Bad Debts & GST – All You Need To Know If You Are Dealing With Losses Due To Bad & Doubtful Debts

Losses are an inseparable part of life. Whether you are an individual working at an MNC or managing a small or big business of your own, you have encountered or might encounter losses at some stage or the other. While we cannot avoid losses, we can prepare ourselves to deal with it properly, especially when our losses have a direct correlation with the taxes we pay.

This article is your ‘one-stop’ GST Wikipedia for everything you need to know about bad debts and the provisions of GST that apply to you if you are dealing with bad or doubtful debts.

What is Bad or Doubtful Debt?

The term ‘bad debt’ or ‘doubtful debt’ is one of the most commonly used terms in business parlance. Ask a hundred business owners about the term, and at least ninety of them would say they have bad or doubtful debt, in some form, on their ledger books.

Bad debt is what happens when you sell goods or provide services to customers on credit, and do not receive the payment within the due date. Bad debt also takes place when the sooner you delivered the goods or services, the debtor went bankrupt, thus leaving you with no opportunity to recover your pending dues.

As you pay GST the moment your goods or services are delivered, not recovering the dues can cause a dent in your bottom-line.

Can You Get a GST Refund for Bad or Doubtful Debt?

Yes. You may claim a GST refund for a bad or doubtful debt if you meet the following criteria:

  1. You are a supplier of goods or services.
  2. You supply goods and services by accepting money.
  3. Your business is GST-registered, and you have paid the GST for the concerned goods or services.
  4. You have written off the entire amount in your books as a bad debt.
  5. It has been 6 months since you sold the goods or services.
  6. The open market value of the goods or services provided is lesser than the sale value.
  7. You have tangible evidence that the goods or services were delivered to the debtor.

By When Can You Claim a Refund?

You can become eligible to claim a refund of your GST if you meet the following criteria:

  1. You have waited for at least six months from the invoice or sale date before claiming a refund.
  2. Your claim is within twelve months from the date of writing off the bad debt.

What is the Procedure to Claim a Refund?

During the filing of GST returns, you should enter the GST amount you plan to claim in the appropriate column. Before you decide to claim a GST refund, check whether you meet the criteria or not. However, remember that you can only claim a GST refund if you charged GST during the sale.

What Records Do You Need to Keep to Claim a Refund?

GST eases the process of claiming a refund. But, when you claim a refund, you have to keep the following documents in order.

  1. The GST invoice copy of the sale you wrote off as a bad or doubtful debt.
  2. A written record of the amount you wrote off as a bad or doubtful debt.
  3. A written record of the total amount you want to claim as a refund.
  4. A note of the GST accounting cycle when the sale of goods or services took place.
  5. A note of the GST accounting cycle when you are submitting documents for claiming a refund.
  6. A written record of the total GST you charged on the sale.
  7. A written record of any part-payment received on the sale.
  8. The name and address of the customer.
  9. The invoice number and date of the bad debt.

According to the GST Act, you have to maintain the records for six years from the date of sale. Hence, if you sold the goods or services, which eventually became a bad debt, on 31st December 2020, you have to maintain all of the records mentioned above till 31st December 2025.

What Amount Can You Claim as a Refund?

The amount you may claim as a refund depends on the amount the customer owes to you. If you owe the full amount, then you may claim the entire GST you have paid. If, however, the customer has made part-payment, then you can claim a GST refund on only the unpaid amount.

How Can You Stay Updated About GST Rules and Regulations?

Staying updated with the changes in the CGST Act is the first step for extracting maximum benefits out of the GST provisions. GST offers amazing flexibility in accounting for the bad or doubtful debts that may arise during the sale of goods and services.

Leave a Comment