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| "Debit notes and VAT adjustments" |
What is VAT adjustment when issuance of debit note?
In Bangladesh, a debit note is typically issued by a supplier to a buyer to increase the amount the buyer owes. This situation can arise due to reasons like
Increase in the value of supply: For example, due to an increase in quantity, price, or applicable VAT rate after the original invoice was issued.
- Correction of errors in the original invoice: For instance, if the buyer was initially undercharged.
- Imposition of additional charges: Including costs like packaging or transportation not present in the original invoice.
When a debit note containing VAT is issued, a VAT adjustment becomes necessary. Here’s how this process unfolds for both the supplier and the buyer:
For the Supplier (Issuer of the Debit Note):
- Output VAT Adjustment: The supplier has effectively increased their taxable sales value. Therefore, they need to increase their output VAT liability for the tax period in which the debit note is issued. This is typically done by including the VAT amount from the debit note in their VAT return (Mushak-9.1) under the "Increasing Adjustments" section.
- Record Keeping: The supplier must maintain a copy of the debit note issued, along with the original invoice details, as part of their VAT records. The debit note should clearly state that it is a debit note, reference the original invoice number and date, show the reason for the debit, the increased value, the applicable VAT rate, and the additional VAT amount. According to VAT regulations in Bangladesh, the debit note must adhere to the specified format (Mushak-6.8).
- For the Buyer (Recipient of the Debit Note):
- Input VAT Adjustment: If the buyer is VAT registered and was eligible for input tax credit on the original purchase, the additional VAT charged on the debit note may also be eligible for input tax credit. The buyer can increase their input VAT credit in their VAT return for the tax period in which they receive the debit note. This is usually recorded under the "Increasing Adjustment" or "Input Tax Credit" section of the Mushak-9.1.
- Conditions for Input Tax Credit: The eligibility for input tax credit on the debit note follows the same rules as for the original invoice. This means the purchase must be for business purposes, the supplier must be VAT registered and have issued a valid debit note (Mushak-6.8), and the payment (if exceeding BDT 100,000) should ideally be made through banking channels to maintain eligibility.
- Record Keeping: The buyer must keep the original invoice and the debit note received as evidence for claiming the additional input tax credit.
In summary, the issuance of a debit note with VAT requires a corresponding adjustment in the VAT records and returns of both the supplier (increasing output VAT) and the buyer (potentially increasing input VAT credit), provided all the conditions for claiming input tax credit are met. Proper documentation and adherence to the prescribed formats for debit notes (Mushak-6.8) are crucial for both parties to ensure compliance with VAT regulations in Bangladesh.