Defective Goods

RESOLVING CENTRAL SALES TAX CHALLENGES THROUGH RIGHT-SOURCING

Handling Tax Credits in Case of Defective Goods Suryabir Singh

Overview Accounting of Input tax credits in case of defective goods have been troublesome for the companies for long. The reason being tracking the input tax credits available and credits taken for a particular good is very complex and time-consuming. Moreover the timing of acceptance or rejection of goods also play a very important role in many states, and more so differently. Alon with accounting of tax credits, it also involves dealing with various notes either procured from or issued to the other dealer. Adjusting the tax credit account with respect to the debit or credit notes, whichever applies into the case demands a lot of paper work and tracking previous information.

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This paper elucidates the above challenges, analyses the manner in which organizations handle defective goods rejection related accounting in VAT and suggests an efficient and cost-effective methodology of executing this operation.

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RESOLVING CENTRAL SALES TAX CHALLENGES THROUGH RIGHT-SOURCING

How does it operate? In this world of Just In Time (JIT) inventory in manufacturing and transaction business, it is becoming harder to track the inventory that has been procured even a month earlier. Moreover sourcing of raw material has also become independent of distance of the supplier from the manufacturing plant or the warehouse. Now a manufacturer based in Maharashtra orders supplies from a supplier based in West Bengal and that too on a daily basis due to the constraints of JIT in terms of warehousing space. Taking an example let a registered manufacturer X in Maharashtra orders some raw materials from a registered producer Y of the raw material in West Bengal. The manufacturer follows the JIT system in its manufacturing plant. For that he has a strategic partnership with the supplier that he would place his orders at least one month in advance and supplier would also supply the material at the right time, in right quantity and of the best quality. Failing this, the supply would be subject to rejection.

For the production schedule on 15th March, X has placed an order on 10th February to Y through a purchase order. He has also paid the amount due for this order on 28th February against the Tax invoice. The accounting for this invoice is completed subsequently and Input Tax Credit was claimed in subsequent filing of VAT return on 5th March. The supplier ships the order on 10th March by road so that it reaches the plant exactly at time. Now since JIT also requires the highest level of quality control, the manufacturer has established very detailed inspection process of incoming goods. The inspection of goods coming from West Bengal on 15th March revealed that the material is defective and can not be used in the manufacturing. According to their contract, the goods are rejected and sent back to Y. Along with goods, X also has to issue a Debit note specifying the details contained in the Tax Invoice to X, so that Y can claim the taxes already paid on these goods. X also has to procure a credit note from Y containing the same details as Tax Invoice for reversal of Tax credit already claimed in returns filed earlier. The rules for issuing debit and credit notes vary in different states. For e.g. according to Tamilnadu VAT rules the goods must be returned to the seller with in six months of the date on which the transaction took place. Similarly, West Bengal VAT rules also provide a time gap of 6 months for reporting the rejection and subsequent return of the goods.

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RESOLVING CENTRAL SALES TAX CHALLENGES THROUGH RIGHT-SOURCING

Key challenges and Costs involved 1. 2. 3. 4. 5.

Warranty management policy of the company need to be followed strictly in case of return of goods due to defect. Internal departments handling these issues need to synchronize in order to complete the task efficiently. Critical recourses of the organization, in terms of skilled manpower, is spending most of time doing routine job rather than strategic thinking. Flow of lot of information between different departments tends to increase the cost of keeping the record and processing it. Acquiring credit or debit note form seller/buyer respectively is very cumbersome.

The right-sourcing solution 1. 2. 3. 4. 5.

Expertise of the compliance solution provider provides with a better and sustained implementation of the warranty management policy. The solution provider will do most of the work and also provide support for the work of internal departments related to this issue. The right-sourcing will leave the strategic resources of the company for planning and thinking. Right sourcing will also provide with cost-effective tracking of the credit and debit notes. After getting the goods back, seller generally tends to forget their responsibility towards buyer to issue the Credit note. A compliance provider will also help keeping the track and helping companies in following up the procurement of credit/ debit note, whichever is applicable.

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RESOLVING CENTRAL SALES TAX CHALLENGES THROUGH RIGHT-SOURCING

More right sourcing solution

Right sourcing diagram

References 1.

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