said, “Although this circular gave directions to rest a large chunk of litigation, implementation of the same remains a challenge at the ground level. The jurisdictional GST commissioners are required to issue form DRC-25, specifying the amount on which a settlement was reached. However, there are cases where there is a reluctance to issue this form given the huge quantum involved. ”He added, “Tribunals and courts are insisting on submission DRC-25 for closure of the GST litigation proceedings. The added issue is that, owing to non-issuance of DRC-25, significant sums are stuck in the form of pre-deposits (paid at the appeal filing stage), which the resultant company is entitled to receive, once the IRP proceedings are completed and dues are settled. ”
Issues also arise as regards input tax credit. Sunil Gabhawalla, chartered accountant,said: “In most of the situations, the successful bidder (new company) faces challenges in the claim of input tax credit of taxes paid to the vendors for the pre-takeover period. ”
Second, there are no provisions to safeguard the interests of other stakeholders. If the defaulting company had had collected the tax and not paid to the government, the recovery of the said dues is protected at the defaulting company’s end. However, the customer who has paid the taxes to the defaulting company receives no protection and his input tax credit is denied. This results in practical difficulties in continuation of business relationship with the said customer by the successful bidder, added Gabhawalla.
Tax experts note that the Central Board of Indirect Taxes and Customs issued a circular in December 2022, and tax adjudicating authorities were instructed to recover only the reduced amount of liability as was decided during the proceedings relating to the insolvency resolution process. Further, the existing dues of the defaulting company, which were not part of the approved plan stood extinguished.
Bipin Sapra, indirect tax partner at EY-India said, “Although this circular gave directions to rest a large chunk of litigation, implementation of the same remains a challenge at the ground level. The jurisdictional GST commissioners are required to issue form DRC-25, specifying the amount on which a settlement was reached. However, there are cases where there is a reluctance to issue this form given the huge quantum involved. ”He added, “Tribunals and courts are insisting on submission DRC-25 for closure of the GST litigation proceedings. The added issue is that, owing to non-issuance of DRC-25, significant sums are stuck in the form of pre-deposits (paid at the appeal filing stage), which the resultant company is entitled to receive, once the IRP proceedings are completed and dues are settled. ”
Issues also arise as regards input tax credit. Sunil Gabhawalla, chartered accountant,said: “In most of the situations, the successful bidder (new company) faces challenges in the claim of input tax credit of taxes paid to the vendors for the pre-takeover period. ”
Second, there are no provisions to safeguard the interests of other stakeholders. If the defaulting company had had collected the tax and not paid to the government, the recovery of the said dues is protected at the defaulting company’s end. However, the customer who has paid the taxes to the defaulting company receives no protection and his input tax credit is denied. This results in practical difficulties in continuation of business relationship with the said customer by the successful bidder, added Gabhawalla.
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