IBC, Income Tax and GST: Tax Issues in Insolvency

Tax authorities are often among the largest creditors of a failed company, and tax rules can make or break a resolution plan. The Code lowers the priority of tax dues and subjects tax recovery to the moratorium, while tax laws have been adjusted so that companies acquired under a plan are not penalised for the change in ownership. This note brings together how the Code treats tax dues, the key income tax relief, and the special GST procedure for companies in insolvency.

1. Tax Dues under the Code

Figure 1: Tax dues at each stage of insolvency

• Operational debt. Dues payable to the Central Government, a State Government or a local authority under any law are operational debts under section 5(21), and tax authorities are operational creditors.
• Moratorium. During the moratorium, tax authorities cannot attach or sell the corporate debtor's assets or continue recovery proceedings; in Sundaresh Bhatt v CBIC (2022), the Supreme Court held that customs authorities could only file a claim and could not sell goods lying in their custody.
• Claims and plans. Tax authorities must file claims with the resolution professional; the plan binds them under section 31, and under Ghanashyam Mishra (2021) dues not included in the plan are extinguished, including dues for earlier periods assessed later.
• Liquidation. Government dues for two years before liquidation rank in section 53(1)(e), equally with the unpaid balance of secured creditors; after the 2026 Explanations, a statutory charge does not make the government a secured creditor (Topic 43)

2. The Code and the Income Tax Act

Figure 2: Income tax and GST in insolvency

• Overriding effect. In Pr. Commissioner of Income Tax v Monnet Ispat (2018), the Supreme Court held that the Code overrides anything inconsistent in the Income Tax Act by virtue of section 238 (Topic 77)
• Carry forward of losses. Income tax law ordinarily disallows carry forward of losses of a closely held company after a substantial change in shareholding; since 2018, this restriction does not apply where the change takes place under a resolution plan approved under the Code, after the tax authority has been heard.
• Minimum alternate tax. For companies under the Code, the computation of book profits for minimum alternate tax allows the aggregate of brought forward losses and unabsorbed depreciation to be reduced, easing the tax burden of restructuring.
• New Income-tax Act. The Income-tax Act, 2025 has replaced the 1961 Act with effect from 1 April 2026; the corresponding reliefs should be checked against the new Act's provisions.

3. GST during the CIRP

• Notification 11/2020-Central Tax. Issued on 21 March 2020, it prescribes a special procedure under which, from the date of appointment of the resolution professional, the corporate debtor is treated as a distinct person and must obtain a new registration in each State or Union territory where it was registered, within 30 days.
• Input tax credit. The distinct person may claim input tax credit on invoices issued since the appointment of the resolution professional in its first return, and customers' credit for supplies in the intervening period is protected.
• Circular 134/04/2020-GST. Issued on 23 March 2020, it clarifies that no coercive action may be taken for pre-CIRP dues, which are operational debts to be claimed in the CIRP, that registrations should not be cancelled merely because of the CIRP, and that the resolution professional must comply with GST law for the CIRP period.
• Current taxes. Taxes arising from running the business during the CIRP are paid as insolvency resolution process costs, ahead of other debts (Topic 31)

4. The Clean Slate for the Acquirer

Figure 3: Practical consequences for tax

A successful resolution applicant takes over the company free of tax demands for the period before the plan that are not provided for in it, since such claims are extinguished. Tax authorities cannot reopen assessments for those periods to recover dues from the new owners. Plans often seek further reliefs and concessions from tax authorities, but those that depend on the discretion of the authorities under tax laws are for them to grant, unless they follow from the Code itself (Topic 40).

5. Frequently Asked Questions

Can the income tax department attach the corporate debtor's bank account during the CIRP?

No. The moratorium under section 14 bars recovery and enforcement actions; the department must file its claim with the resolution professional.

Can the tax department raise a demand for a pre-CIRP year after the resolution plan is approved?

Not for dues not provided for in the plan. Ghanashyam Mishra (2021) held that such claims are extinguished and no proceedings can be initiated for them.

Does a corporate debtor need a new GST registration during the CIRP?

Yes. Under Notification 11/2020-Central Tax, it is treated as a distinct person from the resolution professional's appointment and must obtain new registration within 30 days in each State where it was registered.

Who pays GST on supplies made while the company is being run during the CIRP?

The resolution professional pays it as part of the business's operations, and such taxes form part of the insolvency resolution process costs.

Can customs authorities sell a corporate debtor's goods lying in a warehouse to recover duty during the moratorium?

No. In Sundaresh Bhatt v CBIC (2022), the Supreme Court held that customs authorities may only file a claim in the CIRP and cannot sell the goods during the moratorium.

Will a company acquired under a resolution plan lose its accumulated tax losses because its shareholding changed?

Ordinarily not. The restriction on carry forward of losses after a change in shareholding does not apply where the change takes place under a resolution plan approved under the Code, after the tax authority has been heard.

6. Related Topics

• Topic 31: Interim Finance and Process Costs. Current taxes as CIRP costs.
• Topic 43: Government Dues. Rainbow Papers and after.
• Topic 77: Section 238. Overriding effect over other laws.