Section 16(2) of CGST Act, 2017

The transfer of a sundry creditor balance to an unsecured loan account through a book entry does not, in itself, trigger an automatic reversal of Input Tax Credit (ITC) under the second proviso to Section 16(2) of the CGST Act, 2017.

Legal Position & Clarification

• Payment Requirement: The second proviso to Section 16(2) mandates that a recipient must pay the supplier the value of the supply (along with the tax payable) within 180 days from the date of the invoice. Failure to do so requires the recipient to reverse the ITC, along with interest.

• Mode of Payment: The GST law does not restrict the "mode" of payment to cash or bank transfer only. Book adjustments (settling mutual debts or converting an outstanding creditor balance into a loan) are generally considered a valid discharge of an obligation or debt.

• Judicial Precedent: Authority for Advance Rulings (e.g., Paragon Polymer Products Pvt. Ltd.) have held that when payment is settled through book adjustments (such as converting debt into a loan), the law has not prohibited such methods. Since the primary objective of the proviso is to ensure the supplier is "paid," settling the liability through an accounting entry that effectively discharges the payment obligation is often viewed as compliant.

Key Considerations

1. Discharge of Obligation: To be safe, the accounting entry should clearly document the mutual consent of both parties to treat the loan conversion as a full and final settlement of the outstanding invoice.

2. Evidence: If audited, you must be able to demonstrate that the book entry served as a legitimate settlement of the debt for the specific supply of goods or services.

3. Nature of the Transaction: Ensure this is a genuine commercial transaction. If the "loan" is never intended to be repaid or if the "book entry" is merely a sham to avoid the 180-day rule without actual settlement of the liability, it could invite scrutiny from tax authorities.

Summary:

The second proviso to Section 16(2) of the CGST Act requires the recipient to pay the supplier within 180 days to retain ITC. Converting a sundry creditor to an unsecured loan through a book entry is a recognized method of settling debt, and provided the transaction is genuine and mutually agreed upon, it is generally accepted as a valid discharge of payment, meaning ITC reversal is typically not required.