Vat treatment

Input vat which is disallowable should be added to the expenses for which it is charged if input vat for which credit will be allwed should be treated to duties and taxes under current liabilities.

it should be treated as an expenditure.

is it allowable under income tax act?

when the inputs are vat paid and final products are exempted then gross amount including vat is reflected as purchase i.e vat input credit is not availed on such inputs.

avail input credit of only those inputs which used in taxable outputs, 

Better to divide the purchase and sales in two segments taxable and tax free, this will not generate any prob in accounting.