Treatment of Write Back Amount in GST Era

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ashoknawal
07 Aug 2019
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Background:

The taxpayers may have long outstanding the creditors whose dues are not paid. The
non-payment of dues may be on account of many business decisions.

As per prudent accounting policies, the long outstanding dues are reviewed periodically
and written back (credited to profit & loss account) in the books of accounts.

Write back arises on account of following reasons:

1) Overdue outstanding which is not been paid

2) Sundry balance written back

3) Double booking of invoices & other similar errors and rectifications

As mentioned earlier, such write back amount is offered for income and also thereby for
income tax calculation after arriving the profit on considering write back amount.

Issues to be addressed

1. Whether such income can be covered as activity / transaction and

2. whether to be considered as a supply under the GST Act?

Legal Provisions:

> Section 7 of CGST Act provides Meaning & Scope of Supply which is
reproduced below :

Section 7:

(1) For the purposes of this Act, the expression “supply” includes–

a. all forms of supply of goods or services or both such as sale, transfer, barter,
exchange, licence, rental, lease or disposal made or agreed to be made for a
consideration by a person in the course or furtherance of business;
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b. import of services for a consideration whether or not in the course or furtherance of
business;

c. the activities specified in Schedule I, made or agreed to be made without a

consideration; and

d. the activities to be treated as supply of goods or supply of services as referred to in

Schedule II.

(2) Notwithstanding anything contained in sub-section (1),–

a. activities or transactions specified in Schedule III; or

b. such activities or transactions undertaken by the Central Government, a State

Government or any local authority in which they are engaged as public authorities, as
may be notified by the Government on the recommendations of the Council, shall be
treated neither as a supply of goods nor a supply of services.

> We need to understand Meaning & definition of each word highlighted in

bold.

“goods” means every kind of movable property other than money and securities
but includes actionable claim, growing crops, grass and things attached to or
forming part of the land which are agreed to be severed before supply or under a
contract of supply;
“services” means anything other than goods, money and securities but
includes activities relating to the use of money or its conversion by cash or by
any other mode, from one form, currency or denomination, to another form,
currency or denomination for which a separate consideration is charged;
“Activity”means the combination and operation undertaken by corporate
body, whether or not, they amount to business, trade, profession in the ordinary
service. Activity is referred in different act as per their objective for giving the
meaning of action.
The schedule II of the CGST Act, 2017 has below entry which can be relevant in
this matter.

(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation,
or to do an act; and

(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;

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(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;

“supplier” in relation to any goods or services or both, shall mean the person
supplying the said goods or services or both and shall include an agent acting as
such on behalf of such supplier in relation to the goods or services or both
supplied;
“recipient”of supply of goods or services or both, means:

(a) where a consideration is payable for the supply of goods or services or both, the
person who is liable to pay that consideration;

(b) where no consideration is payable for the supply of goods, the person to whom the
goods are delivered or made available, or to whom possession or use of the goods is
given or made available; and

(c) where no consideration is payable for the supply of a service, the person to whom the
service is rendered, and any reference to a person to whom a supply is made shall be
construed as a reference to the recipient of the supply and shall include an agent acting
as such on behalf of the recipient in relation to the goods or services or both supplied;

> Now, let us understand the definition of disposal:

Marriam Webster Dictionary: Definition of “Disposal”

2: the act or process of disposing: such as

a: orderly placement or distributionthe disposal of troops along the ridge

b: REGULATION, ADMINISTRATION

c: the act or action of presenting or bestowing (see BESTOW sense 4)

somethingdisposal of favorsthe disposal of property

d: systematic destructionespecially : destruction or transformation of

garbagetrash disposalthe disposal of nuclear waste

Collins Dictionery : Definition of “Disposal”

uncountable noun [oft noun NOUN]

Disposal is the act of getting rid of something that is no longer wanted or needed.

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…methods for the permanent disposal of radioactive waste. [+ of]

…waste disposal sites.

