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.

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. 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

Balance Sheet as on 31.03.2XXX 

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

Balance Sheet as on 31.03.2XXX 

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

Balance Sheet as on 31.03.2XXX 

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

Balance Sheet as on 31.03.2XXX 

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

   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     

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: