Vat and sales tax treatment for returns and cancellations

Milind Gupta (Director) (32 Points)

13 March 2015  

Hey Everyone,

I'd be glad if someone can answer my query regarding treatment of sales tax for an ecommerce website when they get a return and a customer wants to exchange an item with the previous one for the same, lower or higher value.

Before posting here, I did a bit of research. Read Myntra's return policy and found this:

  1. "In case of returns, we will credit the amount you paid for the products as cashback into your Myntra cashback account."
  2. "Only size exchanges are allowed. Items can be exchanged for a similar size or a different size."
  3. "You can exchange an item purchased from Myntra.com for a new size or the original size for no extra charge, Please note that we are only able to offer size exchanges"
  4. "If you wish to exchange your item for an alternative product, we suggest that you return it to obtain a cash-back refund and purchase the new item separately."

Above are the 4 important points i found in their return policy.

With that they mean, they would only exchange the item with same SKU. (Size changes are acceptable), But if a user wants to exchange the product with some other product they would provide cashback points and then those cashback points would be adjusted against the new item purchased.

Now here's my doubt:

Say customer x purchases an item from me for Rs1000, with that i'll pay VAT to governemt accordingly. Now he plans to exchange the item with something else for what so ever reason, because i have recieved money for that product the sale coming back to me would be counted as sales return, on which i would ask for refund VAT from government. I would now give those Rs1000 to customer in his account as cashback. 

P.S: I have recieved the product, I still have the cash and i have still not paid sales tax (Vat) to governemt as i got the return.

Now when this customer purchases Item y from my website how should the invoice appear, i cannot treat those Rs 1000 as discount. As i can't keep changing the price of the item for every return. Can i mention advance adjust or terms like cashback in the invoice?

Even if i use that how would i show the total? Total of the item cannot be 0. What'll be the tax treatment here?

Please find the attached copy of my invoice this is how a normal invoice looks.