Synonyms: throwing away, dumping[informal], scrapping, removal More Synonyms

of disposal

Business Dictionery : Definition of “Disposal”

disposal

1. the act or means of getting rid of something

2. placement or arrangement in a particular order

3. a specific method of tending to matters, as in business

4. (Commerce) the act or process of transferring something to or providing something

for another

5. the power or opportunity to make use of someone or something (esp in the phrase
atone’s disposal)

6. (Civil Engineering) a means of destroying waste products, as by grinding into

particles

7. Also (for senses 2–5): disposition

Law of Lexicon Dictionary :

“Disposal” is frequently used in the sense of regulating, ordering, conducting a thing or

a business BAGGETT Vs MEUX 13 MJ CS 232.

Disposal is a personal act, it depends upon the will of individual, removal of thing from
oneself is involves, is the disposal, the goods ordered of the thing is comprehended in
their disposal.

> Further, CBIC has published FAQ for understanding of meaning & scope
of supply. Some of the FAQs are relevant, which is reproduced below:

Q 2. What is the scope of ‘supply’ under the GST law?

Ans. The term ‘supply’ is wide in its import covers all forms of supply of goods or
services or both that includes sale, transfer, barter, exchange, license, rental, lease or
disposal made or agreed to be made for a consideration by a person in the course or
furtherance of business. It also includes import of service. The GST law also provides
for including certain transactions made without consideration within the scope of
supply

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Q 4. What are the necessary elements that constitute supply under
CGST/SGST Act?

Ans. In order to constitute a ‘supply’, the following elements are required to be

satisfied, i.e.-

(i) the activity involves supply of goods or services or both;

(ii) the supply is for a consideration unless otherwise specifically provided for;

(iii) the supply is made in the course or furtherance of business;

(iv) the supply is made in the taxable territory;

(v) the supply is a taxable supply; and

(vi) the supply is made by a taxable person

Q 9. What do you mean by “supply made in the course or furtherance of

business?

Ans. “Business” is defined under Section 2(17) include any trade, commerce,
manufacture, profession, vocation, adventure or wager etc. whether or not undertaken
for a pecuniary benefit. Business also includes any activity or transaction which is
incidental or ancillary to the aforementioned listed activities. In addition, any activity
undertaken by the Central Govt. or a State Govt. or any local authority in which they are
engaged as public authority shall also be construed as business. From the above, it may
be noted that any activity undertaken included in the definition for furtherance or
promoting of a business could constitute a supply under GST law.

Conclusions:

After understanding the basic provision w.r.t. meaning & scope of supply, let us
understand the transactions of write back which is offered to income tax:

There are two views emerging from the reading of above provisions and
facts of the matter.

The word activity has a vide meaning and the same is not defined in the act.
In this case, the person writing back the amount is getting the consideration (as
the liabilities are written off).
The consideration is for activity of writing back which is covered under the word
“disposal”.
These activities are “services” as any activity other than goods is covered under the
ambit of the services considering the wide definition of the services under the GST
Act.
The write back amount is nothing but income for the person writing back the
amount.
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 In terms of Section 16(2) of CGST Act 2017, if payment is not made within 180
days, amount equal to the ITC needs to pay as outward tax liability.

In such circumstances, the person who is writing back in the books of accounts carries
out the activities for consideration and credited to other income or expenses. Therefore
is subjected to GST as “Services” under Schedule II of the CGST Act, 2017 i.e. “TO DO
AN ACT”.

However, there can be another view that such transactions cannot be

treated as Supply on the following grounds:

1. Mere accounting entry of write back do not necessarily will be supply,

2. For supply of goods and services there need to be “supplier” as well as “recipient”

3. There is no recipient in this case, as the definition of the recipient states that “the
recipient is the one who has obligation to pay the consideration”

4. In write back cases, the recipient i.e. vendor may not know details of write back by
the company.

5. Further even after write back the company may decide to honour the payment to the
vendor.

6. In other words, the write back is books of account do not give finality to the
transaction.

7. As per Section 16 (2) of the CGST Act, 2017 in case of non-payment to the supplier,
ITC needs to be reversed. Further GST on the same amount will lead to double taxation.

What Auditors should do in case of such conflicting views?

> The auditor needs to identify the amount written back during the year.

Tags: goods and services tax, GST

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Author Bio

Name: CMA Ashok Nawal

Qualification: CMA

Company: Bizsolindia Services Pvt. Ltd.

Location: PUNE, Maharashtra, IN

Member Since: 24 Jun 2017 | Total Posts: 22

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