Tanzania: VAT and practical challenges associated with rebates, volume discounts

Challenges associated with rebates and volume discounts

Challenges associated with rebates and volume discounts

Rebates (also known as volume discounts or bonus discounts) are financial incentives or advantages given by a manufacturer or supplier, to motivate customers or groups to purchase in bulk. The supplier rewards those buying in bulk by providing a reduced price for each good or group of goods. Volume discounts allow businesses to purchase additional inventory at reduced cost and allow suppliers to reduce inventories by selling more units to bulk-buyers that are incentivized by the lower price.

Volume discounts can be reflected in a variety of arrangements, the most common being retroactive in nature and are often tiered (for instance, a specific discount is applied to a given number of units within that tier). The discount increases for tiers that include larger and larger numbers of units. Upon determining the discount amount, additional volume is supplied to the buyer of the same value of discount.

The volume discounts are retroactive in nature, meaning upon completion of a specified period (usually a month), the supplier assesses the purchases made by the distributor, and whether a certain pre-arranged target was met, to allocate the price reduction and subsequently additional volume. This means for sales completed in a month (for instance, January), the adjustment would be made in the following month (February), pertaining issuing of credit notes. Typically, rebates applying for a certain month would be made available to the buyer after closure of that month, and in most situations also after the filing of value added tax (VAT) returns and remittances of the related VAT payments. This, in turn, requires adjustments to be made in the subsequent month’s VAT return and VAT payments for the supplier (decreased output) and the buyer (decreased input) in adherence to the VAT law pursuant to the guidelines on post-return supply adjustments for adjustment events.

Read a May 2021 report [PDF 319 KB] prepared by the KPMG member firm in Tanzania



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