Dear all your doubt will got clear here.
1. The State-level Value Added Tax (hereinafter referred to
as ‘Value Added Tax’ or ‘VAT’) comes into effect from
April 1, 2005, in place of the sales tax structure prevalent
in various States. The VAT intends to bring harmonisation
in the tax structure of various States and rationalise
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.
2. VAT is a State subject, for which the States are independent
in taking decisions. The States, through discussion
in the Empowered Committee of State Finance
Ministers, constituted by the Ministry of Finance,
Government of India, have found it in their interest to
have certain features of VAT to be common for all the
States with a view to avoid unhealthy competition.
These features are contained in the ‘White Paper on
State-Level Value Added Tax’ released by the
Empowered Committee on January 17, 2005 and constitute
the basic design of VAT. At the same time, the States
have freedom for making appropriate variations in their
respective State laws consistent with this basic design.
3. A trader/manufacturer (hereinafter referred to as a
‘dealer’) who is registered or is required to be registered
under the respective State laws on VAT is entitled
to an input tax credit (hereinafter referred to as ‘VAT
credit’) in respect of tax paid on purchases made during
the tax period where the purchases arise in the course of
his activities as a dealer. The VAT credit is allowed for
purchase of inputs/supplies meant for sale or for utilisation
in the process of production for such sale, irrespective
of when these are utilised/sold, and reduces
the immediate tax liability. The VAT is based on the
value addition to the goods, and the related VAT liability
of the dealer is calculated by deducting VAT credit
from tax payable on sales during the tax/payment
period (say, a month). If, for example, input worth Rs.
1,00,000/- is purchased and sales are worth Rs.
2,00,000/- in a month, and input tax rate and output tax
rate are 4% and 12.5% respectively, VAT credit and
calculation of VAT is as shown below:
(a) Input purchased during the month Rs. 1,00,000
(b) Output sold during the month Rs. 2,00,000
(c) Input tax paid and available as
‘VAT credit’ (Rs. 1,00,000 x 4%) Rs. 4,000
(d) Gross output tax payable
(Rs. 2,00,000 x 12.5%) Rs. 25,000
(e) VAT payable during the month after
adjustment of VAT credit [(d) – (c)] Rs. 21,000
4. VAT credit is given to a dealer for purchase of
inputs/supplies in a State meant for sales within the State
as well as in other States. Even for stock transfer/consignment
sale of goods out of the State, input tax paid in
excess of a certain percentage is eligible for VAT credit.
VAT credit is available in respect of all purchases made
and taxes paid thereon within the State. However, no
credit under the VAT laws is allowable in respect of
taxes paid on purchases made from other States.
8. If the VAT credit exceeds the tax payable on sales in a
month, the excess credit may be carried over to the
future month(s). If there is any excess unadjusted VAT
credit at the end of the specified period, the same is eligible
for refund. The period for which the excess VAT
credit can be carried over before becoming eligible for
refund is prescribed in the respective State VAT laws.
5. All goods, except liquor, lottery tickets, petrol, diesel,
aviation turbine fuel and other motor spirits whose
prices are not fully market determined, are covered
under VAT and get the benefit of VAT credit. The
goods not covered by VAT are taxed under the Sales
Tax Act or any other State Act or by making special provisions
in the VAT Act itself.
6. Besides prescribing various rates of tax for goods, the
State-level VAT laws may also specify (a) certain
goods which are exempt, and (b) the sales which are
‘zero’ rated. The essential difference between the
exempt sales and ‘zero’ rated sales is that while in both
the cases, the dealer does not charge VAT, in case of
‘zero’ rated sales, he is eligible to claim VAT credit for
tax paid on purchase of inputs whereas for the exempted
sales, he is not eligible to claim VAT credit for the tax
paid on the purchase of inputs.
7. Exports sales are ‘zero’ rated under the VAT laws. This
means that the dealer is not required to charge any tax or
pay any VAT on the export sales. The dealer, however,
is entitled to VAT credit in respect of tax paid within a
State on purchase of inputs. The VAT credit is not
restricted to only those goods which are meant or used
in the manufacture for exports. If, in any tax period, the
VAT credit declared in the VAT return exceeds the output
tax and the dealer has declared international exports
in the same tax period, he can claim refund of the excess
VAT credit. The refund will be made within the period
prescribed under the State VAT laws. The units located
in Special Economic Zones (SEZ) and Export Oriented
Units (EOUs) are granted either exemption from payment
of input tax or refund of the input tax paid within
the prescribed period.
