So I play on a server that has the GSit plugin and I noticed when I /lay, when I have an item in both my hands, It doesnt show the item that I'm holding while laying there and my arms are frozen when I want to punch and it jiggles my torso just like it used to do for the paper doll.

I think this is a won't fix(you can disable it in the config). This feature disables that you are holding things and moving your arms when you are sleeping in a bed. I mean you are sleeping, why are the arms moving(and why are you holding for example a sword+shield^^). But if a server does some packet trickery to activate the sleep animation out of context, it's understandable that this logic won't hold up.