[Opinion] From Operational Debt To Secured Claim | State CST Dues Under IBC

Shubhangi Shukla – [2025] 181 taxmann.com 818 (Article)

1. Introduction

The Insolvency and Bankruptcy Code, 2016 (“IBC”) was enacted with the objective of providing a consolidated, time-bound and creditor-driven framework for insolvency resolution and liquidation of corporate persons. One of the most contentious and evolving issues under the Code has been the treatment and priority accorded to Government dues, particularly State tax claims, during corporate insolvency resolution and liquidation proceedings. The question assumes greater significance where such dues are backed by statutory provisions creating a charge over the assets of the corporate debtor.

2. Central Sales Tax (CST) and Value Added Tax (VAT)

Central Sales Tax (CST) and Value Added Tax (VAT) dues payable to State Governments often arise prior to the commencement of insolvency proceedings and are frequently secured by statutory first charge provisions under State taxation laws. Section 48 of the Gujarat Value Added Tax Act, 2003 (“GVAT Act”) is one such provision, which declares that tax dues shall constitute a first charge on the property of the dealer.

Section 48 of the GVAT Act:

“Notwithstanding anything to the contrary contained in any law for the time being in force, any amount payable by a dealer or any other person or account of tax, interest or penalty for which he is liable to pay to the Government shall be a first change on the property of such dealer, or as the case may be, such person.”

3. Concept of Secured Creditor Under the IBC

A secured creditor is defined under section 3(30) of IBC as a creditor in favor of whom security interest is created. Section 3(31) of the Code defines “security interest” to include a right, title, interest or claim to property created in favour of, or provided for, a secured creditor and expressly includes statutory charges within its ambit. Section 3(30) defines a “secured creditor” as a creditor in whose favour such security interest is created.

4. Liquidation Waterfall Under Section 53 of the IBC

Section 53 of the IBC prescribes a order of priority for distribution of proceeds during liquidation. The waterfall mechanism reflects the legislative intent to balance competing stakeholder interests while ensuring predictability and certainty in insolvency outcomes.

Under Section 53(1)(b), two categories rank pari passu:

(i) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date, and

(ii) debts owed to secured creditors who have relinquished their security interest in the manner set out in Section 52.

Government dues are separately placed under Section 53(1)(e), ranking below unsecured financial creditors.

The interpretative challenge lies in determining whether State tax dues secured by a statutory charge fall within Section 53(1)(b)(ii) as secured debts or are relegated to Section 53(1)(e) as Government dues.