GST Implications on Write-off of Unclaimed Creditors' Balances: Analysis of Haryana AAR Ruling
This article analyses the recent Haryana Authority for Advance Ruling (AAR) decision clarifying that the write-off of unclaimed or untraceable creditors' balances through the Profit & Loss Account does not attract GST, as such write-offs do not constitute a "supply" under the CGST Act, 2017. It further discusses the implications related to reversal of Input Tax Credit (ITC) in such cases, highlighting potential issues of double taxation when ITC has already been legitimately claimed and the supplier has paid GST. Drawing parallels with the established non-refundability of GST on bad debts, the article underlines the importance of distinguishing genuine non-payment cases from accounting write-offs. This ruling reinforces the foundational GST principle of avoiding cascading tax and preserving tax neutrality, providing clarity for businesses in managing their GST compliance and accounting practices.
Background and Legal Issue
In commercial practice, it is not uncommon for credit balances of suppliers/creditors to remain outstanding over prolonged periods due to disputes, operational issues, or the inability to trace the party. As a matter of prudence, such balances are eventually written back in the books by crediting them to the P&L Account.
The fundamental issue was whether such a write-back of liability constitutes a "supply" under Section 7 of the CGST Act, which defines the term to include all forms of supply of goods or services or both, for a consideration, and in the course or furtherance of business.
The Haryana AAR clarified that a unilateral write-back of unclaimed liability does not amount to supply since there is no consideration, nor any activity of goods or services rendered. Accordingly, GST is not applicable to such write-offs (Haryana AAR ruling, 2025).
Input Tax Credit and Double Taxation Concerns
A connected aspect relates to the treatment of Input Tax Credit (ITC) under such circumstances. As per Section 16(2) of the CGST Act, entitlement to ITC is contingent, inter alia, on the supplier having paid the due tax to the Government. Once the supplier has discharged the output liability, and the ITC is duly reflected in GSTR-2B, the recipient is entitled to avail credit.
If, notwithstanding this, the recipient is directed to reverse ITC due to a subsequent write-off of creditor balances, this creates an anomaly. It effectively results in double collection of GST:
- The supplier's side-where GST is already paid on the transaction.
- The recipient's side-where reversal of ITC amounts to paying GST again on the same supplies.
This defeats the very object of GST as a value-added tax, which is designed to avoid cascading and duplication of levy (Section 7 and Section 16 CGST Act, 2017).
Contrastingly, in situations where the supplier has not discharged GST, the recipient cannot legitimately retain ITC, and reversal is warranted to protect Government revenue. However, the fact that ITC appears in GSTR-2B ordinarily serves as a conclusive indicator that the tax liability has indeed been discharged by the supplier.
Conceptual Distinction with Bad Debts
The treatment of bad debts under GST provides comparable insight. GST law does not permit adjustment, refund, or reversal of tax paid in respect of outward supplies subsequently written off as bad debts. The Central Board of Indirect Taxes and Customs (CBIC) FAQs specifically affirm that no refund or ITC adjustment is allowed in such cases (CBIC GST FAQs). The rationale is that GST is levied at the point of supply, independent of the subsequent recoverability of consideration.
In the case of unclaimed creditors' balances, however, the transaction does not represent any outward supply at all, and thus the need to levy GST or reverse ITC does not arise in the first place.
Key Takeaways for Taxpayers
- Write-off of unclaimed or untraceable creditors' balances by crediting the P&L Account is outside the scope of supply, as per the Haryana AAR.
- Where GST has already been discharged by the supplier, any subsequent ITC reversal by the recipient would result in double taxation and is not in consonance with GST principles.
- ITC reversal is justified only where the supplier has not paid GST; the presence of ITC in GSTR-2B provides assurance of compliance by the supplier.
- The position is consistent with the treatment of bad debts, ensuring that GST remains levied only on actual taxable supplies and not on mere accounting adjustments.
Conclusion
The ruling by the Haryana AAR provides valuable clarity to taxpayers on the GST treatment of unclaimed creditor balances. It underscores the broader legislative intent of GST to avoid cascading of taxes and prevent unjust enrichment of the revenue through double taxation. Businesses would be well advised to document their ITC positions carefully and distinguish between cases involving genuine non-payment of GST by suppliers and mere balance-sheet write-offs, to ensure compliance while safeguarding their legitimate credits.
The author is a Chartered Accountant with extensive expertise in direct and indirect taxation, audit and financial advisory. He possesses in-depth knowledge of the Income Tax Act, GST regulations and Companies Act compliance, combined with practical experience in tax planning, audit procedures and regulatory filings. Apart from his professional practice, Akshay actively engages in stock market investing and technical analysis, which complements his analytical acumen in financial matters. Through his work, he is committed to delivering precise, compliant, and insightful solutions that support sustainable business growth and informed decision-making among fellow professionals and stakeholders.
References:
- Section 7, Central Goods and Services Tax Act, 2017
- Section 16(2), Central Goods and Services Tax Act, 2017
- CBIC FAQs on GST and Bad Debts
- Haryana Authority for Advance Ruling, 2025 (No GST on Unclaimed Creditors' Balance Written Off)
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