8. In some State VAT laws, industrial units may be granted
the facility of deferring output tax net of VAT credit.
Such units continue to collect tax on sales from the customers
at the time of making sales, but the tax is payable
after a certain specified period. The period of eligibility,
the method of computing the eligibile amount, the repayment
etc., in such cases, shall be in a manner prescribed
under the respective State VAT laws.
9. All tax-paid goods purchased on or after April 1, 2004
and still in stock as on April 1, 2005 are eligible to avail
VAT credit, subject to submission of requisite documents.
Resellers holding tax-paid goods on April 1,
2005 are also eligible. VAT is levied on the goods when
sold on and after April 1, 2005 and VAT credit is given
for the sales tax already paid in the previous year. This
VAT credit is available over a period of 6 months after
an interval of 3 months needed for verification. In certain
States, however, immediate credit for tax-paid
goods lying in stock on April 1, 2005 may be available.
14. VAT credit on all capital goods, except a few capital
goods included in the negative list of respective State
laws, is also available to dealers. VAT credit on capital
goods may be adjusted over a maximum of 36 equal
monthly instalments. The States may at their option
reduce the number of instalments or may grant full
credit in the month of purchase of such capital goods.
Some of the State laws on VAT, e.g., the West Bengal
Value Added Tax Act, 2003, have defined the term
‘Capital Asset’ to include components, spare parts,
accessories, tools, etc., which are basically of the nature
10. Small dealers with gross annual turnover not exceeding
the limit specified in White Paper are not liable to pay
VAT. However, States have flexibility to fix threshold
limit within the specified limit and, therefore, certain
States have fixed lower limits in this regard. Small dealers
with annual gross turnover not exceeding the specified
limit in this respect, who are otherwise liable to pay
VAT, however, have the option to pay tax under an
alternative scheme known as the ‘composition scheme’.
The dealers opting for this scheme are required to pay
tax at a small percentage, as prescribed, of gross
turnover and are not entitled to any VAT credit. Certain
States have fixed lower limits of turnover under the
11. The entire design of VAT with input tax credit is mainly
based on documentation of tax invoice, cash memo or
bill. Every registered dealer, having turnover in excess
of the amount specified, issues to the purchaser, serially
numbered tax invoice with the prescribed particulars.
This tax invoice is required to be signed and dated by the
dealer or his regular employee, showing the required
particulars. The dealer is required to keep a counterfoil
or duplicate of the tax invoice duly signed and dated.
Failure to comply with the above attracts penalty. The
dealer is also required to keep and maintain a true and
correct account of his business transactions, and maintain
appropriate records to ascertain his tax liability.
Various States have prescribed the records required to be
maintained by dealers engaged in various businesses.
12. The State VAT laws also provide for issuance of credit
notes/debit notes by the dealer in cases of wrong calculation
of tax or return of goods after sales/ purchases are
made or in respect of annual discounts and other price
adjustments on settlement between the seller and the
13. The accounting treatment for VAT credit recommended
in the following paragraphs is required only in situations
where the VAT credit is available. Accordingly,
accounting treatment recommended hereinafter would
not be applicable in cases where no VAT credit is available
such as for
(i) dealers not registered under VAT, or
(ii) dealers having turnover below the threshold limit
as fixed under the State laws on VAT, and opting
for composition scheme, or
(iii) dealers engaged in the works contract and opting
to pay tax by way of composition; or
(iv) purchase of goods from unregistered dealers.
“14. The costs of purchase 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. Trade discounts,
rebates, duty drawbacks and other similar items are
deducted in determining the costs of purchase.”
Attention is invited to the paragraph related to ‘costs of
purchase’, according to which, only those taxes have to be
included as costs of purchase which are not subsequently
recoverable by the enterprise from the taxing authorities.
Since the tax paid on inputs is available for set-off against the
tax payable on sales or is refundable, it is of the nature of
taxes recoverable from taxing authorities and accordingly,
input tax paid should not be included in the costs of purchase.
