Relief for Corporate Debtors during COVID-19 pandemic

The Insolvency and Bankruptcy Code, 2016, while still in its initial years, has paved the way for faster and more efficient resolution of insolvency proceedings by replacing the existing bankruptcy laws.

In its 39th council meet, the Goods and Services Tax Council announced the need for a special procedure for corporate debtors undergoing the corporate insolvency resolution process (CIRP) under the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC). The provisions under this special procedure are expected to facilitate even faster resolution of the insolvency process. Here’s everything you need to know.

Threshold for IBC eligibility increased
As per the existing provisions, a company or limited liability partner (LLP) is eligible to initiate a corporate insolvency resolution process if they fail to pay a minimum of ₹1 lakh. Due to the Coronavirus outbreak and subsequent lockdown, this threshold was revised in March 2020 and the minimum cap was adjusted to ₹1 crore. This move was highly significant in the interest of micro, small and medium sized enterprises (MSMEs) who would otherwise come under the radar of defaulting corporate debtors.

Special procedure introduced to facilitate corporate insolvency resolution process
This special procedure breaks down the corporate insolvency resolution process into four simple steps - 

  • Obtain a new registration
  • File returns under Section 40
  • Claim input tax credit
  • Apply for a refund

Let’s understand these steps in detail.

New registration
As per the notification issued by the GSTN, a corporate debtor would be treated as a distinct person once an insolvency resolution professional is assigned to them. This means they would be required to apply for new GST registration within 30 days of the appointment of an IRP and would be required to register under each State where they were previously registered. In a bid to facilitate faster registration, the GST portal has even introduced a provision while applying for GST registration online. The applicant will be required to select the option of “corporate debtor undergoing the corporate insolvency resolution process by IRP/RP" in the drop down menu while applying for a new GST registration on the GST portal as per the new provision.

Return filing under Section 40
The IRP will be required to file tax returns as per provisions under Section 40. Any applicable returns during this period, for instance, GSTR3B, will be required to be furnished during the period between the date on which the company becomes liable for new registration till the GST registration is granted.

Claiming input tax credit (ITC)
As per the provisions under the special procedure, the taxpayer is eligible to claim input tax credit on invoices for both goods and services bearing the previously held Goods and Services Tax Identification Number (GSTIN). But this benefit comes with conditions. ITC can be availed as per the provisions specified under Chapter V of the CGST Ac, however, two restrictions have been imposed under the CGST Act on claiming ITC.

  • The taxpayer cannot claim ITC if they have delayed filing GSTR-3B for the tax periods between July 2017 and March 2018.
  • A stipulated cap of 10% provisional ITC can be claimed. Additionally, any registered taxpayers who are receiving goods from companies undergoing CIRP can claim ITC on invoices bearing the earlier GSTIN in compliance with the conditions specified under Chapter V of the GST Act.

Application for refunds
Any amounts there were deposited in the electronic cash register under the previous GSTIN can be claimed by the IRP from the date of appointment of the IRP until the date of notification specifying a special procedure for taxpayers who have initiated the CIRP process. Refunds will be available even if GSTR-3B/GSTR-1 returns were not filed for the said period.

The key focus of the Insolvency and Bankruptcy Code has been to amend the existing laws relating to insolvency of companies, limited liability entities, partnerships and individuals. Hopefully, these special procedures will help the resolution processes pick up pace.

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