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Accounting For VAT-CST


CA Jay Rambhia 
posted on 09 January 2010



Accounting for VAT/CST

 

Background

 

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.

 

Let me illustrate how set off is beneficial.

 

Particulars

Debit

Credit

Sales 12.5%

 

150000

Vat on Sales 12.5%

 

18750

Purchases Vat 12.5%

110000

 

Vat On Purchases 12.5%

13750

 

CST Sales 2%

 

70000

CST 2%(on sales)

 

1400

CST Purchases 2%

40000

 

CST 2%(on purchases)

800

 

Vatable Expenses 12.5%(Net)

50000

 

Vat 12.5% VAT

6250

 

 

Case 1: Set Off on Expenses is taken. (exclusive method of accounting is followed)

 

Vat payable 18750

 

Set Off

On Purchases     13750

On Expenses  6250 

 

Set Off Available      20000

 

Set off Utilized for Vat 12.5% on sales   18750 18750

 

Vat Payable comes to      NIL

 

 

     

CST Payable 1400

 

Set Off Available   20000

 

Set off Utilized for Vat 12.5% on sales 18750

 

Set off Available          1250

 

Set off utilized for CST 2% on Sales  1250

 

CST Payable          150

 

     

 

    Following Journal Entries will have to be passed.

 

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

 

   At the end of month pass following Entries.

 

6.Transfer VAT liability to VAT Payable A/c.

      Vat 12.5%(Sales)    Dr.   18750

  To Vat Payable 18750

     (Note: Pass any other VAT liability say VAT 4%,

1%, to Vat Payable A/c)

 

7. Transfer VAT Set Off to VAT Set Off A/c.

    Vat Set Off A/c         Dr. 20000   

  To Vat 12.5%(Purchases) 13750

  To Vat 12.5%(Expenses)     6250

      (Note: Pass any other VAT set off to Vat Set Off

  A/c. Say Set off taken on capital assets)

 

8. Transfer CST Liability to CST Payable A/c

    CST 2%(Sales)    Dr.     1400

To CST Payable A/c   1400

 

  At the time of making payment pass following entries.

 

9. Payment Entry for VAT liability

    Vat Payable      Dr.    18750

  To Vat Set Off 18750

    (Note: if Vat Set Off< Vat Payable. Credit

      Cash/Bank A/c for the difference)

 

10. Payment Entry for CST Liability

    CST Payable     Dr.      1400

   To Vat set Off    1250

    To Cash/Bank/    150 

 

NOTE: CST paid on inter state purchases can not be claimed as set off, due to following reasons.

  1. CST is centrally levied though collected by state and it is revenue for state government. VAT is purely a state level tax.

 

  1. 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.

 

  1. 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.

 

 

 

Profit and Loss Account As On 31.03.2XXX

 

Particulars

 

Amount

Particulars

 

Amount

Purchases

 

 

Sales

 

 

Local 12.5%

110000

 

Local 12.5%

   150000

 

OMS 2%

40000

 

OMS 2%

70000

220000

Cst 2%

800

150800

 

 

 

 

 

 

 

 

 

Gross Profit

 

   69200

 

 

 

 

 

 

220000

 

 

220000

 

 

 

 

 

 

Expenses

 

50000

Gross Profit

 

69200

Net Profit

 

19200

 

 

 

 

 

 

 

 

 

 

 

 

69200

 

 

69200

 

Balance Sheet as on 31.03.2XXX

 

Liabilities

Amount

Assets

Amount

Net Profit

19200

Current Assets

 

 

 

Sundry Debtors

240150

Current Liability

 

 

 

Creditors For Goods

164550

 

 

Creditors For Expenses

56250

 

 

Bank Overdraft

150

 

 

 

 

 

 

 

240150

 

240150

 

     

Tax Liability under income tax

Net Profit for the Year                             19200

 

Tax Payable Comes to @30.9%                       5933

 

So, Total Tax Paid:

Income Tax                  5933

Vat                                NIL

Cst                               150

 

Total Paid                          6083

 

 

 

Case 2: Set Off on Expenses is not taken. (Exclusive method of accounting is followed.)

