Interplay Between Tax Laws and Insolvency and Bankruptcy Code on Liquidation

Abstract

The Insolvency and Bankruptcy Code, 2016 was passed to provide a clear set of rules for bankruptcy resolution and liquidation in India. Its goal is to make it easier to resolve claims quickly and get the most money possible. Still, its interaction with present Indian tax laws has made things very difficult, particularly when it comes to sorting out and prioritising tax claims during liquidation proceedings. The Code puts government debts lower on the list of priorities, but traditional tax laws generally put the government first, which leads to confusion and disagreement. This study analyses the interplay between tax claims and liquidation processes under the IBC, alongside the challenges in reconciling the divergent interests of creditors and tax authorities. The used methodology is doctrinal and analytical, using legislative interpretation, judicial precedents from the Supreme Court, NCLT, and NCLAT, with comparative analyses from the United States, the United Kingdom, and Singapore. Secondary literature and policy papers have been analysed to include the wider academic and policy discourses. The findings show that there is always a contradiction between the IBC's waterfall procedure as described in Section 53 and the claims made by tax authorities under other laws at the same time. Judicial interpretations, while mostly affirming the primacy of the IBC, have sometimes resulted in ambiguity, shown by cases such as Rainbow Papers. These arguments cause delays, unpredictable recoveries, and less confidence from creditors in the bankruptcy process. This article improves the current conversation by making clear the similarities and differences between tax law and the IBC framework. It calls for further harmonisation via reforms to the law and procedures to make liquidation processes more predictable, fair, and efficient, while also balancing the needs of creditors, tax authorities, and the economy as a whole