GST: Input Tax Credit allowable on Debt Settlement, says AAR [Read Order]

In a significant ruling, the AAR, West Bengal has held that the companies are eligible to claim the input tax credit even if the liability to pay for inputs between them, including tax, is discharged through adjustments in their books.

The State bench of the West Bengal Advance Ruling Authority was hearing a case relating to Senco Gold, a supplier of jewellery, who also operates a network of franchisee-operated stores. They raised tax invoices on the franchise for the supply of jewellery and for providing of franchisee support services.

Correspondingly, the franchise also raised tax invoices on the applicant for the supply of old jewellery received from customers. The applicant intended to settle the mutual debts through book adjustments.

Section 16 of the GST Act mandates the recipient to pay to the supplier the amount towards the value of the supply, along with tax payable thereon within 180 days from the date of invoice.

Before the authority, the applicant sought for a ruling whether the credit is allowable on debt settlement through book adjustment from the franchise.

The authority noted that the ‘consideration’, as defined under section 2(31), provides the scope and ambit for modes of payment. it includes, in relation to the supply of goods or services, any payment, made or to be made, whether in money or otherwise, and also the monetary value of any act or forbearance. This definition of ‘consideration’ cast the net so wide that almost no form of payment is excluded.

“For example, a mix of money and monetary value of the goods offered together with it is a valid ‘consideration’. Similarly, if the payee owes the payer a debt, and accepts a reduction in such a debt liability as a valid form of payment, that should also be regarded as a valid ‘consideration’ for a supply. In other words, reduction in book debt (an asset in the payer’s books of accounts) is a valid ‘consideration’,” the authority said.

“Unless the law specifically restricts the recipient from claiming the input tax credit when consideration is paid through book adjustment, credit of input tax cannot be denied on this ground alone. Rule 19(8) of the West Bengal Value Added Tax Rules, 2005, specifically provided that credit of input tax would be available only if the payment was made by account payee cheque or account payee draft or through electronic banking clearance when such payment exceeded rupees twenty thousand in a day. No such restriction is apparently provided under the GST Act,” it said.