 

Vat payable 18750

 

Set Off

On Purchases     13750

       

Set Off Available       13750

 

Set off Utilized for Vat 12.5% on sales 13750 13750

 

Vat Payable comes to   5000

 

 

     

CST Payable 1400

 

Set Off Available  13750

 

Set off Utilized for Vat 12.5% on sales 13750

 

Set off Available NIL

 

Set off utilized for CST 2% on Sales          NIL

 

CST Payable   1400

All the Journal Entries passed in case 1 will have to be passed except changes in following entries.

 

5. Expenses

    Expenses (50000+6250)   Dr.  56250

    To Creditors for Expenses 56250

 

7. Transfer VAT Set Off to VAT Set Off A/c.

    Vat Set Off A/c         Dr.   13750   

  To Vat 12.5% (Purchases)          13750

      (Note: Pass any other VAT set off to Vat Set Off

  A/c. Say Set off taken on capital assets)

 

9. Payment Entry for VAT liability

    Vat Payable      Dr.    18750

  To Vat Set Off  13750

  To Cash/Bank             5000

   

 

10. Payment Entry for CST Liability

    CST Payable     Dr.      1400 

    To Cash/Bank/          1400     

 

   Profit and Loss Account As On 31.03.2XXX

 

Particulars

 

Amount

Particulars

 

Amount

Purchases

 

 

Sales

 

 

Local 12.5%

110000

 

Local 12.5%

150000

 

OMS 2%

40000

 

OMS 2%

70000

220000

Cst 2%

800

150800

 

 

 

 

 

 

 

 

 

Gross Profit

 

   69200

 

 

 

 

 

 

220000

 

 

220000

 

 

 

 

 

 

Expenses

 

56250

Gross Profit

 

69200

Net Profit

 

12950

 

 

 

 

 

 

 

 

 

 

 

 

69200

 

 

69200

 

 

Balance Sheet as on 31.03.2XXX

 

Liabilities

Amount

Assets

Amount

Net Profit

12950

Current Assets

 

 

 

Sundry Debtors

240150

Current Liability

 

 

 

Creditors For Goods

164550

 

 

Creditors For Expenses

56250

 

 

Bank Overdraft

6400

 

 

 

 

 

 

 

240150

 

240150

 

 

Tax Liability under income tax

Net Profit for the Year                          12950

 

Tax Payable Comes to @30.9%                       4002

 

 

So, Total Tax Paid:

Income Tax                  4002

Vat                              5000 

Cst                              1400

 

Total Paid                          10422

 

Inference

Tax Paid when set off is not claimed     10422

Tax Paid when set off is claimed    6083

Tax Savings if Set Off is claimed    4339

    

 

 

Case 3: Set Off on Expenses is taken.

   (inclusive method of accounting is followed u/s 145A)

 

Profit and Loss Account As On 31.03.2XXX

 

Particulars

Amount

Amount

Particulars

Amount

Amount

Purchases

 

 

Sales

 

 

Local 12.5%

110000

 

Local 12.5%

150000

 

Vat 12.5%

13750

 

Vat 12.5%

18750

 

OMS 2%

40000

 

OMS 2%

70000

 

CST 2%

800

164500

CST 2%

1400

240150

 

 

 

 

 

 

Gross Profit

 

   75600

 

 

 

 

 

 

220000

 

 

220000

 

 

 

 

 

 

Expenses

(50000+6250)

 

56250

Gross Profit

 

75600

Vat Paid

 

NIL

 

 

 

Cst Paid

 

150

 

 

 

Net Profit

 

19200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet as on 31.03.2XXX

 

Liabilities

Amount

Assets

Amount

Net Profit

19200

Current Assets

 

 

 

Sundry Debtors

240150

Current Liability

 

 

 

Creditors For Goods

164550

 

 

Creditors For Expenses

56250

 

 

Bank Overdraft

6400

 

 

 

 

 

 

 

240150

 

240150

 

 

Case 4: Set Off on Expenses is not taken.

