Delhi Value Added Tax - Part 6 - Refunds and Adjustments
November, 01st 2010
This section explains how to get refunds and make tax adjustments.
As explained in earlier parts of this guide, when your input tax credits exceed your DVAT (output tax), CST, and any applicable interest, penalties, and other amounts due, you may be entitled to a refund.
You may elect to:
Take the refund in cash; or
Carry forward the amount to the next tax period as a tax credit.
If you choose to take the refund in cash, we will pay the refund within one month of your filing the return or making the claim.
When Can Your Refund be Withheld?
Your refund can be withheld in the following situations:
All or a part of the refund may be adjusted against any other amounts you owe under the DVAT Act or the CST Act;
If you ask for a cash refund and the department has asked you to furnish security, but you do not furnish the required security;
If your affairs are being audited at the time;
If we are not fully satisfied with the completeness and accuracy of the information provided in your tax returns; or
Additional information is sought from you after inspecting your records .
Interest on Refunds
We pay simple interest on refunds and overpayments tax. Interest paid on DVAT refunds is calculated from the later of:
The day after the day the refund was due to be paid; or
The day after any overpayment is made.
Manner in Which a Claim of Refund is to be Made
If you are a registered dealer, your return in Form DVAT-16 is also the claim for refund. A claim for refund of any other amount may be made in Form DVAT-21, giving the grounds on which the claim is made.
A claim for refund by an embassy, consular office or other entity referred to in the Sixth Schedule to the DVAT Act has to be made in Form DVAT-23. It should be accompanied by a letter of Authority.
When you apply for a refund, and all your tax affairs are in order, we will send you a refund order in Form DVAT-22. The refund shall be transferred electronically to your bank account that you have intimated to us. Please remember that for safety and security reasons, no cheques will be issued by the department on your name for the refund owed.
Security for Cash Refund
We may ask for a security from you for an amount not exceeding the refund to be granted by issuing a notice in Form DVAT-21A.
This part tells you what adjustments you must make to your tax liability and tax credits in a given tax period.
Adjustment to Tax When There is a Change in the Nature of the Sale
A tax adjustment is required where you have charged an amount of tax on a particular sale or
issued a tax invoice or furnished a return in relation to the sale and subsequently
The sale is cancelled;
The nature of that sale is varied or altered;
The previously agreed consideration for that sale is altered;
The goods or part of the goods sold are returned; or
The whole or part of the price owed by the buyer for the goods has been written-off as a bad debt.
In any of the above situations, you must make an adjustment to your tax in the tax period when it becomes apparent that the tax charged earlier on the sale, was incorrect.
If the tax properly payable in relation to that sale is more than the tax that you actually charged on the sale, the amount of the excess tax payable will be deemed to arise in the tax period in which you are required to make the adjustment.
But, if the tax you actually charged on the sale was more than the tax actually payable, then you can subtract the excess amount from the tax payable by you in the tax period in which the adjustment is to be made.
Gunjan, who uses the accrual basis of accounting, issues Smriti an invoice dated 26th August for goods worth Rs 1125 (Rs 1000 + Rs 125 tax : assuming 12.5% tax rate).
Gunjan accounts for the sale in the return for the period ending 31st August.
In the following March, with no hope of receiving payment from Smriti, Gunjan writes off Rs 1125 as a bad debt.
When computing her tax liability for the tax period ending 31st March, Gunjan can reduce her tax liability by Rs 125.
Adjustment to Tax for Goods Used for Mixed Purposes
Where you sell goods that have been used in part for making taxable or non-taxed sales under DVAT and in part for other purposes, the amount of tax on the sale of the goods shall be the greater of:
(i) A - (A x B / C); or
(ii) A - B;
A = your gross tax liability on the transaction before making any adjustments for the mixed use, or any set-off of available tax credit.
B = the amount by which your tax credit was reduced when you purchased the goods, because they were to be used for mixed purposes.
C = The total amount of the tax credit before any reduction was made.
Kavita buys a computer in the tax period for Rs 1040 (Rs 1000 +Rs 40 tax at 4%. She plans to keep the computer at home where she will use it for her business accounts, and her children will use it for their school work. The use of the computer by the children is personal work and does not give rise to tax credit.
Let us assume that the proposed uses will be 70% business and 30% non-business. Thus she claims tax credit in the tax period of purchase of Rs 28. Now consider the following two situations. For purposes of this illustration, it is assumed that all of the tax credits can be claimed for capital goods at the time of purchase, ignoring the three-year amortization rule.
Kavita sells the computer for Rs 900 two years later. The adjustments to tax ensure that she is compensated for some of the Rs 12 she could not claim when she bought the computer two years ago. The tax liability on sale of Rs 900 is Rs 36 (assuming 4% tax rate).
When we apply the provision for adjustment to tax for goods used for mixed purposes, the amount of tax on the sale shall be the greater of:
(i) A - (A x B / C) = 36 - [36 x 12 / 40] = 36 - 10.8 = 25.2
(ii) A - B = 36 - 12 = 24 Where:
A = The tax for which the dealer would be liable in respect of the sale apart from this section = Rs 36
B = The amount by which the tax credit of the dealer in respect of the goods was reduced = Rs 12
C = The amount of the tax credit before any deduction = Rs 40
Therefore, the amount of tax on the sale of the goods should be = Rs 25.2. Situation 2:
Kavita sells the computer for Rs 1200. The adjustments to tax provisions ensure she gets all of the Rs 12 she could not claim when she bought the computer, but no more. The tax liability on sale of Rs 1200 is Rs 48.
