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GST Implications on Bad Debts

Amit Harkhani 
Updated on 14 August 2020

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In this article we will discuss the GST Implication on Bad Debts.

Before moving ahead first will discuss the two important sections related to this article.

Section 15: Value of taxable supply.

Section 15 of CGST Act, 2017 says that the value of a taxable supply of goods or services or both shall be the "TRANSACTION VALUE".

Transaction Value: It is a combination of three elements.

Price actually paid or payable for the supply (+) Supplier and the recipient of the supply are not related (+) Price is the sole consideration for the supply"

Also if you see the exclusion list of section 15 the only one term i.e. "DISCOUNT" shall be excluded from the value of taxable supply and there is no specific exclusion under Section 15 from the value of supply in respect to non-recovery of payments or bad debts.

Accordingly, GST is levied on transaction value which is available at the time of supply but does not exclude the value of Bad debts.

Now understand the section of Debit note and Credit note.

GST Implications on Bad Debts

Section 34(1) of CGST Act, 2017 

Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.

After reading the above Section it is clarified that the Credit note can be issued under the following circumstances only.

1) Excess rate of units or GST charged. (This is possible in case of Re-negotiation of the value of contracts.)
2) Goods sent back to the supplier.
3) Deficiency in goods and/or services.

Further Section 34(2) of CGST Act, 2017 says that such credit note shall be issued at any time but not later than September following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier.

 

Provided that no reduction in an output tax liability of the supplier shall be permitted if the incidence of tax and interest on such supply has been passed on to any other person.

Conclusion:

Now reading together the above two sections it can be said that bad debts are not allowed for the reduction in GST liability. Generally, on non-receipt of payments, credit notes are being raised by taxpayers to avoid the incidence of tax. However, this needs to be seen very cautiously. There has to be supporting documents with every credit notes to evident the above reasons for raising a credit note. 


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