Top Stories ITC Reversal on Book Adjustments: How to Draft Reply for Response to GST Show Cause Notice [Find Format Here] This article outlines the legal grounds for responding to a show cause notice issued for ITC reversal due to book adjustments and highlights the provisions and case laws supporting book debt as a valid form of payment under the GST Act By Avinash Kurungot – On September 18, 2024 6:31 pm – 3 mins readBy Manu Sharma – On 6:31 pm – 3 mins read The Goods and Services Tax ( GST ) regime in India provides businesses with the advantage of claiming Input Tax Credit ( ITC ) on taxes paid during the procurement of goods and services. GST ITC and Book Adjustments However, an area of contention that has emerged is the reversal of ITC when payments are not made within 180 days as per the requirement under Section 16(2) of the Goods and Services Tax Act, particularly when book adjustments are used instead of actual monetary payments. The GST authorities argue that such adjustments do not qualify as valid payments, leading to ITC reversals.
Understanding the Show Cause Notice for ITC Reversal Show cause notices under section 73(1) of the Central Goods and Services Tax Act, 2017, are typically issued when authorities believe that ITC has been wrongly claimed. In the case of book adjustments, businesses often face allegations that they have not made actual payments for supplies within 180 days, which is a requirement under Section 16(2) of the GST Act. Get a Copy of GST ITC Draft Replies & Internal Controls [New Edition – 2nd Edn 2024], Click here The argument normally put forth by the authorities is that book adjustments, which involve setting off debts between two parties, do not amount to ‘actual payment.’ Instead, they argue that payments must be made through authorised banking channels, such as NEFT, RTGS, or internet banking, as specified in Section 49 of the GST Act. Key Legal Provisions Supporting Book Adjustments 1. Section 16(2) of the GST Act:
The second provision to Section 16(2) states that the value of the supply and the tax thereon must be paid to the supplier within 180 days of the invoice. However, the Act does not explicitly mandate a specific mode of payment, leaving room for interpretation. 2. Section 2(31) – Definition of ‘Consideration’: The term ‘consideration,’ as defined in Section 2(31), includes payments made “in money or otherwise,” allowing for flexibility in how payments can be made. This broad definition supports the argument that book adjustments, which reduce liabilities between parties, qualify as valid payments. Get a Copy of GST ITC Draft Replies & Internal Controls [New Edition – 2nd Edn 2024], Click here 3. Case Laws Supporting Book Adjustments as Payments: Several rulings by authorities have affirmed the legality of book adjustments as a form of payment: – West Bengal Authority for Advance Ruling (AAR): In the case of M/s. Senco Gold Limited, the AAR ruled that book debt settlements are valid payments under the GST Act, allowing businesses to claim ITC. – Malabar Gold Pvt. Ltd. (Kerala AAR):
The ruling in this case established that businesses can settle payments via book adjustments across different GSTINs within the same company, making ITC admissible. Get a Copy of GST ITC Draft Replies & Internal Controls [New Edition – 2nd Edn 2024], Click here 4. Notification No. 26/2018: This notification clarified that reversal of ITC is not required when payments are made by one party on behalf of another, which can include book adjustments. The notification supports the argument that book adjustments are a recognized commercial practice. Drafting an Effective Reply to the Show Cause Notice When responding to a show cause notice regarding ITC reversal on book adjustments, businesses should focus on the following key points: Clarifying the Nature of the Transaction Begin by explaining the commercial practice of book adjustments and how it constitutes a valid form of payment under Section 2(31). Highlight that book adjustments are a common practice in business transactions and are recognized by accounting standards such as Indian Accounting Standard 32 (Ind AS 32).
Referencing Relevant Provisions and Case Laws Quote relevant sections of the GST Act, such as Section 16(2) and Section 49, and refer to rulings from the AAR and AAAR (Advance Authority for Advance Rulings) to strengthen your case. The rulings in favour of Senco Gold and Malabar Gold are particularly useful precedents. Citing Notifications Refer to Notification No. 26/2018 to demonstrate that GST authorities have acknowledged the validity of alternative payment modes, including book adjustments, for the purpose of ITC claims. Request for Personal Hearing Finally, always include a formal request for a personal hearing before any adverse decision is made, allowing for an opportunity to present the case in detail. Get a Copy of GST ITC Draft Replies & Internal Controls [New Edition – 2nd Edn 2024], Click here The reversal of ITC due to the use of book adjustments as payments is a complex but resolvable issue.
The GST Act provides flexibility in defining what constitutes a valid payment, and several legal precedents support the legitimacy of book debt settlements for claiming ITC. Businesses facing show cause notices on this issue should ensure their replies are well-drafted, referencing the relevant laws and rulings to avoid unjust ITC reversals. Subscribers can access the draft reply format by clicking the blue button below.
By understanding the provisions of the Goods and Services Tax Act and leveraging the right case laws, businesses can protect their ITC claims and avoid costly Input Tax Credit (ITC) reversals.