GST ITC REVERSAL IF RECIPIENT FAILS TO PAY TO SUPPLIER WITHIN 180 DAYS

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Trade creditors and other accounts payables constitute financial liabilities of the company which are payable to the respective creditors according to the terms of contracts.

Ind As :-

  • Ind AS 109 specifically provides for the manner in which the financial assets and financial liabilities are to be dealt with the books of the accounts .
  • The standard states that financial liabilities should only be de-recognized by an entity when the related contractual obligation is ‘discharged, cancelled or expired’.
  • The liability of the entity does not extinguish by the mere passage of time.

Question : If creditors were written off or derecognized in our books, should we reverse the Input Tax Credit of GST that has been availed on the particular supply made by the creditor?

Answer : Since creditors written off is being treated as “discharge of liability”, logically ITC need not be reversed on the liability which is considered to be discharged.

But as per Section 16 of CGST Act,2017 :

Where the recipient of goods or services or both has failed to pay the supplier within 180 days from date of invoice, input tax credit availed, in proportion to such unpaid consideration shall be added to the recipient’s output tax liability along with interest as may be applicable (as of now, 18%).

Clarity :

  • If the creditor is written off within 180 days from the date on which the liability was arised, then ITC availed on the transaction entered with that particular creditor need not be reversed.
  • If the particular creditor is not written off within 180 days from the date on which the liability was arised, then ITC availed on the transaction entered with that particular creditor needs be reversed along with interest @ 18% as per the provisions of Sec.16 of CGST Act,2017.
  • The above 180 days concept of GST doesn’t apply to those creditors whose supplies are taxable under reverse charge basis.

Conclusion :

In simple terms, Creditors written off is treated as “Discharge or Official Accomplishment of Liability“. Keeping this in mind, one can interpret the provisions of any statute unless the statute itself mentions anything to the contrary.

AUTHOR : PRABHATH SHARMA (CLICK HERE TO VIEW PROFILE)