News

Double whammy for service companies: Required to pay GST on defaults, bad debts

Double whammy for service companies: Required to pay GST on defaults, bad debts

As customer defaults mount due to the Covid-19 crisis, Indian services companies have been dealt a twin blow: Of unpaid bills, and Goods and Services Tax (GST) liabilities on those incidents on non-payment. Under the current GST framework, there is no provision to allow adjustments of GST paid on supplies for which recoveries are not made. Companies have to pay GST when they raise the invoice or generate the bill, which often is at least a month or two before the customer pays the money. As companies struggle with cash flows, they have to pay GST out of their own pocket even when the customer has defaulted. So, companies are seeking relief. “The absence of a provision for allowing adjustment of GST paid on supplies for which recoveries are not made (bad debts) is a double whammy for businesses,” said Abhishek Jain, Tax Partner, EY. “It leads to a loss on account of consideration for supply not being received, coupled with an outflow of GST from their own pocket. While this has been a concern for businesses historically, in the current economically depressed times, the government should consider relief on this aspect.”

Customer defaults have been on the rise due to the Covid-induced job losses, salary cuts, business closures, and a general breakdown in corporate payment cycles.

“Companies have to pay GST based on point of taxation and the tax payout precedes the receipt of consideration for the supply.

Top