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.
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 of
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 to 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. It
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 goods 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 goods 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. Likewise, credit notes issued for items stated at 2(iv) and 2(v) shall also be not eligible for adjustment
of output tax u/s 8 of DVAT
Act
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(iii). Credit note related to items listed at 2(iv)
to 2(vi) 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 item 2(iv)
to 2(vi).
---------------------------------------------------------------------------------------
Reference:-
DVAT Notification No.F.3(394)/Policy/VAT/2013/349-356 Dated: 08/09/2014