GST Law: Tax as First Charge on Property Except Under IBC India’s GST regime is serious about collecting tax dues and taxing authorities have one of the strongest recovery tools in the form of the concept of “tax as the first charge on property”. The introduction of the Insolvency and Bankruptcy Code, 2016 (IBC) has created an important exception to the previously discussed rule and has fundamentally altered the way priority of claims will be handled in the context of insolvency proceedings. What Does “First Charge on Property” Mean When GST has first-charge status over property, it means that tax authorities will be paid first for any taxes owed by the taxable person. Therefore, they take precedence above any other types of secured or unsecured creditors, like loans or mortgages. The first charge is a statutory charge created automatically at law; a separate contractual arrangement is not needed for this type of charge.
The charge arises upon the due date of a tax obligation and remains in force until the obligation has been paid in full by the taxpayer. The purpose of providing a first charge over property by way of GST is threefold:
To ensure that government revenues (i.e., tax and government dues) are collected
To deter individuals from avoiding paying taxes and
To ensure that government dues are not subordinate to private claims. This helps to promote compliance and discipline within the tax system.
Refer here: Scope and Ambit of the Term 'Proceeding' Under GST Law
Legal Basis Under GST Law Section 82 of the CGST Act, 2017 According to Section 82 :
"Any amount owed by a taxable individual under this law will be considered to have precedence over all other claims to the taxpayer's assets."
Key Takeaways from Section 82 Claims for payment of GST may have priority over all other claims.
Applies to both movable and immovable assets.
Will automatically be a claim against the taxpayer's property once the taxpayer owes GST.
After reading the above statute, the claims for GST payment will have super-priority over other claims for payment.
The Crucial Exception: Insolvency and Bankruptcy Code (IBC) Why GST Law is Overriding by IBC IBC is specific later law, meant to give a timely resolution process for insolvent persons and entities. Section 238 of IBC states:
"The provisions of this Code will prevail, even though there is a conflict with any other applicable law".
This non-obstante clause gives IBC overriding legal authority, even above the GST law.
Position of GST Dues Under IBC The GST Tax Authority is considered as an Operational Creditor.
GST Debt is not given automatic first priority by operation of law.
The GST Debt is resolved through the "waterfall" mechanism of section 53 of the IBC law.
Refer this: Liability for Paying Unpaid GST Dues in Specific Cases
Waterfall Mechanism Under IBC (Section 53) The Insolvency and Bankruptcy Code lays out a defined order of priority for the distribution of assets in the event of liquidation of a corporate debtor. This provides for an equitable and predictable process for the settlement of claims. There is a defined order of priority for creditor claims arising from the liquidation of a corporate debtor's assets, as follows:
Insolvency resolution process costs, including those of the resolution professional/liquidator, as well as other process expenses.
Secured creditors that have relinquished their security and workmen's dues for the previous 24 months.
Employee wages and other unpaid amounts owed to employees (other than those classified as workmen) for the previous 12 months.
Unsecured financial creditors, that is, those without security interests. These include some lenders and bondholders.
Amounts due to the government, including amounts for GST, customs and income tax that are payable to the Central and State governments for the preceding two years.
Any other residual claims that remain after payment of amounts listed above.
GST due to the government will not have first charge priority and, therefore, will be subordinate to claims made by secured creditors. This confirms the primacy of the Insolvency and Bankruptcy Code over tax legislation.
Important Judicial Pronouncements Rulings by the Central Government and National Company Law Tribunal The courts agree on the following:
The IBC has priority over Division B Section 82 of The Central Goods and Services Tax Act;
Taxing authorities and agencies cannot enforce their first charge once insolvency proceedings commence.
Tax authorities are bound by the approved Resolution Plans.
Several notices from both the Central Government and the NCLT emphasized the revival of a corporate debtor prevailed over tax recovery.
Practical Considerations Businesses Under an approved Resolution Plan, GST liabilities may be determined to be reduced or eliminated.
No more will GST taxing authorities be permitted to take aggressive recovery actions once the Corporate Insolvency Resolution Process begins.
Banks and Financial Institutions A secured creditor will, under the IBC, continue to hold priority over an unsecured creditor;
A secured creditor will also have greater certainty regarding its recovery rights and the relief it might obtain from the NCLT through the IBC.
GST Authorities Must file all applicable claims to the Resolution Professional;
Cannot independently attach property to recover debts owed to the authorities once a Corporate Insolvency Resolution Process commences.
GST vs IBC - A Quick Comparison Particulars GST Law IBC Priority of Dues First charge on property As per Section 53 waterfall Overriding Effect Section 82 of CGST Act Section 238 of IBC Treatment of Govt Dues Highest priority Below secured creditors Applicability During Insolvency Continues unless overridden Becomes dominant once CIRP starts Nature of Proceedings Recovery-oriented Resolution and revival-oriented Objective Tax recovery Insolvency resolution
Conclusion Although the General Sales Tax (GST) Law states that a tax liability is treated as the first priority when it comes to property ownership, this rule does not apply when it comes to dealing with bankruptcy/commercial insolvency in accordance with the provisions of the IBC. The difference between these two concepts is essential for those who deal with taxpayers, lenders, or professionals involved in bankruptcy or tax litigation.
Suggested Read: Under GST Law - Understanding Tax as the First Charge on Property (Excluding IBC 7)
FAQs Is GST always the priority on property? GST is the priority on property normally; however, in some situations the priority position is altered (for instance, IBC proceedings).
Which law has prevailing authority, GST or IBC? The IBC has the prevailing authority as per section 238 of the IBC.
Can the GST authorities attach property during the corporate insolvency resolution process? No, once the corporate insolvency resolution process is commenced the GST authorities will submit their claim to the resolution professional.
Are the GST dues unsecured debt? No, the GST dues will be classified as operational debt and not secured debt under the IBC.
What is the outcome for the GST arrears when a resolution plan is approved? An approved resolution plan shall be binding on the GST authorities and regardless of whether all debts are waived.
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