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It is a very common practice in business for customers to return back the goods once sold by the sellers. This article will discuss the tax implications of goods returned especially in light of e-commerce sales keeping in mind that one of the most attractive features of the e-commerce market is the easy return & exchange policy.
A goods return or purchase return is a transaction where the buyer of inventory or other items sends these goods back to the seller. It may be due to various reasons such as poor quality , defective items or extra items being ordered.
If goods are returned by a registered recipient, then the registered seller will issue a credit note to the buyer. The seller must declare the credit note in the GSTR-1 of the month in which it was issued. For example, Ajay sells 100 pens of Rs. 10 each to Vijay on 28th May 2021.
Vijay finds 10 pens are defective and returns them on 3rd June 2021. Ajay will issue a credit note for Rs. 100 (10 x Rs.10) on 3rd June 2021. He will show the credit note in his GSTR-1 of June. The credit note will automatically flow into Vijay’s (buyer) GSTR-2B and GSTR-2A as an entry which in turn can be declared by the buyer in his GSTR-3B.
The following image shows how the sales returns from registered buyers will be reflected in GSTR-1. For more details, please read our detailed guide on GSTR-1.
When should the credit note be issued? The credit note must be issued and declared within the specified time. Earlier of –
So in our above example, Ajay must declare his credit note of 3rd Oct 2020 by Sep 2021. Suppose he files his annual return of 2020-21 on 31st July 2021 then the last day to declare the credit note is 31st July 2021. However, practically, annual return filing happens only when the GST portal opens the filing facility around December of the financial year.
For returns by unregistered buyers, the seller will show a consolidated list of sales returns and other changes in sales details of previous months in his GSTR-1. While breakup on an invoice level is not needed, the seller must give the breakup of intra-state & inter-state sales returns. For both, sales returns through e-commerce must be shown separately. The following image shows how the sales returns from registered buyers will be reflected in GSTR-1. For more details, please read our detailed guide on GSTR-1.
In e-commerce sales, goods return is a very common feature. Buyers often return goods if they don’t fit properly or the description does not match the product or if they have changed their minds. In fact, buyers tend to buy online because the easy return & refund policy is attractive. Most sellers selling online provide a return policy. That being said, there are things you can do to reduce the number of returns. Read about how to reduce the number of sales returns.
In e-commerce, the e-commerce operator collects the amount from the buyers and pays it to the seller after deducting the marketplace fees (Sellers generally incorporate these fees while pricing their products). Click here to find out more about the marketplace fees.
Let us understand this through an example. Mr. Vinay Dua is a trader who sells his ready-made clothes online on Amazon India. He receives an order for Rs 10,000 (including GST). Amazon charges a commission of Rs 200. Clothes worth Rs. 2,500 were returned by the buyer. Amazon will collect the money from the buyer. Finally, Amazon paid Rs. 10,000-2,500-200= Rs.7,300 to Mr. Vinay.
Amazon deducts 1% TCS on the net amount if the payments exceed 2.5 lakhs. Amazon would thus be deducting tax for Rs 100 (1% of Rs. 10,000), assuming his total payments exceed 2.5 lakhs. If Mr. Vinay sells to unregistered buyers, he will show the sales returns in GSTR-1 in a consolidated form as above. If he sells to another registered dealer, he will issue a credit note and show each credit note separately.
The tax liability will be reduced for the seller and the amount will be reversed from ITC of the buyer’s GSTR-2A and GSTR-2B. If the incidence of tax has been passed to another person (i.e., for any reason ITC cannot be reversed) then there will be no reduction in tax liability. For unregistered buyers, the entire amount must be refunded to the buyer returning the items.
If the amount is not refunded for some reason even though goods are returned, then the tax liability will not be reduced. Thus, GST follows the general law of unjust enrichment that no one will be allowed to profit at another’s expense.
These provisions apply on goods sold before GST but returned after GST. When it was sold Excise & VAT was applicable. Now in return, GST is applicable.
Let us consider each situation one by one through a common example involving transition rules.
Taxable goods returned by registered person
Goods (on which taxes were paid under the previous regime) returned by a registered buyer will be treated as ‘Deemed Supply’. GST has to be paid on this by the person returning the goods.
Why must the original buyer pay GST?
This is because when the goods were sold VAT was collected. The buyer claimed input tax credit on VAT paid. Either this VAT credit was adjusted while discharging output tax liability. Or the buyer has carried forward the VAT credit under GST in form TRAN-1. So, allowing reversal of tax liability in GST for the seller or no effect for the buyer will mean unjust enrichment. The tax paid by the buyer will be allowed as input tax credit to the original seller of such goods thus eliminating loss.
Example 1: Registered buyer
Mr. Vijay has to pay 18% on the goods returned. He has already claimed the earlier 14.5% VAT paid as ITC in the previous tax regime. Mr. Ajay claims the GST of 18% as ITC.
Taxable goods returned by Unregistered Taxable Person
When the unregistered buyer returns the goods then the seller of such goods will be allowed refund of tax paid originally if ALL the following conditions are satisfied:
Example 2: Unregistered buyer
Vijay is an unregistered buyer. Then Mr. Ajay is eligible for a VAT refund of 14.5%.
Example 3: Return after 6 months
The goods are returned by Vijay on 2nd Feb 2018. As the goods are returned after 6 months from 1st July 2017, Ajay is not eligible for a VAT refund.
Exempted goods under those which attract 0% tax. Most of the regular food items like rice, cereals are exempted under GST & also under the previous regime. The following provisions mainly apply in situations if the items were exempted under the previous regime but now taxable under GST (e.g. non-commercial LPG for homes).
Exempted goods returned by a registered buyer or an unregistered buyer
If goods which are exempt under the previous regime are returned after GST by a registered or unregistered buyer, no tax is payable by the buyer
Why? The goods were exempted under the previous regime so there was no concept of ITC or carrying forward the same under GST. So, no tax is payable since there is no unjust enrichment.
Example 4: Registered buyer
Both Ajay & Vijay are registered and the goods were exempted in the previous regime. No tax is levied on goods returned.
Example 5: Unregistered Buyer
Vijay is unregistered and the goods returned were exempted in the previous regime. There is no tax implication.
What should a business do? Businesses should be careful and take precautions when accepting or making a return of goods. Returns are vital to the e-commerce business and as sellers you must make sure you record all your sales returns correctly. Sales returns from registered buyers and unregistered buyers must be recorded separately as they will be reported separately in your GSTR-1.
ClearTax GST Software has partnered with Amazon keeping in mind the specific treatment of sales returns of e-commerce. Our user-friendly easy-to-use software will automatically pull the sales return information from your sales data and segregate them correctly.
Be assured of easy, timely, error-free filing with ClearTax GST Software. To know more about how GST affects e-commerce sellers and what kind of GST is applicable on your e-commerce sales please refer to our various articles. To know more about transition to GST, please read our extensive articles on GST.