Can VAT adjustment be claimed for second-hand goods?

Yes. A registered dealer may claim a decreasing adjustment when reselling second-hand goods purchased from unregistered persons, provided conditions are met and proper records are maintained.

How does VAT adjustment work in case of insurance claims?

Registered insurers may claim decreasing adjustments when paying claims, and increasing adjustments if they recover amounts under insurance coverage. Other registered persons receiving insurance payouts related to economic activity may also need to make adjustments.

Is there VAT adjustment for lottery or raffle prize payments?

Yes. Registered persons conducting lotteries, raffles, or similar activities may claim a decreasing adjustment equal to the monetary prize paid, in the tax period when the prize is awarded.

What happens if VAT is paid at the wrong rate?

A registered person must make a decreasing or increasing adjustment depending on the difference between VAT paid and the correct VAT payable under the actual applicable rate.

How does VAT withholding work for unregistered recipients?

When an unregistered recipient is involved, the withholding entity or accounting officer must withhold VAT and deposit it into the government treasury, then provide proof of deposit and submit details in the VAT system.

Can suppliers adjust VAT after withholding by accounting officers?

Yes. After VAT has been withheld and deposited by an accounting officer, the supplier may claim a decreasing adjustment equal to the withheld VAT in the relevant tax return.

Value Added Tax and Supplementary Duty Rules, 2016 Notes-P6

VAT Adjustment Rules (33–39)

33. Adjustment for Second-Hand Goods Purchased for Resale

(1) Subject to the following conditions, a registered person (dealer) may make a decreasing adjustment for second-hand goods purchased for resale or exchange (not for preparation), in the normal course of business:

(a) The goods are purchased from an unregistered person;
(b) The supply would have been taxable if provided by a registered person;
(c) The goods are not imported by the dealer;
(d) The resale by the dealer or trader is a taxable supply; and
(e) All books and records related to sales and purchases are maintained as per the method determined by the Board.

(2) The amount of decreasing adjustment shall equal the tax fraction of the consideration paid by the dealer for the purchase of the used goods.

(3) The decreasing adjustment shall be made in the tax period in which the dealer resells the goods.

34. Insurance-Related Adjustment

(1) A registered insurer may make a decreasing adjustment if payment is made to another person under an insurance contract and the following conditions are met:

(a) The supply under the insurance contract is taxable;
(b) Payment is not made by the insurer for import or supply to himself;
(c) Payment is not made to any other person for a supply unless VAT is imposed at a rate other than zero; and
(d) The recipient of payment is not unregistered or non-resident.

(2) A registered insurer may make an increasing adjustment if:

(a) The insurer receives any amount from exercising rights under insurance coverage (excluding excessive or exemplary losses); and
(b) The insurer has been allowed a decreasing adjustment under sub-rule (1) for the corresponding amount.

(3) A registered person may make an increasing adjustment if:

(a) He receives any amount under insurance coverage, whether or not he is a party to the contract;
(b) The received amount relates to loss, if:

(i) In the normal course of his economic activities; or
(ii) Partially or fully relates to use of assets in economic activities;

(4) The adjustment amount shall equal the tax fraction of the amount paid.

(5) The adjustment amount shall be reduced proportionally if:

(a) The loss occurred in exempt supply preparation; or
(b) The loss-related asset is used in exempt supply preparation or for private purposes; and
(c) If both (a) and (b) apply, the most reasonable method shall apply.

(6) The adjustment shall be made in the tax return of the period in which the payment is made.

35. Adjustment for Lottery, Lucky Draw, Raffle, Housing, and Similar Activities

(1) A registered person conducting lottery, lucky draw, raffle, housing, or similar activities may make a decreasing adjustment if any monetary prize is paid as a result of such activity.

(2) The adjustment shall be made in the tax return of the period in which the payment of the monetary prize is made.

36. Adjustment for Change in Tax Rate

(1) A registered person may make a decreasing or increasing adjustment if VAT has been paid at a rate different from the actual rate applicable to the supply.

(2) The difference between the VAT actually paid and the VAT payable shall determine the adjustment amount.

(3) The adjustment shall be made in the tax return of the period in which the payment is made.

37. Withholding of VAT by Unregistered Recipient

(1) The withholding entity shall deposit the withheld VAT into the government treasury within the time specified in section 40(1)(c)(e).

(2) The withholding entity shall submit information of the VAT deposited (including treasury challan and copies of withholding certificates), except online submission, to the nearest VAT office within seven working days of issuing the certificate.

38. Withholding and Payment of VAT by Accounting Officer on Behalf of Unregistered Recipient

(1) Notwithstanding rule 37, for the purpose of section 49(3)(b) and section 2(21), transactions of unregistered entities handled by accounting officers shall involve VAT withholding and payment to the treasury by the accounting officer.

(2) For this purpose, the withholding entity shall mention the name and business identification number in the bill submitted to the accounting officer.

(3) Upon approval, the accounting officer shall withhold VAT from the payment and deposit into the government treasury via book transfer or other recognized method.

(4) The accounting officer shall notify the withholding entity within three working days and submit the information in the VAT computer system.

39. Decreasing Adjustment by Supplier after Withholding

Notwithstanding rule 38, for the purpose of section 50(1), and subject to subsections (2) and (3), the supplier shall make a decreasing adjustment in the tax return of the relevant tax period equal to the withheld VAT amount.