VAT on Goods Returned and Discount
VAT on Goods Returned and Discount
-N.T.Nirale, MA, MCom, LL.B. Advocate
Retd. Member-Judge, Maharastra Sales Tax Tribunal. Mumbai
1. Introduction -
Bombay Sales Tax Act 1959 was in force from 1-1-1960 to 31-3-2005. Maharastra Value Added Tax Act 2002 [referred as VAT Act] came in force from 1-4-2005. There is lot of confusion and perplexity about the sections and rules of Vat Act. The circulars issued by the department add bewilderment to the administration of VAT Act. But without going into such controversies, we will see and study the implications of the provisions about ‘Goods Returned’ and ‘Discount’.
2. Levy of Tax under VAT Act
2.1 What is the taxable sale price?
Under section 6 of the VAT Act, the tax is levied on the turn over of sales of goods. The word ‘turn over of sales’ is defined u/s 2[33]. According to this definition, it is the aggregate of the amounts of sale price received and receivable by a dealer in respect of any sale of goods. Since the word ‘receivable’ is uses in the definitions, it ordinarily means that even if a dealer does not receive the price, Vat would be payable even on the sale price not received by the seller. Since the amount of ‘Discount’ is not receivable the question of levy of VAT on the amount of discount does not arise.
2.2 If the goods are returned by the customer, though the sale price in respect of the goods returned is not receivable, in certain cases VAT would be payable on it because of definition of the word ‘turnover of sale / purchases’. Sub section [a] of section 2[32] and [33] says that the deduction in respect of the amount refunded from sale / purchase price by the seller to a purchaser, in respect of any goods purchased and returned by the purchaser within the prescribed period will be admissible as deduction and no VAT will payable on it.
2.3 What is prescribed period?
Therefore we have to see what is the prescribed period. Rule 3 of Maharastra Value Added Tax Rules 2005, [referred as VAT Rules] prescribes the period allowed for goods returned, which is of 6 [six] months. It is calculated from the date of sale. Ordinarily the date of sale is the date of sale bill. If we have to take any other date, then the contract of sale has to be referred. If the goods have come back within 6 months, no VAT will be payable. But if they come back after 6 months then VAT will be payable even if the dealer does not receive the amount of sale price for those goods. The dealer claiming the ‘goods returned’ has to prove that the goods sold have come back within 6 months. For such claim the dealer has to preserve and show the debit/credit notes, delivery challans, entries in the account books and the correspondence with the customers.
2.4 When to claim Goods Returned?
As per Supreme Court decision is case of M/s BASF [117 STC 543] the deduction for goods returned has to be claimed during the year in which the sales are effected. Even if the goods are coming back in next year but within 6 months the claim has to be made during the assessment of the year in which the sales were effected.
But according to the departmental circular no. 19/T-1996 dated 7-8-1996 the goods returned can be claimed either in the year in which the sales are effected or in the year in which they have come back. [Please see Tribunal decision in case of M/s Shree Enterprises SA No. 761/2002 dated 30-9-2006]. However these instructions are applicable up to 95-96 and it will not be applicable to the goods receiving back after 95-96.
2.5 Cancellation of sale or Goods Returns -
If the goods are defective and are returned, it will amount to goods returned. But if the goods are defective and purchaser refuses to pay the price of the same, and therefore the seller sues the purchaser, it will not amount to goods returned. VAT will be payable of the same. [Please see 142 STC 182].
Prescribed time limit of 6 months is not applicable if the sale itself is cancelled and the goods are not delivered. [Please see 134 STC 14]
2.5 Entries in account books and Submission of Returns under VAT -
According to section 63[5] of VAT Act, if the goods are received back and the credit note is issued, then it has to be accounted for in the account books and is to be shown in the Sales Tax return for the period in which appropriate entries are taken in the account books. This provision suggests that, it is not obligatory that the claim for goods returned should be made in the year in which those sales were effected. The claim for goods returned can be made in the year in which it is accounted, provided it is within 6 months as prescribed. It is obligatory to disclose the goods return credit notes in the monthly / quarterly / yearly return for the date on which it is accounted, whether you claim the deduction for goods returned or not.
3. Provisions about Discount in VAT Act -
In present commercial world discount given or received is mainly of two types viz,
i] Cash Discount and
ii] Trade Discount.
4. Cash Discount -
4.1 Cash discount is generally offered by the seller for early recovery of the bill amount. It is mercantile practice to offer cash discount where the customer is not asking for credit for a longer period. Since the amount of cash discount is shown as reduction from the total sale amount, the VAT is payable only on the net amount of the sale bill. The amount of cash discount is not the amount received nor is the amount receivable, it is not a part of sale price and therefore no VAT is payable of the amount shown as cash discount. [Pl see M/s Alkali and Chemicals 92 STC 597]
5. Trade Discount -
In the mercantile world various types of discount are offered to boost the trade. Some important types of discount are discussed below and shown how they are affected in VAT.
5.1 Catalogue Discount – This type of discount is offered by the manufacturers and wholesalers at a fixed percentage of the price shown in the Price List. Since availabvility this discount is known to both seller and the purchaser, at the time of making the transaction, no VAT is payable on such discount. [Pl see M/s Advani Orlicon 45 STC 23]. Even if such discount is given at different rate to different customers it is not liable for VAT. [Pl see M/s Alkali and Chemicals 92 STC 597].
