What happens if VAT accounted is less or more than payable due to an adjustment event?

If VAT previously accounted is less than payable, the supplier makes an increasing adjustment and issues a debit note. If more than payable, the supplier issues a credit note and makes a decreasing adjustment, subject to conditions.

How are unpaid invoices treated under VAT rules?

If consideration remains unpaid for over 12 months and is written off as bad debt, the supplier may make a decreasing adjustment. The recipient must make a corresponding increasing adjustment.

Is VAT input credit allowed without banking payment?

No, payment must be through banking channels. If not, an increasing adjustment must be made. However, with Commissioner approval, barter transactions between registered parties may still qualify for input credit.

What happens if assets are used for private purposes after claiming input credit?

A registered person must make an increasing adjustment equal to the input credit claimed on the asset if it is used for private purposes.

Can newly registered persons claim VAT credit on pre-registration goods?

Yes, within three months of registration, a person may apply for decreasing adjustment for VAT already paid on goods held in stock, subject to documentation and Commissioner’s approval.

What adjustment is required upon cancellation of VAT registration?

At cancellation, an increasing adjustment must be made for assets on hand on which input credit was claimed. The amount equals the tax fraction of fair market value of assets before cancellation.

Value Added Tax and Supplementary Duty Rules, 2016 Notes-P5

VAT Adjustment Rules (27–32)

27. Post-Supply Adjustment in Case of Adjustment Events

(1) For the purposes of clause (jj) of sub-clause (71), clause (87) and sub-clause (d) of clause (103) of section 2, and section 48:

If an adjustment event occurs and the VAT previously accounted by the supplier on a supply is less than the VAT actually payable, the supplier shall:

(a) Make an increasing adjustment in the tax period in which the adjustment event occurs, equal to the difference; and
(b) Issue a debit note in favor of the recipient.

(2) If the recipient is a registered person, he may make one decreasing adjustment in the tax period in which he receives the debit note, or within the following two tax periods.

(3) The amount of decreasing adjustment under sub-rule (2) shall be:

(a) Equal to the difference, if the recipient was entitled to full input tax credit on the original acquisition;
(b) A proportion, determined using the fraction in section 47(3), of the difference in the month of adjustment, if partial input credit was allowed;
(c) Zero, if the recipient was not entitled to any input credit on the original acquisition.

(4) If an adjustment event occurs and the VAT previously accounted by the supplier exceeds the VAT actually payable, the supplier shall:

(a) Issue a credit note in favor of the recipient; and
(b) Subject to sub-rule (6), make a decreasing adjustment either in the tax period in which the adjustment event occurs or, if not then, within the following two tax periods. The amount shall equal the difference.

(5) In the case of a registered recipient:

(a) He shall make an increasing adjustment in whichever occurs earlier — the tax period of the adjustment event or the tax period in which the credit note is received; and
(b) The increasing adjustment shall be:
- (i) Equal to the difference, if entitled to full input credit;
- (ii) A proportion, determined using section 47(3), if entitled to partial credit;
- (iii) Zero, if not entitled to any input credit.

(6) A decreasing adjustment shall not be allowed unless:

(a) The recipient is registered and holds valid proof of receipt of a credit note from the supplier; or
(b) The recipient is unregistered, and the supplier has refunded the excess VAT in cash or by offsetting against dues.

(7) For the purposes of sub-rule (6)(b):

(a) If an adjustment event under section 2(87)(a)–(c) results in the supplier refunding money, unless proven otherwise, the refunded amount shall be deemed to include VAT equal to the tax fraction of the refund; and
(b) If an adjustment event under section 2(87)(d) results in a refund, unless proven otherwise, no VAT shall be payable on the refunded amount.

28. Post-Supply Adjustment for Unpaid Consideration

(1) Where the recipient fails to pay full or partial consideration for a taxable supply, the supplier may, with prior approval of the Commissioner, make necessary adjustment.

(2) If consideration remains unpaid for more than 12 months, and the supplier writes it off as a bad debt in his books, the supplier may make a decreasing adjustment as if an adjustment event had occurred.

(3) The adjustment shall be made in the latest of the following tax periods:

(a) When the consideration first becomes overdue for more than 12 months, or when the debt is written off as bad debt;
(b) When the whole or part of consideration remains overdue for more than 12 months;
(c) When the recipient has already claimed input tax credit for the supply.

(4) Under section 48, the recipient shall make an increasing adjustment as if an adjustment event occurred.

(5) If the recipient subsequently pays full or partial overdue consideration after an adjustment has been made, another adjustment shall be made to ensure:

(a) For the supplier: output tax equals the tax fraction of the actual consideration received; and
(b) For the recipient: input credit equals the tax fraction of the actual consideration paid.

(6) The burden of proof that payment has not been made and the debt is bad rests on the supplier.

29. Adjustment for Non-Payment through Banking System

(1) If a registered person pays for taxable supplies (under section 46(2)(a)) without using the banking channel, he must make an increasing adjustment.

(2) The adjustment shall be made in the tax period(s) in which such payment is made by non-verifiable banking means.

(3) The adjustment amount shall equal the tax fraction of the consideration paid without banking documents.

(4) Notwithstanding the above, with prior approval of the Commissioner, input credit shall still be allowed for supplies between related registered or enlisted persons under barter arrangements, even without banking payment.

30. Adjustment for Assets Used for Private Purposes

(1) A registered person shall make an increasing adjustment if:

(a) He claimed input tax credit on acquisition or import of an asset; and
(b) The asset is used for private purposes.

(2) The adjustment shall equal the amount of input tax credit claimed on the asset.

(3) If a turnover-tax enlisted person later becomes registered and supplies taxable goods, and if the turnover return for the tax period immediately preceding registration already included such supplies, he may apply to the Commissioner for a decreasing adjustment equal to the turnover tax paid.

(4) Only one such application may be made, within three months of registration, supported by documentary evidence.

(5) Within two months, the Commissioner shall inform the applicant of the amount of decreasing adjustment (if any) and the tax period for adjustment.

31. Adjustment for Input Tax and VAT upon Registration

(1) A turnover-tax enlisted person who later becomes registered may apply to the Commissioner for decreasing adjustment for goods held at the end of the day before registration, if:

(a) The goods were imported within three months prior and VAT was paid, or acquired locally with supporting invoice; and
(b) The goods were acquired for business use and ongoing supply; and
(c) The person would have been entitled to input credit if registered on the date of acquisition/import.

(2) The maximum decreasing adjustment allowed by the Commissioner shall be the lesser of:

(a) VAT paid on the import or local supply; or
(b) The tax fraction of the fair market value of the goods at registration.

(3) If turnover-tax enlisted and later registered, and taxable supplies already included in the turnover return of the immediately preceding period, he may apply for decreasing adjustment equal to turnover tax paid.

(4) Only one application may be made, within three months of registration, supported by sufficient evidence.

(5) Within two months, the Commissioner shall notify the applicant of the adjustment amount (if any) and the tax period for such adjustment.

32. Adjustment upon Cancellation of Registration

(1) At the time of cancellation of registration, a person shall make an increasing adjustment for all assets on hand if input credit had been claimed on their acquisition or import, or if they contain inputs on which credit was claimed.

(2) The adjustment amount shall equal the tax fraction of the fair market value of the assets on the day immediately before cancellation.

(3) If any adjustments are necessary for such assets under rule 24, the amount shall be reduced by multiplying with the average proportion determined for the last 12 months. If no proportion applies, no reduction shall be allowed.

(4) The adjustment shall be made in the final VAT return (Form MUSAK-2.5) for the final tax period.