Creditors' dues find precedence over tax recovery in insolvency bill

MUMBAI: Tax recoveries will take a back-seat under the proposed insolvency law. In a bid to boost the sentiment among lenders, even repayment of dues to unsecured creditors has been given a higher priority as against payment of taxes to the government. A close reading of the Insolvency and Bankruptcy Code, 2015 ( insolvency bill), shows that the order of priority of repayment of outstanding dues from liquidated assets of the insolvent company is proposed to be changed via suitable amendments in tax laws.

Tax experts laud the bill for providing a legal framework for timely resolution of insolvency disputes, which would reduce the level of distressed loans. It will enable insolvent companies to close down within 180 days without much red tape. However, they admit that tax authorities may find recovery of outstanding taxes challenging.

"The order for settlement of dues, as provided under the Insolvency law would prevail.It would have an overriding effect over other laws, including the Income Tax (I-T) Act," says Gautam Nayak, tax partner, CNK & Associates. At present, under section 178 of the I-T Act, the liquidator of the company has to inform the I-T officer of his appointment. Subsequently , within three months, the I-T officer has to notify the liquidator of the amount which would be sufficient to cover the tax dues then prevailing and also those likely to arise. Secured creditors and liquidation expenses are discharged first, followed by I-T dues.

However, the Insolvency Bill, which calls for an amendment to section 178 of the I-T Act, pushes the priority of tax payments further downward.Clause 53 provides for the priority in which the debts of a company will be settled upon liquidation. "According to this clause, liquidation expenses, payment to secured creditors, specified dues to workmen and employees (for the period of 12 months prece ding the liquidation commencement date), dues to unsecured creditors would stack higher up the order of priority over `taxes due to government' when the debts of the company have to be settled upon liquidation," points out Girish Vanvari, tax head at KPMG.

The insolvency bill emphasizes: "It may be noted that unsecured financial creditors shall be paid before the government. This is intended to promote alternative sources of finance and the consequent development of bond markets in India."

Further, when referring to the payment of government dues, the terminology used in Any amount' due clause 53 is: ` to the state government and central government, in respect of the whole or any part of the period of two years before the liquidation commen cement date. "Recovery of old tax dues beyond two years would now have last priority; even for taxes due for last two years, the recovery would be possible only after payment of unsecured creditors. In most cases, nothing would be left over for payment of taxes," adds Nayak.

There are also a few aspects that need further clarity. Pranav Sayta, tax partner at EY, says: "The scope of coverage of the term `any amount due' needs clarity . For instance, would it include the company's own tax liability or its TDS liability as well? Considering the proposed change in the order of priority of payment to creditors, it is essential to get clarity on the same to ascertain the possibility of credit or refunds in the hands of the recipients of income."

To illustrate, TOI had earlier reported that the Supreme Court in April had directed Kingfisher Airlines to pay around Rs 372 crore to the I-T department for non-payment of tax deducted at source (TDS) from the salaries of its employees. Prior to this, airline employees had been served I-T notices for clearing their I-T arrears as tax had been deducted against their salaries but not deposited by the company .