Tax Impact on Goods Sold Prior to GST, but Returned after GST

In a business, return of goods sold is common. Under current regime, the return of goods are allowed to be reduced from the total turnover of sales, provided that the goods are returned within specified time limit. The eligibility to avail reduction from tax varies from state to state, but it is generally 6 months from the date of sale.
GST, a major reform in indirect taxation is expected to be implemented by 1st July, 2017. ‘Supply’ being the taxable event, it is very important for businesses to understand the tax implications on the goods sold prior to GST, but returned on or after the implementation of GST.
 
Also Read
Moving to GST: For Registered Businesses
Moving to GST: Can I Avail Input Credit on Closing Stock?
Supply of Goods and Services: What does it Mean?
Some questions you may have

• What will happen if taxable goods are returned by the registered taxable person?
• What will happen if taxable goods are returned by an unregistered person?
• What will happen if goods returned are exempt under the current regime but are taxable under GST?

For ease of understanding, let us categorize this into:

• Return of taxable goods
• Return of exempted goods

Return of taxable goods
Let us understand a scenario where taxable goods are sold prior to GST, but are returned on or after the implementation of GST. The return of goods could be from a registered taxable person or from an unregistered person.

Scenario

Explanation

Example

Taxability

Returned by Registered Taxable Person

The return of taxable goods by a registered taxable person will be considered as Supply, and GST will be levied. This is because, on the date of purchase of goods, the tax paid by the recipient was allowed as input tax credit and subsequently it was utilized by him, or was allowed to be carried forward as input tax credit to GST.
 
On such return of goods under GST, the person returning the goods should charge GST, and GST paid on sales returns will be allowed as input tax credit to the original seller.

 
 
Ravindra Automobiles is a registered dealer in spare parts, located in Karnataka. On 15th June, 2017, Ravindra Automobiles sold 30 Nos of spare parts worth Rs. 1, 00,000, with VAT @ 14.5%, to Rajesh Auto Parts, who is also a registered dealer in Karnataka On 5th July, 2017, Rajesh Auto Parts returned 15 Nos of the spare parts to Ravindra Automobiles.

The return of goods by Rajesh Auto Parts will be considered as supply, and will attract GST. Hence, on making the purchase return, Rajesh Auto Parts will charge a GST of 18 %.

Taxable goods are returned by an Unregistered Person

On the return of taxable goods by an unregistered person, the seller will be eligible for refund of duty/tax paid under the current regime. The refund claimed by the seller will be subject to the conditions listed below:
 

1. The date of sale of the goods returned should not be more than 6 months prior to the date of implementation of GST.
2. The return of goods should be within a period of 6 months from the date of implementation of GST.

Ravindra Automobiles is a registered dealer in spare parts located in Karnataka. On 25th June, 2017, Ravindra Automobiles sold a spare part worth Rs. 10,000, with VAT @ 14.5%, to a customer Mr. Kumar.
 
On 2nd July, 2017, Mr. Kumar returned the spare part to Ravindra Automobiles.

Ravindra Automobiles will be eligible for a refund of Rs. 1,450. This is because, the sale period is within 6 months prior to the implementation of GST, and the return of the spare part is within 6 months from the date of implementation of GST.

Return of exempted goods
Consider a scenario where exempted goods are sold prior to GST, but these goods are taxable and are returned on or after the implementation of GST.

Scenario

Explanation

Example

Taxability

Returned by Registered Taxable Person

On exempted goods, which are sold under the current law and are returned after implementation of GST, no tax will be levied. This is applicable subject to the following conditions:
 

1. The date of sale of the goods returned should not be more than 6 months prior to the date of implementation of GST.

2.The return of goods should be within a period of 6 months from the date of implementation of GST.

1. On 15th June, 2017, Ravindra Automobiles sold a goods worth Rs. 1,00,000, which is exempt from VAT.On 20th July, 2017, goods were returned to Ravindra Automobiles
2. On 15th June, 2017, Ravindra Automobiles sold goods worth Rs. 1,00,000, which is exempt from VAT.On 20th January, 2018, spare part were returned to Ravindra Automobiles.

1. On return of goods, no tax is payable. This is because, the sale period is within 6 months prior to the implementation of GST, and the return of goods is within 6 months from the date of implementation of GST.2. On return of goods, tax is payable. This is because, the return of goods is not within 6 months from the date of implementation of GST.

Exempt goods are returned by an Unregistered Person

The Goods which are sold as exempt under current regime and are returned by unregistered person in GST regime, no tax is payable on such return.

On 25th June, 2017, Ravindra Automobiles sold a goods worth Rs. 10,000, to a customer Mr. Kumar. This was exempt from VAT.
 
On 2nd July, 2017, Mr. Kumar returned goods to Ravindra Automobiles.

No tax is payable on such returns.

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