Government will issue a circular to facilitate recovery of tax dues from companies undergoing insolvency that may require new buyers to settle “agreed tax claims” while a resolution package is approved.

The revenue department will discuss the necessary changes with the Ministry of Corporate Affairs (MCA) that administers the Insolvency and Bankruptcy Code (IBC). The move is aimed at providing clarity following a Supreme Court judgement.

The issue was discussed at the Goods and Services Tax Council meeting Saturday, and it was agreed that more clarity was required regarding the treatment of statutory dues under the IBC.

After the meeting, the finance ministry said a circular will be issued for clarifying the issue of treatment of statutory dues under the GST law.

Operational Creditors

Tax authorities are currently categorised as operational creditors under the IBC, which makes it difficult to recover dues. Tax authorities have several times pointed out the difficulty in recovering legitimate GST dues once a company lands in the National Company Law Tribunal under the IBC.

“Recovery has been very poor in cases that have gone under insolvency,” a government official said.

The resolution process will clearly establish the tax liability of the new buyer of an insolvent company, ensuring payments while cutting down on disputes, the official said. Changes will also be made to Rule 161 of CGST Rules, 2017, and Form GST DRC-25 to allow fresh demand notices when resolution proceedings have been finalised under the IBC.

Experts said this will not increase the resolution cost. “This will in fact give more certainty to both taxpayers and tax officials in terms of the exact amount they are liable to pay or recover,” said Sourabh Agarwal, tax partner, EY.

ET reported last week that the MCA is already examining changes to the IBC and is likely to introduce an amendment bill in the budget session.

In its ruling in the ABG Shipyard case, the Supreme Court had held insolvency proceedings and the imposition of moratoria under the IBC restrict the powers available to customs authorities under the Customs Act, 1962, for recovery of duty.

The judgement is seen to have set a precedent for indirect taxes.

“The moratorium provisions kick in when company faces insolvency proceedings and the issue remains whether tax dues could be recovered, at what stage can recovery happen and can the admitted tax due be recovered partially or completely,” said Abhishek A Rastogi, founder, Rastogi Chambers, explaining the need for clarity.