Tax laws

Seeking harmonization of income tax laws with the insolvency code

The Insolvency and Bankruptcy Code (IBC) has been in force for over 5 years now and has, overall, been successful legislation. However, as expected, given that the IBC is a relatively new law, there have been teething problems resulting from a lack of synchronization with other laws such as tax laws.
For example, to reduce the burden of conflicting claims and compliances under various laws, BAC provides a moratorium on various actions against the debtor company (i.e. the insolvent company) during the corporate insolvency and resolution process (CIRP).

In addition, the IBC also provides that the provisions of the code will prevail over other laws. Thus, while under normal circumstances tax authorities are empowered to adjust a refund due to a taxpayer against any other pending tax claim of that taxpayer, such an adjustment should not be permitted where the taxpayer is subject to CIRP .

Pursuant to the IBC, a moratorium is imposed, among other things, on the enforcement of any judgment, decree or order of a court of law, tribunal, arbitration board or other authority. Thus, no recovery should be made by the tax administration by the execution of any order.

However, in practice, since the tax authorities are often unable to collect tax assessments from debtor companies, the tax authorities have offset refunds due to debtor companies against any pending tax claim, dismissing the stay request filed by the debtor companies. debtor companies.

Under the IBC, amounts due to government are treated as operational debt, which ranks below secured debt in the distribution cascade. The object is lost if the tax administration does not file claims with a resolution professional unilaterally offsetting refunds.

The idea behind the moratorium period is to suspend/suspend the initiation/continuation of litigation against the debtor company. However, in practice things are often very different.

Suppose a lower authority has issued an order against the debtor company. In this case, the debtor company is sometimes under pressure to file an appeal against it during the moratorium period because the fear is that:

a) if the tax debt is considered as crystallized by the tax administration, the latter may set off the refunds due to the debtor legal entity; and

(b) the issues discussed in the tax order against the debtor company may create an adverse precedent for future tax years.

On the other hand, if an order has been issued in favor of the taxpayer, the debtor company generally argues that the tax authorities should not file any claims against the debtor company during the period of the moratorium. This puts the tax authorities in a difficult position as they cannot pursue a case which may ultimately result in a tax claim.

After approval of the resolution plan, the option to file a claim under the IBC is extinguished. However, all stakeholders, including the tax authorities, are bound by the resolution plan, which allows the resolution applicant to run the business with a clean slate.

Thus, if a tax is assessed as payable after the resolution process has been approved by the debtor company in accordance with the assessment orders for which the tax authorities have not filed a claim with a resolution professional, these receivables taxes should not be maintained. In these cases, the tax authorities offset the reimbursements due to the debtor company with the tax receivables.

While the introduction of BAC was certainly a step in the right direction, it is hoped that in the next budget some of the creases will be ironed out to further facilitate the insolvency process.

Abhay Sharma Abhay is Partner and Priyanka Jain is Senior Partner in Tax Practice at Shardul Amarchand Mangaldas & Co