Reversal of
Input Tax Credit under Section 10 of the DVAT Act, 2004 in respect of Credit
Note/ Debit Note related to discounts
Circular No. : 30/2013-14
Dated:
19/12/2013
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 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 (vi) i.e. cash
discount.
Regards
CA. Mona Singhal
Partner
Arpit Gupta & Associates
Chartered Accountants
701, Nirmal Tower,
26, Barakhamba Road,
Connaught Place, Delhi-110001
Mobile:- 8130711885, 9873082769
Website: www.caaga.co.in
