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VAT intends to bring harmonization in the tax structure of various States and rationalize
The overall tax burden. The essence of VAT is that it provides credit/set-off for input tax, i.e.,
tax paid on purchases, against the output tax, i.e., tax payable on sales. To reconcile the details
submitted in monthly/ quarterly / half yearly return and actual details prevailing as on
31/03/2XXX it is very much imperative to account for VAT Payable, VAT Set Off (on
purchases, Expenses and capital goods), set Off used against payment of CST in a systematic and
consistent manner to avail the benefit of Set Off. Sometimes due to wrong accounting Set Off is
forgone while filing the return.
G
1. Local Sales
Debtors A/c Dr. 168750
To Sales 12.5% 150000
To Vat 12.5%(Sales) 18750
2. Interstate Sales
Debtors A/c Dr. 71400
To Sales 2%(CST) 70000
To CST 2%(Sales) 1400
3. Local Purchases
Purchases 12.5% Dr. 110000
VAT 12.5%(Purchases) Dr. 13750
To Creditors 123750
4. Interstate Purchases
Purchases 2%(OMS) Dr. 40000
CST 2%(Purchases) Dr. 800
To Creditors 40800
5. Expenses
Expenses Dr. 50000
Vat 12.5%(Expenses) Dr. 6250
To Creditors for Expenses 56250
NOTE: CST paid on interstate purchases cannot be claimed as set off, due to following reasons.
CST is centrally levied though collected by state and it is revenue for state government. VAT is
purely a state level tax.
If credit is given for CST paid in OMS purchases then state (in which goods are purchased) will
have to part with its revenue from its treasury which no state will accept.
CST liability can be off set against Vat Set Off for administrative smoothness. As collection of
CST on one hand and refunding Vat set off on other hand will involve only Procedural
formalities.
Due to above fact CST paid on purchases should be added to purchases while making financial
statement. This will not lead into inconsistency in accounting on the ground that purchases are
recorded inclusive of CST whereas sales are recorded exclusive of CST because set off on such
purchases can not be claimed and is non refundable duty so there is no harm in claiming such
CST paid as expenses. Alternatively it could be shown as expenses in the Profit and Loss A/c.
However if above accounting is adhered to then differential liability of vat and cst at any time
during the year is known. If any entries remains to be passed in the previous period which comes
to the notice after return is filed then it becomes very easy to revise the return if changes are
substantial or incorporate such changes in the return of next period.
Case 2: Set Off on Expenses is not taken. (Exclusive method of accounting is followed.)
Set Off
On Purchases 13750
5. Expenses
Expenses (50000+6250) Dr. 56250
To Creditors for Expenses 56250
Inference:
Tax liability will not alter whether inclusive or exclusive method is followed.
See Case 1 and Case 3.
See Case 2 and Case 4.
Basic Price
779663
Octroi
38025
Vat 12.5%
102211
Insurance Charges
23388
RTO Charges
68708
On sale of goods
Debtors A/c Dr. 112500
To Sales 12.5% 100000
To Vat 12.5% 12500
AS 9 and IAS 18
AS- 9 on Revenue Recognition is silent regarding treatment of Revenue from sales. However
IAS 18 on Revenue clarify that amounts collected on behalf of third parties such as Sales tax,
Service Tax, Excise Duty should be excluded from revenue.
AS-2 states that the costs of purchase and value of closing stock in trade consist of the purchase
price including duties and taxes (other than those subsequently recoverable by the enterprise
from the taxing authorities) freight inwards and other expenditure directly attributable to the
acquisition.
Section 145A states that purchases and sales are recorded inclusive of any tax and duty.
Clause 12(b) of form 3CD asking for Details of deviation, if any, from the method of valuation
prescribed under section 145A, and the effect thereof on the profit or loss.
However Section 145A for Tax Audit purpose is deviated if exclusive method of accouting is
followed. However the ultimate profitability will not be altered in either case.(see case 1 and
case 3 OR case 2 and case 4).
Conclusion:
So in general abovementioned accounting is considered for recording local and interstate
transaction. If VAT Act of particular state requires some specific treatment then that is to be
followed. For instance in some state Vat Set off on purchases of fixed assets available
immediately whereas in some other state it is available over a period of time.