Tax Dues in Insolvency under the IBC: Priority, Moratorium and the Clean Slate after the 2026 Amendments

Tax authorities are among the largest creditors in many insolvencies, yet the Insolvency and Bankruptcy Code, 2016 (“IBC”) does not give tax dues under IBC any special treatment during a corporate insolvency resolution process (“CIRP”). This has led to significant litigation over whether statutory tax charges constitute “security interests”, what tax authorities may do during an IBC moratorium, and whether tax claims survive an approved resolution plan. The 2026 amendments to the IBC and income tax law have clarified several of these issues.

Where Tax Dues Rank?

In liquidation, Section 53(1) sets the order of distribution. Dues owed to the Central and State Governments are placed in clause (e)(i), alongside the unpaid balance of secured creditors who enforced their security, and below insolvency costs, secured creditors who relinquished security, certain workmen’s and employee dues, and unsecured financial creditors.

The Rainbow Papers debate. In State Tax Officer v. Rainbow Papers Ltd. (Supreme Court, 6 September 2022), the Court treated a statutory first charge under the Gujarat Value Added Tax Act, 2003 as a security interest, making the State a secured creditor. In Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. (Supreme Court, 17 July 2023), the Court confined Rainbow Papers to its facts.

The 2026 statutory position. The Insolvency and Bankruptcy Code (Amendment) Act, 2026, in force in this respect from 26 May 2026, resolves the issue by statute:

• an Explanation to Section 3(31) provides that a security interest exists only if created by agreement or arrangement between two or more parties, and not merely by operation of law; and
• an Explanation to Section 53(1)(e)(i) provides that Government dues for the whole or any part of the two years preceding the liquidation commencement date rank under that sub-clause, whether or not secured by agreement or by law, and any remaining Government dues rank under clause (f).

A tax authority can therefore no longer claim secured-creditor priority in an IBC liquidation merely because a tax statute creates a charge.

What Tax Officers May do During a Moratorium

Section 14(1) prohibits the institution or continuation of suits and proceedings against the corporate debtor, and any action to recover or enforce security interest, from the insolvency commencement date. Section 238 gives the IBC overriding effect.

In Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs (Supreme Court, 26 August 2022), the Court held that once a moratorium is in force, the customs authority has only limited jurisdiction: it may assess or determine the quantum of duty, but cannot initiate recovery, and must file its claim in the insolvency process.

Adjustment of refunds. In Bharti Airtel Ltd. v. Vijaykumar V. Iyer, 2024 INSC 15 (3 January 2024), the Supreme Court held that insolvency set-off is not available during CIRP. Applying this, the NCLAT in Devarajan Raman, Liquidator of Kotak Urja Pvt. Ltd. v. Principal Commissioner of Income Tax (24 May 2024) directed the Income Tax Department to return a refund of about ₹90 lakh that it had adjusted against tax dues while the moratorium was in force.

Liquidation moratorium. Under amended Section 33(1)(b)(iv), a liquidation order must now declare a moratorium, subject to Section 52. The earlier Section 33(5) has been omitted.

Penalty for breach. New Section 67B allows the Adjudicating Authority to impose a penalty on persons who authorise or permit a contravention of the moratorium, on application by the Insolvency and Bankruptcy Board of India, the Central Government or an authorised person.

Tax Claims after an Approved Resolution Plan

In Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657, the Supreme Court held that claims not included in an approved resolution plan stand extinguished, including statutory dues owed to the Central Government, State Governments and local authorities, and that no proceedings can be continued in respect of them.

The 2026 amendments codify this in Section 31(6): unless the plan provides otherwise, prior claims against the corporate debtor and its assets under any law are extinguished, and no proceedings, including proceedings for assessment of such claims, may be continued or instituted. Explanation III deems this to apply to plans approved since the Code came into force, except matters that have attained finality. Explanation I preserves claims against promoters, persons in management or control and guarantors.

Tax authorities, like other creditors, must therefore submit claims within the CIRP timetable. Belated claims after the committee of creditors approves a plan are generally not admitted, as the Supreme Court held in M/s RPS Infrastructure Ltd. v. Mukul Kumar, 2023 INSC 816.

