1. Background
In the course of business, it is not uncommon to find outstanding balances in the names of trade creditors that remain unclaimed or where the supplier becomes untraceable. Many entities, after a reasonable period, choose to write off such balances by transferring them to the Profit & Loss Account. While the income-tax implications of such write-offs are well-settled under Section 41(1) of the Income-tax Act, 1961, the question arises—does such a write-off attract GST?
2. Charging Section under GST
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Section 9, CGST Act: GST is levied on the value of “supply” of goods or services or both.
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Section 7(1), CGST Act: “Supply” is defined to include all forms of sale, transfer, barter, exchange, etc., made for a consideration in the course or furtherance of business.
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Schedule I: Certain transactions are deemed to be supply even without consideration (e.g., supply to related persons, import of services from related persons, etc.).
📌 Writing off a creditor balance by the recipient is a unilateral act and does not amount to a supply of goods or services.
3. Circulars and Departmental Clarifications
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CBIC has, in multiple contexts, clarified that mere book adjustments or accounting entries which do not involve any supply of goods/services are outside the scope of GST.
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For example, adjustments in advances or security deposits forfeited have been distinguished from taxable supplies unless linked to an underlying obligation of supply.
4. Judicial / Advance Ruling Positions
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United Breweries Ltd. [KAR/AAR/UB-07/2018]: It was held that the write-off of amounts payable to creditors does not attract GST, since there is no underlying supply.
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Other AARs have similarly held that accounting entries alone, without supply, do not attract GST.
Thus, the consensus emerging is that creditor write-off is not taxable under GST.
Haryana AAR also expressed same in acse of "M/s. Rites Limited"
5. ITC Reversal Obligation under Rule 37
The real implication under GST lies not in levy, but in Input Tax Credit (ITC) compliance:
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Rule 37 of CGST Rules, 2017:
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If the recipient avails ITC on inward supplies but fails to pay the supplier the value of supply along with tax thereon within 180 days from the invoice date, the ITC attributable to such unpaid amount must be added back to output tax liability along with applicable interest.
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When the creditor is untraceable or balance is written off, it is deemed that payment has not been made, thereby necessitating ITC reversal.
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🔑 Important distinction:
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GST is not payable on the write-off itself,
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But ITC earlier claimed must be reversed if payment condition is not satisfied.
6. Practical Scenarios
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Creditor for Goods/Services (ITC Availed):
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No GST payable on write-off.
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ITC reversal required if unpaid beyond 180 days.
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Creditor for Goods/Services (No ITC Availed):
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No GST payable.
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No ITC reversal obligation arises.
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Creditor Not Relating to Supply (e.g., loan, deposit, capital liability):
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Not covered by Section 7 or Rule 37.
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No GST implications at all.
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7. Professional Conclusion
From a GST standpoint:
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Creditor write-off is not a “supply” under Section 7 and hence is not taxable under GST.
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However, practitioners must carefully review ITC availed on such creditors. If invoices remain unpaid beyond 180 days, Rule 37 mandates reversal of ITC with interest, even if the liability is later written off.
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Therefore, the real impact lies not in GST levy, but in ensuring timely ITC compliance.
✅ In summary:
No GST payable on creditor write-offs, but ITC reversal obligation under Rule 37 may apply.