   (inclusive method of accounting is followed u/s 145A)

 

Profit and Loss Account As On 31.03.2XXX

 

Particulars

Amount

Amount

Particulars

Amount

Amount

Purchases

 

 

Sales

 

 

Local 12.5%

110000

 

Local 12.5%

150000

 

Vat 12.5%

13750

 

Vat 12.5%

18750

 

OMS 2%

40000

 

OMS 2%

70000

 

CST 2%

800

164500

CST 2%

1400

240150

 

 

 

 

 

 

Gross Profit

 

   75600

 

 

 

 

 

 

220000

 

 

220000

 

 

 

 

 

 

Expenses

(50000+6250)

 

56250

Gross Profit

 

75600

Vat Paid

 

5000

 

 

 

Cst Paid

 

1400

 

 

 

Net Profit

 

12950

 

 

 

 

 

 

 

 

 

 

 

 

69200

 

 

69200

 

 

Balance Sheet as on 31.03.2XXX

 

Liabilities

Amount

Assets

Amount

Net Profit

12950

Current Assets

 

 

 

Sundry Debtors

240150

Current Liability

 

 

 

Creditors For Goods

164550

 

 

Creditors For Expenses

56250

 

 

Bank Overdraft

6400

 

 

 

 

 

 

 

240150

 

240150

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.

 

     

 

 

1. When Assets is sold on which Vat is collectible.

    Gross amount is received Rs. 50000 on sale of Car.

     Bank A/c                        Dr.  50000  

   To Car A/c                        44444   

   To Vat 12.5%(Sales Others)            5556

 

 

 

2. Transfer VAT liability to VAT Payable A/c.

     Vat 12.5%(Sales Assets)     Dr.      5556

      To Vat Payable A/c  5556

  

3. Purchases of New Motor Car

 

Basic Price   

779663

Octroi

38025

Vat 12.5%

102211

Insurance Charges 

23388

RTO Charges         

68708

 

   New Motor Car A/c      Dr.  909784

   Vat 12.5% (Purchases Assets)           Dr.  102211

    To Bank                1011995  

 

4. Transfer above  VAT Set Off to VAT Set Off A/c.

    Vat 12.5%(Purchases Assets)             Dr.   102211

    To Vat Set off A/c 102211

 

5. Expenses on which Set Off is claimed subject to reduction.

    Expenses incurred for packing of Tax Free Goods.

    Net      1000

    Vat 12.5%      125

    Total    1125

  

    (a)Expenses A/c               Dr.      1000  

   Vat 12.5%(Expenses)   Dr.  125

    To Creditors For Expenses  1125  

 

 

    (b)Expenses A/c Dr.  20

     To Vat 12.5%(Expenses)     20

  (Reversal of Vat Set off to the extent of 2%)

  (125/12.5*2=Rs.20/-)

 

6. Treatment of Output Tax on Debtors becoming insolvent.

    Sales 12.5%                   100000

    Vat 12.5%                          12500

 

    On sale of goods

    Debtors A/c        Dr.   112500

   To Sales 12.5%       100000

   To Vat 12.5%    12500

 

    On Debtors becoming insolvent   

    Vat 12.5%                           Dr.     12500

    Bad Debts  Dr.   100000

   To Debtors                           112500

 

7. Interstate Sales Return after 6 months.

    OMS Sales 2%     10000

    CST 2%  200

   CST/Vat collected and paid to government is not reversible if goods are returned beyond 6 months.

    Sales 2%(CST)   Dr.      10000     

     To Debtors       10000       

   

 

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, Section 145A and Clause 12(b) of form 3CD.

 

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.

  

 Jay Rambhia

CA Final Student


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