How to utilise credit notes for VAT in Uganda

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Case study as at the East Africa School of Taxation: Kigwa & brothers Limited raised an invoice worth Shs. 100,000,000 in June 2010 to Fina associates. But goods were delivered 25 August 2010. On 10 October 2010, Fina associates made a payment of Shs. 75,000,000 and informed Kigwa & brothers Limited that goods worth Shs. 15,000,000 had been found damaged and were returned on 09 September 2010.

The Managing director of Kigwa & brothers Limited insisted that Fina associates should pay the balance with immediate effect since his company had already declared and account for the tax on the sale to Uganda Revenue Authority (URA). One of the ways to proceed is found under section 14 of the VAT Act Cap 349.

Under section 14 of the VAT Act, the time of supply refers to the date on which the supply is deemed to have taken place. It is useful in that it determines that tax point. The tax point determines the tax period in which output tax should be accounted for and credit for input tax should be claimed. The rate of tax also helps in determining the rate at which tax is payable. It also determines the conversion rates for foreign currency.

For an ordinary supply, it is the earlier of the following: the invoice date, the payment date or the delivery date. In the case of Kigwa brothers, the tax point is June 2010 when the invoice was raised. The tax period is the month ended June 2010. However, the declaration and accounting for VAT to the URA does not necessarily mean that Fina Associates should pay the full amount even for the returned goods.

Section 22 of the VAT Act deals with adjustments to tax and adjustments under this section are meant to cater for the taxable person selling and not the one purchasing. A tax can be adjusted where the supplier has issued an invoice in respect of the supply or accounted for the tax on the supply and Kigwa did both.

The circumstances that would lead to an adjustment in tax are: when the supply is cancelled. This should be evidenced by the original invoice marked cancelled. In an automated system there should be a reversal or the transaction with the particular serial number. Where the price is changed and this could be down wards leading to a reduction in output tax or upwards leading to an increase in output tax. The causes could be discounts offered, mistakes and others. When the supply has been fundamentally altered; for example, the supply of vita foam mattresses being changed to the cheaper crest foam mattresses or vice versa. Or where there are returns inwards. This could be due to damaged goods, unwanted goods, and delivery over order quantity, high price or others

In the case of Kigwa, there was a returns inwards and therefore Kigwa has a right to a tax credit where the new adjusted position leads to a reduction in the supply as under section 22 (4). Adjustments downwards are by issue of a credit note by a taxable person (Kigwa) to his customer Fina Associates.

Where a tax invoice has been issued as a result of an adjustment (sec 22(1) (e), and the amount shown as tax charged on the tax invoice exceeds the tax properly chargeable in respect of the supply, the person making the supply (the seller) shall provide the recipient of the supply (buyer) with a credit note containing, unless the commissioner provides otherwise, the following particulars;

a) The words “credit note” in a prominent place;

b) The commercial name, address, place of business, and the tax identification and VAT registration numbers of the taxable person making the supply;

c) The commercial name, address, place of business and the tax identification and VAT registration numbers of the recipient of the taxable supply;

d) The date on which the credit note was issued;

e) The rate of tax; and

f) Either; (i) the taxable value of the supply shown on the tax invoice, the correct amount of the taxable value of the supply, the difference between those two amounts, and the tax charged that relates to that difference; or

(ii) where the tax charged is calculated under section 24 (2), the amount of the difference between the taxable value shown on the tax invoice and the correct amount of the taxable value and a statement that the difference includes a charge in respect of the tax; and

g) A brief explanation of the circumstances giving rise to the issuing of the credit note; and

h) Information sufficient to identify the taxable supply to which the credit note relates.

Therefore, instead of asking Fina associates to pay the full price including that of the goods returned, the Kigwa & brothers Managing Director can issue Fina associates with a credit note and claim the input VAT on the goods which were returned. The goods returned to a tune of Shs. 15,000,000 have VAT of Shs. 2,700,000.

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