QUESTION

Whether ITC can be availed if the payment is not received through banking channels . Whether ITC is available in the case where entire payment is not made against individual invoice, to vendor , in cash or through banking channels but declared to have been received by carrying out book adjustment ( difference of sale and purchase values is paid to the vendor or received from vendor ).

ANSWER

Facts of the case:

Payment for supply is not received through banking channels but is adjusted through book entry of difference between sale and purchase values. To decide whether ITC on the purchase can be claimed.

Law Applicable:
Second proviso to subsection 2 of section 16 CGST is laid as under

"Provided further 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"

Interpretation:
As per the second proviso to section 16(2) of CGST the recipient is bound to reverse the ITC if payment for the supply is not made within a period of 180 days from the date of issue of invoice. However the term "pay" or "payment" has not been defined under the GST act. Therefore these words shall be interpreted by the meaning assigned to them in general trade parlance and accounting sense.

To set off and adjust the entries of sale and purchase in a common practice in trade where the balance amount is paid by one party to another and an accounting entry is passed in the books to this effect.

This treatment of transaction falls within the ambit of "pay" and "payment" and therefore such an adjustment shall be deemed to satisfy the condition laid under the second proviso to section 16(2) CGST.

Conclusion:
Inter-adjustment of accounts for sale and purchase through accounting entry and payment of balance amount falls within the ambit of "payment" and thus ITC can be claimed without the need to reverse in 180days of the date of invoice since there is no violation of second proviso to section 16(2) CGST. (Reply dt. 20/01/2022)