Payment by Set-off

[CA Akash Phophalia]

Payment under GST law is of utmost significance. The governing provisions of input tax credit under GST required payment of tax before claim of credit of the said tax. In this article author wishes to through light on admissibility of input tax credit on payment through set off under this law in the light of decision IN RE: M/S. SENCO GOLD LTD. [2019 (5) TMI 701 - AUTHORITY FOR ADVANCE RULING, WEST BENGAL] 

Assessee was engaged in the manufacturing and retailing of jewellery and articles made of gold, silver, platinum, diamonds and other precious stones. It also owned retail stores, and maintains a network of franchisee-operated stores. It 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 (hereinafter the Agreement). The assessee raised a 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 intended to settle the mutual debts through book adjustments.

The provisions of section 16 required payment of taxable value and tax within the period of 180 days else the assessee is required to reverse the credit already availed of.

Second proviso to section 16(2) of the GST Act reads as

" 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."

The assessee argued that 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. Payment through adjustment of the books of accounts is a prevalent commercial practice. Further, para 42 of lndian 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 (a) currently has a legally enforceable right to set off the recognized amounts; and (b) intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

Discussion and Findings

1. Legal Provisions - Third proviso to section 16(2) of the GST Act says: "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". It 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.

2. Meaning of Payment - 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. Of course, in the payer's books of accounts, such transfer will be reported as a reduction in the book value of the asset being transferred.

3. Consideration – it is defined under section 2(31) which 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'.

Conclusion

The above discussion establishes 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.

Food for thought

Whether the principle enumerated through this advance ruling is wide enough to claim discount given at the time of settlement of account is proper mode of payment

CA Akash Phophalia

9799569294

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