PAYMENT OF GST THROUGH BOOK ADJUSTMENT

[Mr. M. GOVINDARAJAN]

The indirect tax laws usually allow the assessee to pay the tax by means of cash.  The assessee can adjust the input tax credit against the payment of tax.  The condition for availing such credit is that the assessee is to pay the tax to the suppliers of the goods or services.  No other mode is prescribed in the earlier laws as well as in the present GST laws.  The Government Department used to pay duty or tax by means of books adjustment.  The postal department now pays the tax by means of book adjustment since the postal department and indirect tax department both are government departments. 

The Department of Telecom paid the service tax through the book adjustment.  When the telephone bill is received the service tax portion is booked under the service tax code which automatically credited in the Government account.  When the Department of Telecom is converted to Bharat Sanchar Nigam Limited, a public Enterprise, with effect from 01.10.2000, the BSNL paid the service tax only by means of cash or cheque but not by book adjustment.

This type of book adjustment is not available to the assessee other than the Governmental bodies.  The Authority for Advance Ruling allows the payment through book adjustment since there is no restriction placed in the provisions of the GST laws.

In re ‘Senco Cold Limited’ – 2019 (5) TMI 701 – Authority for Advance Ruling (West Bengal) the Applicant is engaged in the manufacturing and retailing of jewellery and articles made of gold, silver, platinum, diamonds and other precious stones under the brand name “Senco Gold & Diamonds”.  The applicant also maintains a network of franchisee-operated stores.  The applicant grants such a franchisee the right and license to operate a showroom and to use, in connection therewith, certain Proprietary Marks and System in accordance with a Franchise Agreement.  The Applicant raises tax invoices on the Franchisee for the supply of jewellery and other articles and also for Franchise Support Services in terms of the Agreement periodically. On its part, the Franchisee also raises tax invoices on the Applicant for the supply of old gold, silver etc., received from the customers.

The applicant filed the present application seeking an advance ruling on whether the input tax credit is admissible when he settles through book adjustment the debt created on inward supplies from the Franchisee.

The applicant submitted the following before the Authority for Advance Ruling-

•  The second proviso to section 16(2) of the GST Act that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed.
• Apart from the above proviso, the GST Act nowhere makes availing of input tax credit dependent upon the payment to be made for the inward supply.
• The captioned proviso also does not prescribe or restrict the mode in which the payment has to be made
•  The payment through adjustment of the books of accounts is a prevalent commercial practice.
• Para 42 of Indian Accounting Standard 32 provides that a financial asset and a financial liability shall be offset and the net amount presented in the balance sheet when, and only when, an entity-

• currently has a legally enforceable right to set off the recognized amounts; and
•  intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

• Rule 19(8) of the West Bengal Value Added Tax Rules, 2005, that restricted claim of input tax credit to transactions where the payment had been 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.

The Revenue submitted the following-

• Section 16(1) of the GST Act provides that entitlement to take credit of input tax is subject to the conditions and restrictions as may be prescribed and, in the manner, specified in section 49.
• Section 49(1) provides that every deposit made towards tax, interest, penalty, fee and any other amount shall be made through internet banking or by using credit or debit cards or NEFT or RTGS or by such other mode and subject to such conditions and restrictions as may be prescribed. 
• Explanation (a) to section 49 provides that the date of credit to the account of the Government in the authorized bank shall be deemed to be the date of deposit in the electronic cash ledger.
• The above provisions make it clear that all transactions of the supplier and the recipient should be made through the online banking system.
• The recipient is ineligible to claim credit of input tax if the payment is made by way of book adjustment instead of through any banking channel.

The Authority for Advance Ruling heard the arguments placed before it by both the parties.  The Authority observed the following-

•  Section 49(1) deals with the manner in which the supplier shall make payment of tax, interest etc. to the Government to be credited to his electronic cash ledger.
• The Applicant has made no submission that he intends to deposit tax to the Government in any other manner.
• Section 49(2) provides that the input tax credit as self-assessed in the return of the registered person shall be credited to his electronic credit ledger.
• It does not prohibit the Applicant from reporting in the return input tax credit when consideration is paid to the supplier by way of book adjustment.
• Section 49 does not deal with the mode of the transaction between the recipient and the supplier.
• The Authority, therefore, finds the only merit in the submissions of the concerned officer from the Revenue to the extent of payment of tax.
• Third proviso to section 16(2) of the GST Act provides that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon which   clearly limits the recipient’s entitlement to input tax credit only to transactions where he has paid the consideration for the supply received, along with the tax payable thereon. 
• Such input tax may be provisionally credited to the recipient’s electronic credit ledger, but the same will be reversed, according to the second proviso to section 16(2), by an equivalent amount being added to his output tax liability unless he makes the payment within one hundred and eighty days from the date of issue of the invoice. 
• It is, therefore, clear that no input tax credit is admissible unless the recipient pays the supplier the consideration for the supply received.

The Authority further observed that a payment is a transfer of an asset to the payee for discharging an obligation arising out of transactions involving goods, services or other legal obligations.    The most common asset class used for such payment is money, although other assets unless specifically excluded by law, may be used provided the payee accepts payment by such assets other than money as good and sufficient discharge of the obligation.  In the payer’s books of accounts, such transfer will be reported as a reduction in the book value of the asset being transferred.

The Authority held that the recipient can pay the supplier consideration by way of setting off book debt. 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.

The Authority gave the ruling on the application made by the applicant as detailed below-

• The Applicant can pay the consideration for inward supplies by way of setting off book debt. 
• The GST Act and rules made there under does not restrict the recipient from claiming the input tax credit when consideration is paid through book adjustment, subject to the conditions and restrictions as may be prescribed and in the manner specified in Sections 16 and 49 of the GST Act.