• Notification Date: 20-12-2022
• Notification No: N/A

Delhi High Court’s Decision on Insolvency Law's GST Problem

The Delhi High Court is about to examine whether the GST department can do indirectly what the insolvency law prevents it from doing directly. The Delhi HC will pass its judgment on whether the Goods and Services Tax department can deny input tax credit to customers of an insolvent entity on grounds of unpaid dues of the latter. 

The case relates to Trimax IT Infrastructure and Services Ltd., which was admitted to insolvency in 2018. Subsequently, a resolution plan, submitted by EbixCash Ltd., for Trimax was approved by the National Company Law Tribunal in May 2020. According to the plan, all GST claims and indirect taxes were settled for Rs 1. This was sanctioned by the insolvency tribunal, which meant that the GST authorities could not proceed against the insolvent company for any tax dues. 
Soon after, the GST department sent a notice to one of Trimax's customers called National Informatic Centre, denying it input tax credit to the tune of Rs 3.4 crore on the supplies made by the insolvent company. The credit was denied by the GST department because Trimax had collected GST from NIC, but failed to deposit it with the government. Since the department denied it credit, NIC withheld payments to Trimax on future invoices. This prompted Trimax, which is known as EbixCash Mobility Software India Ltd. at present, to approach the High Court.  

The GST authorities are trying to meet their claim indirectly by initiating actions against its customers. EbixCash Mobility told the court that no direct action can lie against it. The insolvency law and GST experts have expressed different views on the matter. Anoop Rawat, partner at Shardul Amarchand Mangaldas and Co., said that the department's action is a clear violation of clean state doctrine under the insolvency law. 

But Asish Philip, partner at Lakshmikumaran and Sridharan Attorneys, said that several conditions need to be fulfilled under GST law for availing credit, namely possession of a tax invoice, proof of goods or services received, filing of returns, and tax payment to the government. Unless all these conditions are met, the recipient of service, that is NIC, is not really entitled to credit, Philip highlighted. 
The question is whether a bona fide person can be denied credit on non-payment of tax by the supplier. The Bombay High Court has ruled against allowing credit whereas the Madras and Calcutta High Courts have allowed tax credit in bona fide transactions, Philip said. The high court has issued a notice in Ebix's case, acknowledging the issue requires further consideration. The court will next hear the matter on Jan 24, 2023.