Meaning of Bad debts

The debt may become bad when it is proved to be irrecoverable on account of the fact that the debtor is in a bad financial position or that it has become irrecoverable. So long as there is a ray of hope to recover the debt, however, dim it may be, and so long as the debt is in the process of realisation, it cannot be said that it has become irrecoverable.

GST Implications on Bad debts

The GST is required to be paid on the value of supply which is price paid or payable for supply. Interestingly, Section 15 has not provided anything regarding, at what point of time this amount paid or payable value should be referred. It simply says the value of supply shall be the amount paid or payable.

One may say that value can be determined at any point in time instead of the time when it is taxable (i.e. time of supply) and GST shall be payable on the amount which is ultimately recovered or recoverable from the customer. However, the value should be taken at the time of supply only because of the following several reasons:

It is well-established principle that the statute must be read as a whole especially when we are finding the intention of the legislature. It is incorrect to decide or respond as to any particular part of law without examining the whole of the law. The Supreme Court in case of State of WB v. UOI AIR 1963 SC 1241 held that the Court must ascertain the intention of the legislature by directing its attention not merely to the clauses to be construed but to the entire statue; it must compare the clause with the other parts of the law, and the setting in which the clause to be interpreted occurs. By combined reading of provisions of the meaning of supply, levy of tax, time of supply, value supply, etc. under the CGST Act, it can be construed that the value of supply is to be computed when the event becomes taxable i.e. at the time of supply.

If the intention of the law is to allow determination of the value of supply at any other point of time, it wouldn't make special provisions of treatment of discount under GST.

The value of the supply of goods or services is transaction value, which is the price actually paid or payable for the said supply of goods or services. In case of bad debts, the amount is actually payable but it is just that it is not realized.

Given the above, it would be untrue to hold the view, that the value of supply can be calculated at a time other than the time of supply. Given this, the benefit of bad debt would not be available to the supplier. The department has taken a similar view in its question no 48 of FAQ's issued for Baking and Financial Sector wherein it has been provided that GST already paid on bad debts cannot be adjusted.