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;
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 anythingother 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;
(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.
…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 foranother
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
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.
·
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.
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