5.2 Quantity Discount - This kind of discount is offered when the customer purchases more quantity than fixed one. It is generally given at the end of the year based on the quantity purchased by the customer. This discount will not be liable for VAT only if the customer knew that he would be getting such discount at the end of the year. [Pl see Color Chem SA No. 1091/86 dated 19-4-1988]. If the customer is not aware at the time of purchase that he will be getting quantity discount, then VAT will be payable on such discount. [Please see Coromandal Fertilizer SA No. 1101/91 dated 31-3-1994]
5.3 Target Discount – This is another kind of quantity discount. No VAT will be payable on such discount. [Please see 128 STC 289]
5.4 Free Schemes – Under free scheme same articles or different articles are offer free on purchases of certain goods. Since in the sale bill the price of such free supply is shown as nil no VAT is payable on such free supplies. [Please see 135 STC 157]
5.5 Quality Discount - Where the quality of goods sold in vital for the purchaser and the quality of the goods is specifically agreed in the agreement, the discount is allowed for the inferior quality supplied by the seller. No VAT will be payable on such quality discount given. [Please see 79 STC 82].
5.6 Service Discount – If goods supplied are not packed as per agreement, the seller gives service discount to the purchaser as he has to repack the goods. No VAT will payable on such kind of service discount. [Please see 53 STC 48].
But if discount is offered for late delivery of goods, then such discount will be liable for VAT. [Please see 126 STC 306].
5.7 Extra Discount – If discount is offered to all customers at a fixed rate but more discount is allowed to new customers, it will not be liable for VAT. [Please see 56 STC 192]. If discount is given on the basis of last years purchases, then it will not be liable for VAT [Please see 132 STC 374]
5.8 Future Credit Notes – The customers are given credit notes for purchases to be made in future. This is in the nature of Discount Coupons. No VAT is payable on this. [Please see 94 STC 292]
5.9 Final Settlement Discount – When the amounts of sale price are not recovered fully, the trader gives discount as a final settlement. Though this is termed as discount, it not discount but the loss of the seller in collection of the sale amounts. Therefore such final settlement discount will be liable for VAT. [Please see 15 STC 397]
6 Provisions about Debit and Credit Notes in VAT Act -
6.1 Unlike the BST Act 1959, VAT Act has made the provisions about issue of Debit and Credit Notes in section 63. Section 63[5] very politely requests the dealers to issue debit or credit notes in case of any price variation.
6.2 VAT Act has not prescribed any form for debit or credit notes. But the only direction under section 63[5][a] is that the component of tax must be separately specified in Debit or Credit notes.
6.3 Section 63[5][b] makes it compulsory to disclose the Debit or Credit notes in the return for the period in which appropriate entries of those Debit or Credit notes are taken the account books. The time prescribed for goods returned is 6 months. But there is no prescribed period within which the Debit or Credit notes are to be issued. Therefore it is felt that, if it can be proved that the goods are returned within 6 months the Debit or Credit notes for the same can be passed even after 6 months. It will not be out of place to advice here that, the Debit or Credit notes should be passed and accounted in the account books before due date of filing the revised return or at the latest before the end of the period prescribed for tax audit u/s 22 or before the commencement of assessment u/s 23 so that the arguments with the department can be avoided.
6.4 The credit notes need not be issued for individual sale bill. No VAT will be payable even if the consolidated credit note is issued at the end of the year. [Please see 138 STC 133]. If you do not show the trade discount in the returns nor claim it at the time of assessment, still it can be claimed in first appeal. [Please see 138 STC 1]
7 Concluding Remarks -
7.1 The seller has a right to sell the goods at any price. It is his privilege to give any discount at any rate. But at the same time it is his duty to pay the taxes according to law. It is another story as to how the VAT Act is assaulting the rights of the dealer, and is a stuff for a separate article.
7.2 But it will be worthwhile to note the following points so that the departmental authorities do not reject the claim of goods returned or of issue of debit / credit notes.
- See that the goods are returned by the customer within 6 months and the relevant entries are passed in the account books immediately.
- Show the claim in the returns or in revised returns.
- Collect and preserve the proof about goods coming back, because the assessing authorities do not believe the words of the dealer, they believe the paper work.
- See if the goods returned amounts to cancellation of agreement to sell, because it is easy to cancel the sale than to claim the goods returned due to prescribed period of 6 months.
- The Debit or Credit notes should give sufficient details of original sale involved in the Dr / Cr notes.
- The reasons should be mentioned in the debit or credit notes as to why the goods are coming back.
- The Debit or Credit notes should show price and tax element related to the goods returned. This helps to ascertain the claim of set-off . If the goods purchased are returned, the care should be taken to reduce the set-off.
- The most essential is the evidence to show that the customer was knowing at the time of purchase that he will be receiving the discount. This evidence can be in the form of Terms and conditions printed on the price-list or catalog, Trade circulars, Trade Association news letters, and correspondence with the customers.
Written by ntnirale on July 11th, 2009 with comments disabled.
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