What is VAT adjustment when issuance of credit note?
In Bangladesh, a credit note (Mushak-6.9) is a crucial document used to adjust the Value Added Tax (VAT) when a change occurs after a taxable supply has been made and a VAT invoice (Mushak-6.3) has already been issued. This typically happens in situations like:
- Returned Sales: Goods sent back by a customer after purchase.
- Price Reductions/Discounts: If the original price of goods or services is reduced after the invoice has been issued (e.g., due to a negotiation, quality issue, or bulk discount).
- Correction of Errors: When there's an error in the original VAT invoice that resulted in an overcharge of VAT.
Here's how VAT adjustment works with a credit note in Bangladesh:
1. The Need for Adjustment:
When a credit note is issued, it means the original value of the supply, and consequently the VAT charged on it, needs to be reduced. This impacts both the supplier (who collected the VAT) and the recipient (who paid the VAT and may have claimed input tax credit).
2. Issuance of Credit Note (Mushak-6.9):
- By the Supplier: The supplier who originally issued the VAT invoice (Mushak-6.3) will issue a credit note (Mushak-6.9) to the recipient.
- Details on the Credit Note: The credit note must clearly reference the original VAT invoice number and date, the reason for the adjustment (e.g., sales return, price reduction), and the decrease in the taxable amount and the proportional VAT adjustment.
- Purpose: The credit note serves as evidence of the decrease in the taxable value of the supply and the VAT associated with it.
3. VAT Adjustment for the Supplier (Output VAT Reduction):
- Decrease in Output VAT: The supplier, upon issuing a credit note, can reduce their output VAT liability for the tax period in which the credit note is issued. This means they will pay less VAT to the government for that period.
- Reflecting in VAT Return (Mushak-9.1): Suppliers record this adjustment in the "decreasing adjustments" section of their monthly VAT return (Mushak-9.1).
- Example: If a supplier initially sold goods worth BDT 1000 with 15% VAT (BDT 150) and later issued a credit note for a return of goods worth BDT 200 Reflecting in VAT Return (Mushak-9.1):
- Suppliers record this adjustment in the "decreasing adjustments" section of their monthly VAT return (Mushak-9.1).4. VAT Adjustment for the Recipient (Input VAT Reduction/Reversal):
- Decrease/Reversal of Input VAT: The recipient, who initially paid the VAT and likely claimed it as an input tax credit, must now reduce or reverse their input tax credit by the amount of VAT shown on the credit note.
- Reflecting in VAT Return (Mushak-9.1): This adjustment is also reflected in the recipient's monthly VAT return (Mushak-9.1) under the "increasing adjustments" section, or by reducing the input tax claimable. This increases their net VAT payable to the government or reduces their refund claim.
- Cash Flow Impact: If the recipient previously claimed the input tax credit, which led to a refund or lower VAT payment, they may now owe the government the VAT that was originally credited because of this adjustment.
- Example: If the recipient initially claimed BDT 150 as input VAT on the purchase of BDT 1000, and then received a credit note for their output VAT for that period would see a BDT 30 reduction.
- 5. Legal Basis and Documentation:
- The process of issuing credit notes and making VAT adjustments is governed by the VAT and Supplementary Duty Act, 2012, and the Value Added Tax and Supplementary Duty Rules, 2016 (and subsequent SROs) in Bangladesh.
- Proper documentation, including the original VAT invoice and the credit note (Mushak-6.9), is crucial for both the supplier and the recipient to justify their VAT adjustments during audits or assessments.
In summary, a credit note is a mechanism to ensure that VAT is correctly accounted for when the original value of a taxable supply changes after the initial invoice. It allows both the supplier and the recipient to adjust their VAT liabilities to reflect the true value of the transaction, preventing over-collection or under-collection of VAT.