Reversal
of Input Tax Credit under Section 10 of the DVAT Act, 2004 in respect of Credit
Note/ Debit Note related to discounts.
1. Under
Section 10 (1) of the DVAT Act, 2004 where any purchaser has been issued with a credit
note or debit note in terms of section 51 of this Act or if he returns or
rejects goods purchased,
as a consequence of which the tax credit claimed by him in any tax period in respect
of which the purchase of goods relates, becomes short or excess, he shall compensate
such short or excess by adjusting the amount of the tax credit allowed to him in the
tax period in which the credit note or debit note has been issued. Such adjustment of tax
credit shall be made in the context of sale/purchase made in Delhi and not in
the context
of interstate sale/purchase.
2. The
Credit Note issued by the Selling Dealer may relate to :
(i) Trade
Discount by any name called including quantity discounts, end of year discounts,
close out discounts, target discounts, bonus or incentives in the form of general
credit to the purchaser’s account or supplying additional quantity of the goods dealt in
by the selling dealer or providing/supplying perks, such as allowing package tours or
giving gift articles, etc [Post sale perks and discounts].
(ii)
Relating to goods returned or rejected by the purchaser.
(iii) Due
to variation in rate or quantity in individual sale invoice;
(iv)
Consideration for other facilities offered by the purchaser, such as, rent for
window display,
sign-boards, lease rental of premises, other establishment expenses, etc.
(v)
Reimbursement of expenses incurred by purchaser on behalf of seller.
(vi) Cash
Discount. (For payment made before the agreed date)
3. Trade
vs. Cash Discounts Trade
discounts are incentives for a customer to purchase a product. They may be new customer
discounts, quantity discounts, repeat customer discounts, end of year
discounts close out
discounts, and many more. Whatever be the type, they are designed to entice a customer
to purchase now, to purchase more and to purchase this. Trade discounts are generally
reflected in the credit side of the Trading Account of the dealer Cash
discounts, on the other hand, are incentives for a customer to pay the bill
once they have made
that purchase. They tell the customer when the bill must be paid, and 2 communicate
whether there are financial benefits (discounts) for paying before that deadline.
Cash discounts are generally reflected in the credit side of the Profit &
Loss Account
of the dealer.
4. Trade
discounts could further be classified into two types of discounts-
(a)
Discounts given at the time of sale – According to the trade practice, such
discounts are offered
at the time of sale and VAT is charged on the resultant cost. Suppose, the cost
of a good is
Rs. 120/-. The seller offers a discount of Rs. 20/-. The resultant cost of the commodity
now becomes Rs. 100/- and VAT @ 12.5% (say) would be Rs. 12.50 making the sale
price to Rs.112.50. The seller is liable to pay Rs. 12.50 as VAT to Government and the
buyer is entitled to an ITC of Rs. 12.50 on the purchase. The tax liability of
the buyer
would depend on the sale price at which the good is sold to consumer. In this
case no VAT
adjustment is required to be made.
(b) Post
sale discounts – If in the above example, the original seller offers a
post-sale discount
of say Rs. 10/-. Then, the cost of the good would become Rs. 90/- and VAT liability
would be Rs. 11.25. But, the seller has already paid Rs. 12.50 as VAT and accounted
for the same in his books of accounts. Thus, the seller is entitled to make adjustment
of Rs. 1.25 (12.50-11.25) in accordance with the provision of Section 8 of DVAT Act.
The sale price would now be reduced to Rs. 101.25 (112.50 -11.25). By reducing
the cost price by Rs. 10/-, the seller has to issue credit note of Rs. 11.25
(10 +1.25) to
the buyer. It hardly matters whether the seller indicates the value of credit
note as Rs. 11.25
or Rs. 10.00 plus Rs. 1.25 as VAT. Consequently, the buyer now becomes entitled
to an ITC of Rs. 11.25 instead of Rs. 12.50 already claimed. Thus, an ITC of
Rs.1.25
(12.50-11.25) has to be reduced by the purchaser as provided in section 10 of DVAT Act.
5. The
reduction in ITC by buyer is independent of reduction in output tax liability
by seller.
The seller may reduce the liability by revising return or making adjustment for
the reduction
in the output tax liability of current tax period’s return in terms of section
8 While
assessing or scrutinizing the return of buyer in a particular ward, it is
difficult to find out
whether the pairing selling dealers have also reduced their output tax
liability.
The
sellers may be registered in different wards. There is no system of issue of
certificate to buyer
by seller stating that the output tax corresponding to credit note has been adjusted
or not and neither it is desirable in VAT regime.
6. Cash
discount stated at 2 (vi) issued by selling dealer is not eligible for
adjustment to Output
Tax in terms of provisions of Section 8 of the DVAT Act. Therefore, the Credit. Notes
issued on this account need not be mentioned in Annexure 2C of the return. Similarly,
the purchasing dealer need not to mention such Credit Notes in Annexure 2D of the
return in Form DVAT-16.
7. Input
Tax Credit has to be adjusted by the Purchasing Dealer in respect of Credit
/Debit. Notes
related to items listed at 2(i) to 2(v). Credit note related to cash discount
need not be
subjected to ITC reversal. Consequently, the selling dealer will not be
eligible to make
adjustment of output tax on account of issue of Credit Note with respect to 2.
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This Article is written by CMA Samir Biswal. He can be
reached at cmasamirbiswal@gmail.com
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