1. Introduction
Bad Debts can be said to be uncollectible debt. There are provisions under the Income Tax Act, 1961 which mandate that an assessee who has paid income tax on certain income , if turns out bad , the deduction towards the same can be availed by writing it off such debts from the books.
Now the question arises as to whether such deduction of bad debts is available under GST law or not. Lets start the deliberations.
2. Payment of GST to be made by supplier, even if payment is not received
As per Section 12(2) of the CGST Act, 2017, the liability to pay tax on supply of goods by the supplier arises on basis of time of supply which is the date of issue of invoice or due date of issue of invoice ( as prescribed under Section 31 of the CGST Act) . The requirement for payment of GST on advance of goods has been dispensed w.e.f. 15.11.2017.
In regard to services, as per Section 13(2) of the CGST Act, 2017 the time of supply is the date of invoice (date of provision of service if invoice not issued within prescribed time as per Sec 31) or date of payment whichever is earlier.
From above provisions, it is evident that payment of GST is required to be made by the supplier upon issuance of invoice of goods or services or due date of issue of invoice of goods or date of supply of service, as may be applicable. Thus even if the payment is not received by the supplier from the recipient, the supplier will be required to deposit GST on such supply upon triger of time of supply. Needless to mention here that upon receipt of advance of services also the supplier becomes liable to deposit GST.
It is pertinent to mention here that we are discussing here the cases covered under normal charging Section 9(1) of the CGST Act, wherein the supplier is liable to pay tax under forward charge mechanism. The above discussion is not relevant for cases covered under Section 9(3) and 9(4) viz Reverse Charge Mechanism wherein the tax is not paid by supplier but rather paid by recipient of supply.
3. Treatment if the payment is not received by Supplier and bad debts are written off
As discussed above , in case the supplier has issued invoice for taxable supply of goods or service it will be required to charge GST in such invoice and deposit the GST while filing the GST return.
Now subsequently, in case payment is not received from the recipient in respect of such supply and the amount recoverable in the books (including GST) towards the same is written off as bad debts. In regard to above situation, following two questions emanate and needs to be answered in light of GST law.
3-1 Whether supplier can avail adjustment of tax paid on supply upon writing off such debt?
As per GST law in regard to supply of services, adjustment of tax paid earlier on any supply is possible by issue of credit note. As per Section 34(1) of the CGST Act, 2017, credit note can be issued only:
i) where the taxable value or tax charged in tax invoice is found to exceed the taxable value or tax payable or
ii) where the goods supplied are returned by the recipient, or
iii) where the goods or services are found to be deficient.
Out of three above situations, one of the situation is return of goods by supplier. It may be noted that in case of return of goods, credit note will be issued and the debts standing in the books will be reversed with corresponding reversal of the sales. Thus any question of bad debts being written off on above supply will not arise.
Normally, the bad debts will be written off where payment of amount due towards supply made has not been received and therefore it cannot be said that excess taxable value was charged in the invoice or that goods or services are found to be deficient and thus none of situations where credit note can be issued is fulfilled and thus credit note cannot be issued in such a case. However in case partial amount has been received it can be argued that full amount was not paid by recipient due to deficient supply and credit note can be issued for balance amount.
Accordingly, adjustment of GST paid on amount of supply earlier made , the amount of debt towards the same is now fully being written off , cannot be made.It is pertinent to mention here that there are no provision in GST law for providing any relief in regard to bad debts. Therefore, in case any amount on which GST is paid is not recovered and fully written off in books, no adjustment can be availed in respect of such GST paid which will be sunk cost for the supplier.
3-2 Whether GST would be levied on writing off the bad debts treating it as independent supply? As per Section 7(1)(a) of the CGST Act, 2017 the presence of consideration is must for any transaction to be regarded as supply (except for 4 situations covered under Schedule-I of the CGST Act). In cases where the debts recoverable by supplier are written off as bad debts , there will be no flow of consideration to such supplier, rather in such cases the amount recoverable is written off from books. Therefore, writing off of bad debts would not be treated as an independent supply and thus will not be subjected to GST.
4. Concluding Remarks
Unlike Income Tax Act, 1961 there is no provision under GST Law allowing for any deduction towards writing of any debts (including GST) towards supply of goods or services on which GST has been paid. This is a double whammy for the supplier as despite providing supply of goods or services he has not got a single penny and rather he has shelled out GST from his own pocket.
Further the writing off the bad debts will not be exigible to GST as there is no flow of consideration from recipient to the supplier.
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