Income Tax Law After 1 April 2026

The Income-tax Act, 2025 came into force on 1 April 2026 and repealed the Income-tax Act, 1961, subject to the savings in Section 536. Several provisions relevant to insolvency continue in the new Act:

• Refund set-off. Section 438 (formerly Section 245) permits a refund to be set off against sums payable after written intimation. The decisions in Bharti Airtel and Kotak Urja indicate that this power cannot override the IBC moratorium.
• Modified demands. Section 290 requires the Assessing Officer to serve a modified notice of demand where tax, interest, penalty or other sums are reduced as a result of an order of the Adjudicating Authority under the IBC.
• Carry-forward of losses. The Act continues to relax the restriction on carry-forward of losses on a change in shareholding where the change results from a resolution plan approved under the IBC, after a reasonable opportunity of being heard is given to the jurisdictional Principal Commissioner or Commissioner.
• Minimum alternate tax. In computing book profit, the Act continues to allow a company admitted into CIRP to reduce the aggregate of brought-forward unabsorbed depreciation and loss.
• Returns. For a company in CIRP, the return is to be verified by the insolvency professional appointed by the Adjudicating Authority.
• Liquidators. The provisions requiring a company liquidator to notify the Assessing Officer and set aside amounts for tax apply irrespective of other laws, except the IBC.

Readers should verify the precise section numbers and current text in the Income-tax Act, 2025, as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026.

Issues that Remain

• Assessment during moratorium. Sundaresh Bhatt permits assessment but not recovery; how far assessment proceedings may continue after a plan is approved is now governed by Section 31(6), which bars even assessment of extinguished claims.
• Pending prosecutions. The omission of Section 74 of the IBC does not affect prosecutions instituted before 26 May 2026.

Frequently Asked Questions

How are tax dues treated under the IBC?
Tax dues are generally treated as claims under the IBC and do not receive special priority merely because they are statutory dues.

Do tax dues have priority in IBC liquidation?
Under Section 53, Government dues for the relevant two-year period rank under Section 53(1)(e)(i), while remaining Government dues rank under Section 53(1)(f).

Can tax authorities recover tax dues during the IBC moratorium?
No. Tax authorities may assess or determine dues where permitted, but recovery or enforcement actions are restricted by the Section 14 moratorium.

What happens to tax dues after an IBC resolution plan is approved?
Claims not provided for in the approved resolution plan are generally extinguished under Section 31(6), subject to its exceptions.

Can the Income Tax Department adjust a refund during CIRP?
The Supreme Court has held that insolvency set-off is not available during CIRP, and tax authorities cannot use refund adjustment to circumvent the IBC moratorium.

Legal Information Disclaimer

This article provides general information about Indian law as it stood on 16 September 2026. It is not legal advice, and reading it does not create an advocate–client relationship. Statutes, rules and judicial interpretations change, and their application depends on the facts of each matter. Readers should consult the current official text of the laws and judgments cited and should not act on this information without advice specific to their circumstances. This article is published for legal awareness and education and is not intended to advertise or solicit professional work.

Sources / Authorities

1. Insolvency and Bankruptcy Code, 2016 — Sections 3(31), 14, 31, 33, 53, 67B, 235A, 238 (as amended) — IBBI – Legal Framework
2. Insolvency and Bankruptcy Code (Amendment) Act, 2026 (No. 6 of 2026) — Gazette text (IBBI); Notification S.O. 2625(E) dated 22 May 2026 — IBBI
3. Income-tax Act, 2025 (No. 30 of 2025) — Sections 290, 438 and 536 — Income Tax Department; Press Information Bureau release, 1 April 2026 — PIB
4. State Tax Officer v. Rainbow Papers Ltd., Supreme Court of India, 6 September 2022
5. Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd., Supreme Court of India, 17 July 2023 — IBBI copy
6. Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs, Supreme Court of India, 26 August 2022 — Indian Kanoon
7. Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657, Supreme Court of India, 13 April 2021
8. M/s RPS Infrastructure Ltd. v. Mukul Kumar, 2023 INSC 816, Supreme Court of India, 11 September 2023 — Indian Kanoon
9. Bharti Airtel Ltd. v. Vijaykumar V. Iyer, 2024 INSC 15, Supreme Court of India, 3 January 2024 — Indian Kanoon
10. Devarajan Raman, Liquidator of Kotak Urja Pvt. Ltd. v. Principal Commissioner of Income Tax, Company Appeal (AT) (Insolvency) No. 977 of 2023, NCLAT, New Delhi, 24 May 2024