The Central Board of Indirect Taxes and Customs has clarified that once a firm reaches the insolvency arena, it can’t be forced to cough up dues to the government like GST, in excess of the “reduced amount” determined. The move will bring more certainly for investors and banks.

The CBIC said that if any government dues including Central GST demand has been reduced following IBC proceedings, then the Commissioner concerned will issue an intimation to the taxpayer and also the authority with whom the recovery is pending, intimating the reduction in demand.

Abhishek A Rastogi, Founder, Rastogi Chambers said the circular implicitly means that once the proceedings are admitted before the NCLT, no coercive action can be taken to recover tax dues as the final amount is not determined at the stage of admission. “It has been clarified by the circular that recovery proceedings can continue only in relation to reduced amount of government dues. This settles the dispute of the quantum of recoveries which can be done,” he said.

Under the extant rules, a company or limited liability partnership whcih defaults on payments of Rs 1 crore and above can be taken for up corporate insolvency resolution process. GST dues are considered as an operational debt. The clarification follows the 48th meeting of the GST Council, which had recommended that a circular should be issud for clarifying the of treatment of statutory dues under GST law for taxpayers for whom the proceedings have been finalised under the IBC.

“Representations have been received from the trade as well as tax authorities, seeking clarification regarding the modalities for implementation of the order of the adjudicating authority under Insolvency and Bankruptcy Code, 2016 with respect to demand for recovery against such corporate debtor under Central Goods and Services Tax Act, 2017 as well under the existing laws and the treatment of such statutory dues under CGST Act and existing laws, after finalisation of the proceedings under IBC,” the CBIC said in a circular.

Abhishek Jain, Tax Partner, KPMG said the circular resolves the much pending confusion for indirect tax authorities to tackle matters involving interplay with the IBC law and would prevent unnecessary litigation. The Insolvency and Bankruptcy Code overrides any other law in India, and stipulates that recovery including tax recovery needs to be made per the resolution plan approved post NCLT proceedings. This has also been affirmed by the Apex Court in the case of Ghanashyam Mishra & Sons, Jain noted.

“As per Section 84 of CGST Act, if the government dues against any person under CGST Act are reduced as a result of any appeal, revision or other proceedings in respect of such government dues, then an intimation for such reduction of government dues has to be given by the Commissioner to such person and to the appropriate authority with whom the recovery proceedings are pending. Further, recovery proceedings can be continued in relation to such reduced amount of government dues,” the CBIC said.

The word ‘other proceedings’ is not defined in CGST Act, it further said, adding that as the proceedings conducted under IBC also adjudicate the government dues pending under the CGST Act or under existing laws against the corporate debtor, it is covered under the term. The jurisdictional Commissioner will issue an intimation in Form GST DRC-25 reducing the demand.