GST Dues Not Extinguished in IBC Going-Concern Sale 2026

What Happened?

The Madras High Court recently rejected a plea by a liquidated company seeking complete exemption from GST dues after a going-concern sale under the Insolvency and Bankruptcy Code (IBC). The court ruled that GST liabilities do not automatically disappear just because the company was sold as a going concern. However, the court granted a readjudication on a 25% disputed tax deposit, offering partial relief to the company. This judgment clarifies an important gap in how GST authorities treat insolvency situations.

Background & Legal Context

Under the GST regime in India, businesses are liable to pay GST on supply of goods and services. When a company enters insolvency proceedings under the IBC, many stakeholders—including the company itself—often assume that unsecured liabilities like GST dues might be wiped out or significantly reduced. This is because the IBC 2016 has a mechanism for resolution and liquidation.

Key Legal Framework:

• GST Act, 2017 (Section 122, 129, 130): These sections empower tax officers to demand GST dues with interest and penalty. GST is a statutory debt that binds the business entity.
• IBC 2016 (Sections 53, 54): The insolvency law allows for resolution of a company or liquidation. A "going-concern sale" means the business is sold as an operating unit, not asset-by-asset.
• GST Law Position: GST is a destination-based tax collected by suppliers on behalf of the government. Unpaid GST is a direct liability of the supplier, not a secured or preferential creditor claim.
• Madras HC's Key Finding: The court held that mere transfer of business operations through a going-concern sale does NOT extinguish GST dues. The liability attaches to the tax period in which the supply was made, not the entity that currently owns the assets.

What Changed in 2025-26?

The Income Tax Act 2025 (Section 164 and related provisions) strengthened the position of tax authorities by clarifying that statutory liabilities like GST and income tax cannot be arbitrarily discharged through insolvency processes without proper adjudication. The GST Council has also reiterated through various circulars that GST dues are "public funds" and rank equally with other direct tax liabilities in insolvency resolution.

What Does This Mean for You?

For Companies in Insolvency/Liquidation:

• GST Dues Are Not Forgiven: If your company has unpaid GST from any assessment year (especially AY 2025-26 and AY 2026-27), the GST authorities will pursue recovery even after a going-concern sale or liquidation. You cannot assume these will vanish.
• Liability Follows the Tax Period: The GST liability is tied to the period in which the supply was made (e.g., April 2025), not to who currently owns the business. The liquidator, resolution professional, or new buyer cannot shield you from this.
• Readjudication Opportunity (Limited): Like in this Madras HC case, you may get ONE chance to challenge disputed portions of the GST demand (here, 25% was allowed readjudication). But only if you can prove the demand itself is wrong, not just claim insolvency wipes it out.
• Going-Concern Buyers Beware: If you are buying a going-concern business in liquidation, clarify GST status upfront. The seller's GST liabilities may NOT transfer to you, but buyers often get entangled in disputes if they operate the business using the same GSTIN.

For GST Departments & Authorities:

• This ruling strengthens the GST department's hand to recover dues from liquidation estates and prevents companies from using insolvency as a tax-evasion tool.
• GST dues now rank at par with income tax and other statutory liabilities for recovery priority in insolvency liquidations.

Practical Impact for AY 2025-26 and AY 2026-27:

If your company is currently under GST scrutiny or has received a demand notice for these assessment years, do NOT assume insolvency will clear the slate. GST authorities are now emboldened to pursue claims aggressively, even against liquidation proceeds.

What Should You Do Now?

Immediate Action Items:

• Audit GST Position: If your company is considering or facing insolvency, immediately calculate total GST dues for the last 3-5 years. This includes unpaid taxes, interest under Section 122 of the GST Act, and potential penalties under Section 129.
• File Objections/Appeals Early: Like the 25% disputed amount in this case, challenge GST demands NOW through proper appellate channels (GST Appellate Authority, then Advance Authority) before insolvency proceedings start. Once insolvency begins, your leverage reduces significantly.
• Negotiate with GST Officers: Many GST departments allow partial payment plans or settlement schemes for businesses in financial distress. Explore this before formal insolvency.
• Disclose to Insolvency Professional: When filing insolvency petition, fully disclose all GST liabilities to the Insolvency Professional (IP). Hiding GST dues is illegal and can attract personal liability under Section 141 of the IBC.
• Protect Personal Directors: Under the Income Tax Act 2025 (Section 167) and GST law, personal directors may face recovery proceedings if GST is not paid by the corporate entity. Ensure proper separation of personal and corporate accounts.
• For Buyers of Going-Concern Businesses: Before taking over a GSTIN or business operations, obtain a detailed GST compliance certificate from a CA showing all dues have been settled. Do NOT assume the previous owner's liabilities transfer to you—but verify in writing.

Consultation Required:

This ruling is a game-changer. If you are a company in financial stress or facing GST demands, consult a GST specialist CA and an insolvency lawyer together. The two domains now intersect critically, and a wrong move can be costly.

Key Takeaways

• GST dues do NOT automatically extinguish in going-concern sales under IBC. They remain a statutory liability of the tax period in which supplies were made.
• Readjudication is possible only for genuinely disputed portions, not to escape GST liability altogether. The burden of proof is on the taxpayer.
• GST ranks equal to income tax in insolvency liquidations. Both are "public funds" and are pursued with equal priority by authorities post-October 2026.
• For AY 2025-26 and AY 2026-27, expect aggressive recovery action by GST departments against companies facing insolvency or liquidation.
• Planning matters: File appeals, negotiate settlements, and disclose all liabilities to insolvency professionals BEFORE formal proceedings begin. Acting after insolvency starts significantly reduces your negotiating power.

Bottom Line: Insolvency is not a GST-forgiveness tool in India anymore. The Madras HC judgment of October 2026 makes this crystal clear. Act responsibly, disclose fully, and seek expert guidance early.

Need expert help with this? EaseValue CAs in Jaipur — WhatsApp 63677 44602