Writing Off Bad Debts: Tax Treatment and the GST Consequence

The income tax deduction

Section 36(1)(vii) allows a deduction for any bad debt or part of it written off as irrecoverable in the accounts of the assessee for the previous year. Section 36(2) adds the conditions: the debt must have been taken into account in computing income of that year or an earlier one, or must represent money lent in the ordinary course of a banking or money-lending business.

The requirement that the debt was previously offered to tax is why advances paid to suppliers, as opposed to receivables from customers, generally do not qualify.

You need not prove irrecoverability

Before 1989 the assessee had to establish that the debt had actually become bad. The amendment replaced that with a simpler test, and the Supreme Court in TRF Ltd confirmed that after the amendment it is sufficient that the debt is written off as irrecoverable in the accounts.

That removed a great deal of litigation. What remains necessary is the actual write-off in the books — a provision for doubtful debts is not a write-off, and a mere entry in a memorandum account will not do.

The GST that does not come back

GST was paid when the invoice was issued, regardless of whether you were ever paid. There is no bad debt relief mechanism in Indian GST equivalent to those in some other jurisdictions.

The only route to recover the tax is a credit note under Section 34, and that must be declared by the thirtieth of November following the financial year of the original invoice. A debt recognised as bad eighteen months later is outside that window, and the GST is simply a loss.

What follows from that

The practical implication is that the decision to stop pursuing a debt has a deadline attached that most businesses do not track. If a receivable looks doubtful and the November deadline is approaching, the question of whether to issue a credit note is worth asking then rather than at write-off.

That in turn requires the ageing report and the GST calendar to be looked at together, which in most businesses they are not.

Frequently asked questions

### Can I deduct a bad debt without proving it is irrecoverable?

Yes. Since the 1989 amendment, and as confirmed by the Supreme Court in TRF Ltd, it is sufficient that the debt is written off as irrecoverable in the accounts. You need not demonstrate that recovery steps were exhausted.

### Can I recover the GST paid on a bad debt?

Only through a credit note under Section 34, declared by 30 November following the financial year of the original invoice. After that the tax cannot be recovered, and Indian GST has no separate bad debt relief provision.

### Is a provision for doubtful debts deductible?

No. Section 36(1)(vii) requires the debt to be actually written off in the accounts. A provision is not a write-off, and the deduction is specifically denied for provisions other than in the limited case of banks and specified financial institutions under Section 36(1)(viia).