Issue

A trader had received an advance of Rs. 1,00,000 from a customer against a proposed supply of goods/services. Ultimately, no supply was made against such advance, and the customer did not seek refund for more than 3 years. The trader now proposes to write back the outstanding customer advance liability to the Profit and Loss Account as income.

The issue for consideration is whether GST becomes payable merely because such old unclaimed advance has been written back in the books of account.

View

On the stated facts, mere write-back of the old unclaimed customer advance to the Profit and Loss Account should not, by itself, attract GST, provided that:

1. no supply was actually made against the advance;
2. there was no separate agreement for cancellation charges or forfeiture;
3. the amount retained is not consideration for any independent or identifiable supply.

Legal Position

1. GST is leviable only where there is a “supply”

Under section 9 of the CGST Act, GST is chargeable only on taxable supplies. Further, section 7 of the CGST Act contemplates the existence of a “supply” made for consideration in the course or furtherance of business.

A mere accounting entry recognizing cessation of an old liability does not, by itself, amount to a supply of goods or services.

The unilateral write-back of an outstanding advance in books of account is merely an accounting recognition that the liability is no longer payable. Such write-back does not automatically establish the existence of any fresh outward supply.

2. CBIC Circular on forfeiture, cancellation charges, and tolerance of act

CBIC Circular No. 178/10/2022-GST dated 3 August 2022 clarifies that amounts such as liquidated damages, penalties, cancellation charges, and forfeitures are taxable only where they are, in substance, consideration for an independent supply, such as an agreement to tolerate an act, default, or cancellation.

The circular further clarifies that where money is retained merely as a consequence of breach, non-performance, or similar lapse, without any separate contractual obligation to tolerate such act for consideration, the amount is compensatory in nature and does not constitute consideration for a taxable supply.

Applying the same principle, where an old customer advance simply remains unclaimed for many years and is subsequently written back in accounts, the write-back by itself does not create any new taxable event.

3. Distinction between contractual cancellation charges and mere unclaimed balances

A distinction must be drawn between:

(a) Contractual cancellation/forfeiture arrangements

Where the agreement itself provides that:

• the customer may cancel the order upon payment of cancellation charges; or
• the supplier agrees to tolerate cancellation/default against a specified amount,

the retained amount may potentially qualify as consideration for a taxable supply.

(b) Mere unilateral write-back of stale liabilities

Where:

• no supply is made,
• no cancellation service is contractually contemplated,
• the amount remains unclaimed for several years, and
• the liability is merely written back in books,

the better legal view is that the amount represents cessation of liability and not consideration for any supply.

Important Practical Aspect

If GST was otherwise payable at the time of receipt of advance under the applicable provisions prevailing during the relevant period, the department may separately examine whether tax liability had arisen at the original stage of receipt of advance itself.

However, the present issue is limited to whether the subsequent accounting write-back after 10 years independently triggers GST liability. In this context, mere transfer of the amount to the Profit and Loss Account should not by itself create any fresh GST liability.

Practical Conclusion

Accordingly, in the stated case, mere write-back of the old unclaimed customer advance of Rs. 1,00,000 to the Profit and Loss Account after 3 years should not, by itself, attract GST, provided there was no separate contractual arrangement treating the amount as consideration for cancellation, forfeiture, or tolerance of breach/default.

In case of departmental inquiry, the primary defense should be that:

• the amount represents cessation of an old liability;
• no identifiable supply exists;
• no reciprocal contractual obligation was undertaken by the trader; and
• the accounting write-back does not constitute consideration for any taxable supply under section 7 of the CGST Act.