Whether Payment for Supplies can be made by Book Adjustments for availing ITC

There has been a confusion among the dealers whether the consideration for supplies can be paid by book adjustments under GST Act. In many businesses, the dealers buy and sell goods or services from one another for which they don't make payment in cash rather they adjust the book entries for such purchases and sales.

Section 16 of CGST Act provides conditions for eligibility to avail input tax credit. In the section, there is a proviso which prohibits the recipient from availing input tax credit unless he makes payment for the value of such supply of goods or services or both along with tax thereon, to which the input tax credit relates, within 180 days from the date of invoice. The recipient is eligible to take input tax credit only after making the payment beyond 180 days.

Section 2(31) of CGST Act defines "consideration" which is reproduced as below:

(31) - "consideration" in relation to the supply of goods or services or both includes– 

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government; 

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government: 

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;

With reference to the above definition for consideration, the payment can be made either in money or otherwise. Here we can conclude that the word "otherwise" includes all forms of payment for the supplies.

The definition also clarifies that the payment can be made by the recipient or by any other person. When the payment is made by any other person on behalf of the recipient who actually receives supplies, such payment can be adjusted only by book adjustment in the books of the recipient.

Also, according to Section 7 of the CGST Act, the scope of supply includes barter and exchange as other forms of supplies. When such forms of supplies, barter or exchange occurs, the settlement for such transactions can be made only by exchanging the goods or services rather than by cash, in normal trade practices.

Schedule I lists out the activities as supplies even if made without consideration. Such transactions mostly happen between the branches of the same company located in different states or union territories having the same Permanent Account Number but different GST registrations. Such transactions are adjusted in books only without actual payment in cash. The act also doesn't deny input tax credit for these transactions.

Also, please refer to the advance ruling: In re Senco Gold Ltd (GST AAR West Bengal) Appeal Number : Order No. 02/WBAAR/2019-20, the ruling was favoured to the applicant that there is no need to reverse ITC for book adjustments and can be considered as payment for the supplies made.

So we can conclude that consideration for the supplies can be made not only by cash but also other means as recognized by the Act. The recipients need not to reverse the input tax credit in case the consideration is made by merely book adjustments as long as the same is agreed by both parties, the supplier and the recipient. After all the purpose of the proviso is to make sure that the supplier doesn't suffer the tax from his pocket and he is paid in full for the supplies along with tax which is also ensured by the book adjustments as per the terms of the contract of the supplies.

The author can also be reached at uday.gstguide@gmail.com

Disclaimer: This article is only for the purpose of understanding the provisions of the Act, as known by the author. The author bears no responsibility on decisions taken by the readers whatsoever. E&OE.