Compliance

Writing off bad debts: the law, the tax treatment, and what most businesses get wrong

Two mistakes come up constantly: businesses that think they need to prove a debt is genuinely unrecoverable before writing it off (they don't, since 1989), and businesses that think writing it off gets them the GST back (it doesn't, in most cases). Here's the actual law behind both.

General guidance, not tax advice — confirm treatment for your specific situation with your CA before relying on it for a filing.

The income tax side: Section 36(1)(vii) and 36(2)

Under Section 36(1)(vii) of the Income Tax Act, a bad debt written off as irrecoverable in your accounts is allowed as a deduction — subject to the conditions in Section 36(2), the main one being that the debt (or part of it) must have already been taken into account in computing your income for the year you're writing it off or an earlier year. In practice: you can't write off an amount that was never actually recognised as income — a bad debt deduction only applies to debts arising from sales or services you've already booked as revenue, not to a loan you gave someone informally.

You don't have to prove it's actually unrecoverable

This is the part that surprises most business owners. Before 1989, the law required you to establish that a debt had become bad — essentially prove it, which was subjective and led to constant disputes with assessing officers. The 1989 amendment removed that requirement: now, writing the debt off as irrecoverable in your books is itself sufficient. The Supreme Court confirmed this directly in TRF Ltd. vs CIT (2010) — a taxpayer doesn't need to demonstrate the debt has actually become bad, only that it has been written off in the accounts. This matters practically: don't sit on a genuinely uncollectable invoice for years trying to "prove" it's bad before writing it off. If you've made the collection effort and it hasn't worked, the write-off itself is the qualifying act.

The GST side: this is where most businesses get caught out

Unlike some VAT regimes elsewhere that allow bad debt relief — reclaiming GST already paid on an invoice that later goes unpaid — Indian GST law has no general bad debt relief provision. If you charged GST on an invoice, paid it to the government, and the customer never pays you, you generally cannot reclaim that GST just because the debt became bad. The only real lever is a credit note under Section 34 of the CGST Act, and that's meant for actual goods returned or a genuine deficiency in supply — not simply non-payment — and it has to be issued within a specified time limit (by 30 November following the end of the financial year in which the supply was made, or the date of filing the relevant annual return, whichever is earlier). Miss that window and the credit note route closes too.

The practical implication: the GST you charged and remitted on a bad debt is usually a real, sunk cost — one more reason to catch a stalling customer early rather than let an invoice age into genuinely uncollectable territory. This is exactly the gap between a customer who's "slow" and one who's disputing something specific — see spotting a disputed invoice for how to tell the difference before it's too late to do anything but write it off.

Before you write it off, not after

• Have you actually exhausted collection? A phone call, a written reminder, and a final notice create a paper trail that supports the write-off if it's ever questioned — and more importantly, might get you paid before you need to write anything off.
• Is this genuinely uncollectable, or is it disputed? A disputed invoice — held up over a delivery issue, a GST mismatch, a missing e-way bill — isn't a bad debt yet. Those are usually resolvable and shouldn't be written off prematurely.
• Do you have documentation for Section 36(2)? The invoice, proof it was included in income for that year, and the write-off entry itself. Presumptive taxation under Section 44AD means some businesses don't keep this level of detail by default — worth checking before you need it.

Next: Recording a bad debt in Tally · Legal options against a defaulter · Spotting a disputed invoice