Vat charged at 5% instead of 12.5%

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

13 July 2012 client have charged VAT at 5% instead of charging at 12.5%. on realization he started charging at 12.5% how to deal with such a situation. and what about old tax invoice which are at 5% VAT.

sharma.ctc@gmail.com

sharma.ctc@gmail.com (Expert)
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13 July 2012 You didn't mentioned the period for the same.

If its not much old, then you can issue debit notes for the difference in amount in VAT and then ask the parties to make payments for the same and then take the input credit.

Further remember you will have to file the revise return for the same and pay the interest too.

I suggest to first consult your Sales Tax Authorities ..

"However I am sure that these Sales Tax Officers will not help you, but then also try"

Querist : Anonymous

Querist : Anonymous (Querist)

13 July 2012 client don't want to issue any debit not to his client, they want to bear the extra cost them self, is it possible to pay diff by client without bothering his clients

Querist : Anonymous

Querist : Anonymous (Querist)

13 July 2012 client don't want to issue any debit not to his client, they want to bear the extra cost them self, is it possible to pay diff by client without bothering his clients

Further client is charging at wrong rate for almost a year.

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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02 August 2025 Got it, here’s how to handle the situation where your client charged VAT at 5% instead of 12.5% for almost a year and now wants to correct it **without bothering their customers**.

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### 1. The issue:

* VAT charged incorrectly at 5% instead of 12.5%.
* Now they want to charge 12.5% going forward.
* They **don’t want to issue debit notes** or collect the difference from customers.
* They want to bear the difference themselves.

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### 2. Legal and compliance perspective:

* **Technically, VAT is payable on the correct rate (12.5%)**, so the shortfall (difference between 12.5% and 5%) is a liability of your client.
* The tax department expects payment of the **difference plus interest and possibly penalty** for undercharged VAT.
* **Input tax credit claims for customers may be affected** if tax invoices showed the wrong VAT rate.
* Issuing debit notes to customers is the ideal way to recover the shortfall legally.

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### 3. Bearing the difference by your client (not passing cost to customers):

* Yes, **your client can choose to bear the extra tax cost themselves** — they pay the difference to the VAT department from their own pocket.
* However, they **cannot just ignore the shortfall** or assume it will go away.
* Your client must:

* **Calculate the difference in VAT payable** for the past period.
* **Pay the difference with interest and any penalty to the VAT authorities.**
* **File revised VAT returns** for the affected periods.
* Customers should ideally be informed, but if the client decides not to collect from them, that is their business decision.

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### 4. Practical steps:

1. **Calculate VAT difference**:
Difference = (12.5% - 5%) × taxable turnover for the period.

2. **Pay VAT department**:
Pay difference + interest + penalty (if any).

3. **File revised returns**:
Submit amended returns for affected periods reflecting correct VAT.

4. **Going forward**:
Charge VAT at 12.5% properly on new invoices.

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### 5. Risks:

* The department may impose penalties or initiate audits.
* Customers might question input tax credits if invoices have wrong VAT rates.
* The client’s accounting needs to clearly document this correction.

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### Summary:

| Action | Possible Outcome |
| ------------------------------ | --------------------------------------------------------------------------- |
| Issue debit notes to customers | Legally clean, recovers shortfall from clients |
| Bear difference internally | Pay difference + interest/penalties to department; no recovery from clients |
| Do nothing | Risk of penalties, audit, and legal trouble |

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If you want, I can help draft a **payment calculation template** or a **letter for revised returns** to the tax authorities.

Would that help?

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