Adjusting the Value of the VAT - Goods returned / Bad-debts

Businesses witness many situation where goods are returned or rejected or the supply is cancelled due to various reasons like the goods get damaged, goods with wrong specification are received, excess quantity is received and so on. The VAT Executive Regulations issued recently have given the procedures and conditions for adjustment in the value of tax in the VAT return on account of such return of goods.

In the case of good returned after the date of supply, the VAT payable can be adjusted by the taxpayer if the cancellation, return or rejection occurs after the tax due date and the taxable person has to issue a credit note to make such adjustment in the VAT return and the accounting records. Further, the regulation have specified that the goods and the value of consideration should be returned within three (3) months from the date of supply and none of the party should earn any benefit from such returned transaction. If the goods are returned after 3 months of the date of supply, adjustment to VAT return is not possible.

Under the VAT Law when the taxable person raises a tax invoice, he has the responsibility to collect and pay VAT upfront to the Tax Authorities for the tax period. Taxable person may face situation of non-recovery of receivables as part and parcel of doing business in Oman. There can be various reason for non-recovery or bad-debts like inability of the customer to pay, fraud or bankruptcy. As the VAT is timely paid by the taxable person, in the case of bad-debts, the taxable person can adjust the value of the tax due if the followings conditions are met;

• The value of supplies excluding VAT should be more than RO 5,000.
• The adjustment is allowed after 12 months from the tax due date mentioned on the invoice
• The amount should be written off as bad-debts in the accounting records
• The Tax should be adjusted within three (3) years from being written off
• The taxable person must notify in writing to the customer of the amount being adjusted

However, the Executive regulation have laid down stringent procedure to be followed for collection of the consideration before writing it off as bad debts. The Regulation stipulates that there should be courts judgement for the debtors to pay the consideration. The taxable person should obtain a debt performance order from a competent judge. There should be proof of death, liquidation, bankruptcy of customer for claiming a bad-debt. The objective of the Law is to ensure that the taxable person takes care of necessary steps for recovering the consideration and should not simply write off.

The Tax Authority will assess the adjustments made to VAT payable amount and will levy hefty penalties in the case of incorrect adjustments to the returns.