Returned Goods and VAT: How to Adjust the Tax Correctly

The tool: an additional e-invoice

• A full or partial return of goods is a ground for adjusting the VAT base (Article 257 of the Tax Code).
• The adjustment is made within one year, and for goods with a warranty period, within the warranty period.
• The seller issues an additional e-invoice (ESF) dated the day of the return (Regulation approved by Cabinet of Ministers Resolution No. 489); on that basis the buyer adjusts the input VAT previously offset (Article 257).
• Correcting errors is not an adjustment: the original e-invoice is cancelled and a corrected one is issued.

Example

Goods were sold for 112 million soums, including VAT of 12 million. The buyer returned goods worth 28 million soums (VAT 3 million). The seller issues an additional e-invoice for minus 28 million and reduces VAT payable by 3 million; the buyer reduces its input VAT offset by 3 million in the same period.

Why a return changes the tax picture

VAT is charged on a sale. When goods are returned, the sale has not taken place to that extent, and the parties' tax obligations must be brought into line with the facts.

This applies to both parties at the same time: the seller adjusts the tax charged, the buyer adjusts the input VAT offset. If only one party makes the adjustment, a gap appears in the system, and it will be noticed when the data are matched.

Grounds for a return and why they matter

The tax consequences depend on what exactly happened. Return of defective goods, return by agreement of the parties, refusal of part of a delivery and a resale back to the seller are different transactions in substance, even though people often call them the same thing.

The key distinction is between adjusting the original supply and a new, separate sale. If the buyer is in fact selling the goods back, this is a separate transaction with its own tax consequences, not a reversal of the old one.

• return due to non-conformity in quality or completeness
• return under the contract terms within the agreed period
• refusal of part of a delivery before acceptance
• return by agreement of the parties after acceptance
• buy-back as a separate transaction

Documents that settle the question

Documentation is what distinguishes a proper return from a suspicious transaction. The inspector needs to see that the return actually took place, in what volume and on what grounds.

The set must be consistent: quantities and items in the certificate, the waybill and the adjusting document must match, and the parties' settlements must correspond to the original supply.

• a return clause in the contract or a supplementary agreement
• a claim or a certificate of defects found, if the return is due to quality
• a document confirming the goods were actually handed back to the seller
• an adjusting document amending the data of the original supply
• documents on the refund of money or a set-off
• recording of the transaction in both parties' accounting registers

What the seller does and what the buyer does

The seller reduces the previously recorded sale and the related tax to the extent the goods were returned, puts the goods back on its books and issues an adjusting document to the buyer.

The buyer, in turn, adjusts the input VAT offset; otherwise it would keep a deduction for goods it no longer has. This is the step most often forgotten, and it is exactly what surfaces when the data are matched.

The procedure for documenting the adjustment is set by tax legislation and the requirements for source documents, so the specific form and sequence should be checked against the current version.

Complex cases: partial returns, defects, a change of period

A partial return requires careful calculation: only the corresponding part of the supply is adjusted, including related discounts, delivery and other terms if they were allocated across the whole volume.

A return of defective goods is often accompanied by a dispute over the causes, an expert examination and negotiations. Until the grounds are documented, it is premature to record the transaction in the accounts.

A separate difficulty arises when the return happens in a period different from the period of shipment. Here it is important to determine correctly in which period the adjustment is recorded, so that both parties' reporting remains comparable.

Typical mistakes and their consequences

The most common mistake is to document a return as an ordinary sale from the buyer to the seller. Sometimes this is justified by the substance of the relationship, but more often it creates a distorted picture of turnover and unnecessary tax liabilities.

The second mistake is a one-sided adjustment. The seller reduced the tax, the buyer did not reverse its offset, and the gap is picked up when the parties' data are matched.

The third is the absence of a document confirming the actual handover of the goods. Without it, the transaction looks like a tax reduction without a real basis, and it is easy for the inspector to disallow such an adjustment.

• the return was documented without proof of actual handover
• only one party made the adjustment
• items and quantities in the documents do not match
• discounts and costs allocated to the batch were not taken into account
• the transaction was recorded in the wrong period

How we help

We analyse the substance of the transaction: what actually happened, what the contract says and how it should be recorded by both parties. Everything else depends on the correct classification.

Then we set up document flow for returns, so that a standard situation is handled by procedure rather than decided anew each time, and we check transactions already recorded for accumulated discrepancies.

Leader Audit is an audit firm with 13 years of practice and more than 220 audits. We look at documents through the eyes of an inspector and close the areas that usually raise questions.