Reversal of Input Tax Credit under Section 10 of the DVAT Act, 2004

No.F.3(394)/Policy/VAT/2013/349-356 Dated: 08/09/2014

CIRCULAR NO. 11 of 2014-15
Sub: 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 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)
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
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
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
8. It supersedes Circular No.30 of 2013-14 issued vide
No.3(394)/Policy/VAT/2013/1097- 1103 dated 19/12/2013.
9. This issues with the prior approval of Commissioner, Value Added Tax.
forwarded for information and necessary action to:
1. All Spl./Addl./Joint Commissioners, Department of Trade and Taxes,
GNCT of Delhi, Vyapar Bhawan I.P.Estate, New Delhi-02.
2. Registrar, Value Added Tax, Applellate Tribunal, Department of Trade
& Taxes, Vyapar Bhawan, New Delhi-02
3. The President/General Secretary, Sales Tax Bar Association (Regd.),
Vyapar Bhawan, I.P.Estate, New Delhi
4. Dy. Director (Policy), Department of Trade and Taxes, GNCT of Delhi,
Vyapar Bhawan, I.P.Estate, New Delhi-02.
5. System Analyst(EDP), Department of Trade and Taxes, GNCT of Delhi,
Vyapar Bhawan, I.P.Estate, New Delhi-02 for uploading the circular on the
website of the department.
6. .All Assistant Commissioners/AVATOs Department of Trade and Taxes, GNCT
of Delhi, Vyapar Bhawan, I.P.Estate, New Delhi-02.
7. PS to the Commissioner, VAT Department of Trade and Taxes, GNCT of
Delhi Vyapar Bhawan, I.P.Estate, New Delhi-02.
8. Guard File.
(Rajesh Bhatia)
Assistant Commissioner(Policy)
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