Kaustav Mukherjee : Articled assistant.
A Discussion on Value Added Tax Treatment in Accounts
Vat is a multi point tax system which is charged in every step of manufacturing or trading or wherever “ Value “ is added. Whenever a trader does an intra state purchases, he have to pay VAT on purchases and when he does any intra state sales, he is liable to pay to pay VAT.
The Vat is charged like this:
Purchase Price – Rs 100 , Vat on Pur @ 4% = Rs 4
Add : Conversion Cost n Profit - Rs 50
Now Net Vat liability = Rs 6 – Rs 4 = Rs 2
Alternatively : Vat on Conversion Cost (Value Addition) = Rs 50 @ 4 % = Rs 2
Points to be noted.
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The Vat which is paid at the time of purchases, is known as INPUT VAT.
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The Vat which is paid at the time of sales is known as OUTPUT VAT.
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The input vat which is paid at the time of purchases can be claimed back as Input Tax Credit.
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Vat is calculated on every value addition.
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If Output Vat is more than Input Vat then the trader have to pay the excess amount, i.e. Vat Liability = Output Vat – Input Vat.
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If Input Vat is more than the Output Vat then the excess can be carried over to next period., i.e. Input Tax c/o = Input Vat – Output Vat.
Journal Entry – When goods are purchased :
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Purchase A/c dr.
Input Vat A/c dr.
To Party A/c
Journal Entry – When Goods are sold :
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Party A/c dr.
To Sales A/c
To Output Vat A/c
Journal Entry – Input Vat is set off on output vat :
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Output Vat A/c dr.
To Input Vat A/c
Here Tax liability is = Output Vat – Input Vat when Output Vat is more.
Net Tax credit = Input Vat – Output Vat when Input Vat is more.
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Vat Liabilty will be shown in the Balance Sheet as under Current Liabilities.
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Input Tax Credit will be shown under Current Assets, Loans & Advances.
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