When we apply the provisions for the adjustment to tax for goods used for mixed purposes the amount of tax on the sale of the goods shall be the greater of:
(i) A - (A x B / C) = 48 - [48x 12/ 40] = 48 - 14.4 = 35.6 (ii) A - B = 48 - 12 = 36
Therefore, the amount of tax on the sale of the goods should be = Rs 36
Adjustments to Tax Credit
Adjustment to Tax Credit Due to a Change in Price
Where you have been issued with a credit note or debit note or if you return or reject goods purchased as a consequence of which the tax credit claimed by you in any tax period becomes short or excess, you shall make an adjustment in your tax credit claim in the tax period in which the credit note or debit note has been issued or goods are returned.
Adjustment to Tax Credit for Change of Use
You may have purchased goods which were intended to be used for sale and are subsequently used, fully or partly, for purposes other than a sale, or vice versa. In such cases the tax credit claimed in respect of such purchase will be reduced or increased (as the case may be) in the tax period during which the change in use takes place.
In case commodity-wise accounts are maintained by you co-relating the use of goods for sale and for other purposes, the tax credit shall be reduced by the input tax paid on the purchases used for purposes other than sale. If commodity-wise accounts are not maintained by you, the reduction of input tax credit shall be calculated on the basis of purchase price immediately preceding the sale or the fair market value, whichever is higher.
One situation requiring the tax credit adjustment would be where you buy goods and raw materials for manufacture or resale and subsequently export the goods, or the goods manufactured from the raw materials, out of Delhi under a branch transfer arrangement. If you had originally claimed a credit for all of the input tax paid on the goods purchased, then you would be required to reverse a part of the credit claimed. As noted earlier, in the case of branch transfers, tax credits are not allowed for the first 4% of the input taxes on goods involved. Thus, credit adjustment (or reversal) would be as follows:
100% of the credit previously claimed for goods which are liable to tax at 1%;
100% of the credit previously claimed for goods which are liable to tax at 4%;
20% of the credit previously claimed for goods which are liable to tax at 20%; and
32% of the credit previously claimed for goods which are liable to tax at 12.5%.
Another situation where credit adjustment would be required is where you purchased goods that you intended to sell, but instead incorporated into the structure of a building that you own or occupy. In such cases, you must appropriately reverse the tax credit claimed in respect of such purchase in the tax period during which such incorporation takes place.
Adjustment for Bad Debts
If you make a taxable sale in respect of which you have already paid the tax, but you do not receive the payment from the customer, you may claim credit adjustment for the bad debt. This adjustment is allowed only if you have written off the amount in your books of accounts and also claimed it as a deduction in computing your income for income tax purposes.
If you subsequently recover the amount, in whole or in part, you will be required to reverse the credit adjustment on account of tax on the amount recovered
Where the bad debt relates to a supply of mixed goods taxable at different rates, you would calculate your credit adjustment by allocating the amount written off to various amounts outstanding in the following order:
Any interest amount due and outstanding;
Sale price of any exempt or non-taxed goods;
Sale price of goods taxable @ 1%;
Sale price of goods taxable @ 4%;
Sale price of goods taxable @12.5%; and
Sale price of goods taxable @ 20%.
Where you subsequently recover the whole or part of the bad debt, you are required to calculate the reversal of the credit adjustment by allocating the recovery amount to the above amounts in the reverse order. An example in the following box explains this ordering/allocation mechanism.
Aloc & Sons Pvt. Ltd. made a sale in February 2006 for Rs 3,290, consisting of taxable turnover of Rs 1,000 for goods taxable at 4% (total sale price Rs 1040) and Rs 2,000 for goods taxable at 12.5% (total sale price Rs 2,250). The customer did not pay the amount due, which had risen to Rs 3,600 on March 31, 2007 on account of interest that became due and payable. Aloc & Sons Pvt. Ltd. decides to write off the entire amount as a bad debt on March 31, 2007 and also claim a deduction of the amount written off for income tax purposes.
For DVAT purposes, Aloc & Sons Pvt. Ltd. would be allowed to claim a credit adjustment for the bad debt in March 2007. The bad debt amount would be allocated as follows: Rs 310 on account of interest, Rs 1,040 on account of goods taxable at 4%, and the balance of Rs 2,250 on account of goods taxable at 12.5%. The credit adjustment would be Rs 40 for goods taxable at 4%, and Rs 250 for goods taxable at 12.5%, for a total of Rs 290.
In July 2007, Aloc & Sons Pvt. Ltd. is able to recover Rs 1,000 through the efforts of a collection agency. This would require a partial reversal of the credit adjustment previously claimed. The amount of the recovery would be deemed to be first on account of goods taxable at 12.5% (reverse of the order followed for claiming the credit adjustment), and then only for goods taxable at 4% and for interest. Since the recovery amount was only Rs 1,000 (less than the amount written off for sale taxable at 12.5%), all of it would be treated as on account of goods taxable at 12.5%. Aloc & Sons Pvt. Ltd. would be required to include Rs 111 (tax rate of 12.5% divided by 100+12.5, multiplied by the amount recovered) as additional tax in its DVAT return for July 2007