VAT base adjustment: what is done if goods are returned, the price changes or a service is cancelled?

VAT is charged at the moment of sale, but a sale does not always stay as it was: the buyer returns part of the goods, the price is renegotiated later, the customer cancels a service. Then the VAT paid in March turns out to be too much or too little. The Tax Code has a separate article for such cases: Article 257 "Adjustment of the tax base".

In which cases is the VAT base adjusted?

Part one of Article 257 lists four cases: 1. the buyer returns the goods in full or in part; 2. the customer refuses a service already rendered; 3. the transaction terms change, including the price or quantity (volume) of goods or services shipped; 4. the seller grants a discount. In this case the base is reduced only if the terms of the discount are provided for in the contract or in the seller's pricing (tariff) policy. Such a condition may be the buyer meeting a particular term of the contract, including buying a certain volume or paying early.

The adjustment can go both ways: a reduction (negative) and an increase (positive). If the price is raised later, the base also increases.

Part three adds one more case: when the obligation to pay for goods or services is recognised as bad debt under Article 313 of the Code and has to be written off. In this case the adjustment procedure is approved by the Cabinet of Ministers (the regulation approved by Resolution No. 489 of 14 August 2020).

When and with which document is the adjustment made?

Under part four, the adjustment is made on the basis of an additional invoice or another document confirming that a case from part one has occurred. Most importantly, the adjustment is made in the tax period in which the event occurred. In other words, if a return on a March sale happens in May, the March VAT return is not reopened: the reduction goes into the May VAT return.

The time limit (part two): the base is adjusted within one year, and for goods and services with a warranty period, within the warranty period. The article does not say separately from which date this year is counted, so counting from the date of the original turnover is the most cautious approach.

There is also a boundary (part five): if the base changes because of correcting an error, or changes need to be made to an invoice issued earlier, Article 257 does not apply. In that case the old invoice is cancelled and a corrected invoice is issued in its place. That is, the situation "we entered the price wrongly" is resolved not with an additional invoice but with a corrected invoice.

Besides, if the discount is granted on the date of sale itself, no adjustment is needed at all: under part two of Article 248 the base is determined straight away from the price after the discount.

Example: three months at the "Nur Bosma" print shop

"Nur Bosma" LLC is a VAT payer. In March it printed 10 000 catalogues to order for a furniture showroom: 50 000 000 soum (excluding VAT), VAT 12%: 6 000 000 soum. Then two events followed (all hypothetical): - May: the showroom found that the colours had smudged in 1 000 catalogues and returned them. This is the first case (partial return). The part returned: 50 000 000 × 1 000 ÷ 10 000 = 5 000 000 soum. - June: under the price review clause of the contract the parties agreed to raise the price of the batch already shipped by 3 000 000 soum; no additional work was done, only the price changed. This is the third case (change in the transaction price), and the adjustment is positive.

Each change goes into the return for its own month: 6 000 000 in the March return, in the May return output VAT falls by 600 000 soum, in the June return it rises by 360 000 soum. The three-month total 6 000 000 − 600 000 + 360 000 = 5 760 000 soum is exactly 12 percent of the final base of 48 000 000 soum. So the adjustments were made correctly.

Now imagine: the showroom returned the catalogues more than a year after the March sale, and no warranty period was set for the catalogues. With such a late return the one-year term from part two may have expired, and the print shop risks losing the right to reduce the VAT base. That is why a return should not be dragged out.

What should the buyer watch for?

The additional invoice is a single document for the seller and the buyer. Under part six of Article 257, when the seller adjusts the base, the buyer, on the basis of the same additional invoice, reduces or increases accordingly the VAT amount it credited earlier. In the "Nur Bosma" example, the showroom's credited VAT falls by 600 000 soum in May and rises by 360 000 soum in June.