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Method of Accounting of VAT

Sundararajan S 
on 28 December 2015

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Value Added Tax – Method of Accounting

‘Men may come and men may go, but I go on forever’ says this Value added tax system amidst the chaos of Goods and Services Tax. This system of VAT was introduced in TamilNadu with effect from 1st January 2007. We all know that this system was the aftermath of white paper constituted by Empowered Committee of Finance Ministers of all states. It is a tax levied by the state Government on the Value added to the goods sold by dealers and the interstate trade transactions are governed by Central Sales Tax Act, 1956. Though we know these legal aspects, many of us do not know how to bring this concept into the books of accounts. This article just tells how to record VAT transactions in books of accounts.

Ok friend; now let me ask a question. Do you think VAT is to be brought to P&L? That is whether Vat Input tax paid is to be taken as expense and Vat output tax collected as income? If you think yes, am sorry to say this friend your thought process did not go in the right way. Just think like this; do we bring Tax Deducted at source into profit and loss? No right? The same concept comes here. Both VAT and TDS are neither business income nor business expenditure. They both are dues to the Government. You may be bubbling with certain questions, may be inter. Let me illustrate with some examples.

Example 1: Abdullah and Co., Madurai, traders in ghee have purchased 500 bottles of ghee at Rs. 200 exclusive of VAT each from The Madurai District Co-operative Milk Union Association(Vat@5%). Now how to Account this in the books of accounts?

Purchase 5%..........Dr.    100000
Vat ITC 5%.............Dr. 5000
To Madurai District Co-op Milk union  105000
(Being the purchase of 500 ghee bottles)

Now say in the second case, he sells it to Akash Agency.

Example 2: Abdullah and Co. sells 300 bottles of ghee at Rs.210 each to Akash Agency, Madurai.

Akash Agency………Dr. 66150
To Sales 5%    63000
To Vat OTC 5%   3150       

(Being the sale of 300 ghee bottles)

Now here, we could see four different ledgers maintained with regard to VAT, namely, Purchase 5%, VAT ITC 5%, Sales 5%, VAT OTC 5%.(Here ITC refers to Input tax Credit and OTC refers to Output tax credit). Of these four, only Purchase 5% and Sales 5% are to be brought to Profit and Loss A/c. That is, Purchase and Sales figures exclusive of Value added Tax is to be brought into profit and loss account. The Input and Output Tax ledgers should be taken over to Balance Sheet under the group Duties and Taxes or Current Liabilities. Ok now comes a question, will these ledgers be present throughout the year and the balances will be carried forward to all years. The answer is no. We will see the finalization aspect in dual manner after seeing one more illustration on Interstate transactions.

Example 3: Asian Retail Lighting Ltd. Chennai, purchases 200 lights at a cost of Rs. 20 per piece from Chrome Lighting India Ltd., Mumbai. (CST@2%).

Now here, this is an Interstate transaction between Tamil Nadu and Maharashtra.

So the entry would be as follows:

Purchase Interstate……Dr.   4080
To Chrome Lighting India Ltd. 4080
(Being the purchase of 200 lights)  

Now, you will have a question. Why CST is not accounted separately? Why CST paid is not kept as a separate ledger? Answer is simple friends, we cannot avail Input tax Credit on CST Paid on Purchase. We won’t be able to set off it against the Output tax payable by us in Tamil Nadu since this CST will be paid in the state of Maharashtra to the Maharashtra Government.

So, we take it as an expense and include it with the Purchase.

Example 4: Asian Retail Lighting Ltd. Sold 200 lights at a cost of Rs. 30 per unit exclusive of  CST 2% to Techpro Systems, Pondicherry.

Techpro Systems……….Dr. 6120
To Sales Interstate  6000
To CST 2% 120
(Being interstate sales)

Ok friends, Now we saw the method of accounting of VAT. Now let us see how to set off the Input tax and Output tax. As said earlier it has dual roles to play with.

They are:

1. Monthly set off or

2. Yearly set off

Monthly set off is that we will set off the Input tax credit available against the output tax collected every month. For this we need to create another ledger in the name VAT Paid or Sales tax Paid. Let us see in the journal form.

Now, Say we have Input tax credit 5% of Rs. 10000 ITC 14.5% of Rs. 5000 and Output Tax Collected 5% Rs. 12000 and OTC 14.5% of Rs.6000 and CST Payable Rs.1000 as on 30.04.2015.

We are going to integrate the OTC and ITC ledger in the Sales tax paid ledger.

Sales tax Paid….Dr. 15000
To Input tax Credit 5% 10000
To Input Tax credit 14.5% 5000
(Being the transfer of ITC)

OTC 5%.............Dr.12000
OTC 14.5%........Dr.6000
CST Payable……Dr.1000
To Sales tax Paid 19000

Now here, the credit side of Sales Tax Paid will have 19000 as total and Debit side will show a total of 15000. This means an additional amount of Rs.4000 is to be paid to the Government in the way of VAT as Rs.3000 and CST as Rs.1000.

The third entry will be

Sales Tax Paid….Dr. 4000
To Bank 4000
(Being VAT, CST Paid)

The second aspect is that instead of monthly set off, the same thing can be done at year end as on 31.03.2016. The only thing is that monthly payment of Vat should be routed through another separate ledger viz. sales tax paid. On the contrary if there is an excess of Input tax over Output tax then the excess shall be shown as VAT ITC C/f to next month/ year as the case may be in Other Current Assets in Balance Sheet. If there seems to be a case where tax is to be paid, a provision shall be made as Vat tax Payable in Current Liabilities in Balance Sheet.

S. Sundararajan
Madurai

Hope, this article will be useful to you. Thank you for your patient reading.


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