GST On Sale Of Not Readily Realizable Assets In Liquidation Under IBC

The explanation to regulation 37A further clarifies that for the purposes of the said sub-regulation, NRRA means any asset included in the liquidation estate which could not be sold through available options and includes contingent or disputed assets and assets underlying proceedings for preferential, undervalued, extortionate credit and fraudulent transactions under the Insolvency Bankruptcy Code. Thus, any amounts recoverable, whether or not there are suits or other legal proceedings filed in respect of them, including applications under referred to in sections 43 to 51 and section 66 of the IBC.

Why Specific Provision for NRRA?

NRRAs can form a large part of a financially distressed company's assets. Until regulation 37A was introduced, most Liquidators only opted for sale of the company itself as a going concern. This would discourage several bidders who were not interested in buying the entire company, but only in its receivables. Having specific provisions for sale of NRRAs is a way forward in obtaining maximum value for them. When assets of a company are itemized and sold separately it attracts those bidders who specialize in each item who can offer a better price for the same.

Since the concept of NRRAs is new to most, it is understandable that many Liquidators, let alone bidders would not be familiar with the procedure foe sale of the same including valuation of NRRA, qualification of bidders and the GST applicable on sale of the same. In this article we will only be analyzing the GST applicable on sale of NRRA by a Liquidator under the IBC.

GST On NRRAs

The Central Goods and Services Tax Act, 2017 does not provide for NRRAs, but it does mention 'actionable claims'. Section 2 (52) of the CGST Act defines "goods" as every kind of movable property other than money and securities but specifically includes certain items listed one of which is 'actionable claim'.

Section 2 (1) of the CGST Act provides that "actionable claim" shall have the same meaning as assigned to it in section 3 of the Transfer of Property Act, 1882.

Schedule III of CGST Act, 2017 state that transactions in actionable claims (other than those relating to lottery, betting or gambling) shall neither be treated as a supply of service nor as a supply of goods. Thus, it can be concluded that if an NRRA satisfies the definition of 'actionable claim' under TOPA then its transfer is exempt from GST.

What Are Actionable Claims?

The Transfer of Property in turn defines "actionable claim" as a claim to any debt, other than a debt secured by mortgage of immoveable property or by hypothecation or pledge of moveable property, or to any beneficial interest in moveable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent;.

Thus, if a debt or claim is not secured by mortgage, hypothecation or pledge the same is considered as actionable claims and its transfer would be exempt from GST.

What About Secured Debts Or Claims?

Does this mean that other debts or claims which are secured by mortgage, hypothecation or pledge attract GST? The answer is no. The GST Council has in its FAQ on Banking, Insurance and Stock Brokers Sector clarified as under:

"Sale, purchase, acquisition or assignment of a secured debt does not constitute a transaction in money; it is in the nature of a derivative and hence a security."

As we have seen above the definition of 'goods' under the CGST Act, excludes money and securities and since secured debts are categorized as 'securities' they are not 'goods' under CGST Act and thus do not attract GST.

Unsecured debts that are 'actionable claims' are exempt under Schedule III of CGST Act.

Secured debts do not fall under definition of 'goods' under CGST Act and thus do not attract GST.

For those transferring NRRAs other than under IBC, it is pertinent to note that in case any amount is charged towards a 'service' in relation to the transfer of the NRRA, such as 'processing fees' or 'handling charges' or 'brokerage' then such amount taken towards the 'service' would attract GST.

The author is an Advocate practicing in Mumbai. Views are personal.