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A group with 3 operating companies in India runs a central treasury netting arrangement: instead of each entity making multiple inter-group payments per month, the treasury calculates the net position across all entities and settles only the net amount on the last business day of the month.
In January, Entity A owes Entity B ₹48 lakh, Entity B owes Entity C ₹32 lakh, and Entity C owes Entity A ₹21 lakh. The net settlement: A pays B ₹27 lakh (₹48L − ₹21L), B pays C ₹32 lakh. Total cash moved: ₹59 lakh instead of ₹1.01 crore without netting.
The cash efficiency is clear. The reconciliation challenge: each entity’s books show the gross intercompany transactions, not the net settlements. Bank statements show only the net settlement. The reconciliation must bridge both.
Types of Netting in Indian Business
Bilateral Netting (Two-Party)
The simplest form: two counterparties who are both buyer and seller to each other settle the net difference periodically.
Example: A software company is both a vendor to (providing IT services worth ₹15 lakh/month) and a customer of (purchasing office supplies worth ₹3 lakh/month) the same group entity. Under a bilateral netting arrangement, only ₹12 lakh is settled each month — the software company receives the net.
The reconciliation challenge: the books show a ₹15 lakh receivable and a ₹3 lakh payable. The bank shows a ₹12 lakh credit. The matching engine must know about the netting arrangement to match correctly.
Multilateral Group Netting
Central treasury netting across 3+ entities. The treasury system calculates each entity’s net position relative to all others and generates a single settlement instruction per entity.
| Entity | Gross receivables | Gross payables | Net position | Cash movement |
|---|---|---|---|---|
| A | ₹48 lakh | ₹21 lakh | +₹27 lakh | Receive ₹27 lakh |
| B | ₹32 lakh | ₹48 lakh | −₹16 lakh | Pay ₹16 lakh |
| C | ₹21 lakh | ₹32 lakh | −₹11 lakh | Pay ₹11 lakh |
Each entity’s books show the gross transactions. The bank shows only the net settlement. Reconciliation at each entity requires matching the gross transactions against the net bank movement using the central netting statement as the bridge.
Platform Settlement Netting
Marketplace platforms (Amazon, Flipkart, Meesho) net commissions, returns, adjustments, and logistics charges against seller earnings before remitting the net settlement. The seller’s finance team receives one bank credit representing:
- Gross order value collected by platform
- Less: platform commission
- Less: return/refund deductions
- Less: TCS withheld under Section 206C
- Less: logistics charges (if applicable)
- Plus/Less: promotional credits or deductions
Reconciling this requires the platform’s settlement report — which breaks down each component — not just the bank credit.
GST on Netting Arrangements
Netting does not reduce GST obligations. Each invoice must be raised at full value with full GST. The netting applies only to the cash settlement.
Example:
- Company A raises an invoice on Company B for ₹10 lakh + ₹1.8 lakh GST (18%) = ₹11.8 lakh
- Company B raises an invoice on Company A for ₹3 lakh + ₹54,000 GST = ₹3.54 lakh
- Net cash settlement: A receives ₹11.8 lakh − ₹3.54 lakh = ₹8.26 lakh
Both companies claim full ITC on the invoice received. Company A claims ₹54,000 ITC; Company B claims ₹1.8 lakh ITC. GST is never netted — only cash is.
Attempts to raise a single net invoice for ₹7 lakh (the net of ₹10L and ₹3L) result in under-reported GST and incorrect ITC for both parties.
TDS on Netting Arrangements
When TDS applies to intercompany payments (which is common for services transactions between group entities), the deduction is calculated on the gross invoice amount — not the net settlement.
Example:
- Company A owes Company B ₹10 lakh (services, 10% TDS under 194J)
- Company B owes Company A ₹3 lakh (rent, 10% TDS under 194I)
- Gross TDS positions: A deducts ₹1 lakh from payment to B; B deducts ₹30,000 from payment to A
- Net cash settlement: A pays B ₹10 lakh − ₹1 lakh TDS = ₹9 lakh; B pays A ₹3 lakh − ₹30,000 TDS = ₹2.7 lakh
- After netting: A pays B the net cash: ₹9 lakh − ₹2.7 lakh = ₹6.3 lakh; TDS is deposited separately by each entity
The reconciliation must track the gross TDS from each direction separately — netting of TDS payable against TDS receivable is not permitted.
Netting Agreement Documentation Requirements
For statutory audit purposes, netting arrangements require:
- Formal netting agreement — signed by both/all entities, specifying the netting period, settlement date, and governing rules
- Monthly netting statement — issued by the treasury entity, showing gross positions and net settlement amounts
- Counterparty confirmation — both entities confirm the netting statement is accurate before settlement
- Bank-level evidence — the bank statement showing the net settlement, reconciled to the netting statement
Without the netting statement as an intermediate document, the statutory auditor cannot reconcile the gross intercompany balances to the net bank settlements — and will issue an audit observation on unreconciled intercompany balances.
Reconciliation software India that supports netting arrangement configuration — mapping net bank credits back to gross individual transactions using the netting statement as the bridge — eliminates the most common intercompany reconciliation failure mode.
Bank reconciliation software that can match a single bank credit against multiple underlying transactions (the gross receivable minus gross payable combination) handles bilateral netting correctly without requiring manual journal entries to bridge the mismatch.
The Reserve Bank of India publishes guidelines on payment netting arrangements and cross-border netting rules under FEMA — relevant for group companies with netting arrangements that span domestic and international entities.