15. In view of the above, the amount of tax paid on purchase
of inputs/ supplies and available for VAT credit should be
debited to a separate account, say, VAT Credit
Receivable (Inputs) Account. As and when VAT credit is
actually utilised against VAT payable on sales, appropriate
accounting entries will be required to record the
adjustment, i.e., VAT Credit Receivable (Inputs)
Account should be credited with a corresponding debit to
the account maintained for tax payable on sales. The debit
balance in VAT Credit Receivable (Inputs) Account, at
the year-end, should be shown on the ‘Assets’ side of the
balance sheet under the head ‘Loans and Advances’.
16. A dealer may purchase certain common inputs which are
to be used for making taxable sales as well as for making
exempt sales. In such a case, the dealer, on the date
of purchase, should estimate inputs expected to be used
for making taxable sales and for making exempt sales.
The dealer should recognise VAT credit only in respect
of those inputs which are expected to be used for making
taxable sales and no VAT credit should be recognised
in respect of inputs expected to be used for making
exempt sales. Subsequently, in case the actual use is
different from the estimated use, the dealer should pass
an appropriate adjustment entry for the same. Similarly,
in the case of stock transfer/consignment sale of goods
out of the State where VAT credit is available only to the
extent of a certain portion of input tax paid, the dealer
should make an estimate of the expected stock transfers/
consignment sales and account for accordingly.
17. The accounting treatment recommended in the following
paragraphs applies only to those capital goods
which are eligible for the credit.
VAT credit on capital
goods may or may not be available immediately. To the
extent VAT credit is available immediately, the amount
in respect thereof should be debited to an appropriate
account, say, ‘VAT Credit Receivable (Capital Goods)
Account’ and the balance which is not available immediately,
should be debited to another appropriate
account, say, ‘VAT Credit Deferred (Capital Goods)
Account’. Subsequently, when the balance credit or a
part thereof becomes available, the appropriate adjustment
for the same should be made, i.e., the amount of
credit becoming available should be credited to ‘VAT
Credit Deferred (Capital Goods) Account’ with a corresponding
debit to ‘VAT Credit Receivable (Capital
Goods) Account’. Depreciation should be charged on
the original cost of fixed asset excluding VAT credit.
ACCOUNTING TREATMENT FOR
LIABILITIES ADJUSTED FROM VAT
CREDIT RECEIVABLE BALANCE –
INPUTS AND/ OR CAPITAL GOODS
18. A dealer may, normally, utilise the VAT credit receivable
balance pertaining either to inputs or to capital
goods for adjusting/setting-off the following liabilities:
(a) Liability in respect of VAT payable on sales.
(b) Liability in respect of disallowance/withdrawal of
19. All liabilities adjusted out of the VAT credit receivable
balance should be credited to the VAT Credit
Receivable (Inputs) Account or VAT Credit Receivable
(Capital Goods) Account. The corresponding debit for
the same should be given to the account maintained for
recording VAT liability on sales, say, ‘VAT Payable
Account’, if the liability for VAT payable on sales has
been met by using the balance in the said account.
20. If, on the other hand, the amount utilised pertains to disallowance/
withdrawal of VAT credit taken on purchase
of inputs made during the year, the same should be added
to the cost of inputs. Appropriate adjustment in that case
would have to be made while valuing inventory of
inputs. If the amount adjusted pertains to disallowance/
withdrawal of credit in respect of purchases
effected in earlier years, the accounting treatment would
depend on whether the said inputs/supplies are available
in stock or not. If they are not available, i.e., these have
already been sold, the disallowance/withdrawal should
be debited to profit and loss account and treated as
expense of the current year. If these are still lying in
stock, the amount should be added to the cost of inputs.
30. If the amount utilised out of VAT credit receivable balance
pertains to any disallowance/withdrawal of VAT
credit on capital goods, the same should be added to the
cost of the relevant fixed asset. For accounting purposes,
depreciation on the revised unamortised depreciable
amount should be provided prospectively over
the residual useful life of the asset. In case the fixed asset
no longer exists, the relevant amount should be writtenoff
in the profit and loss account with an appropriate disclosure.
If the amount of VAT credit disallowed on capital
goods is standing to the debit of VAT Credit
Deferred (Capital Goods) Account and has not been
transferred to VAT Credit Receivable (Capital Goods)
Account, the account to be credited would be the VAT
Credit Deferred (Capital Goods) Account.
ACCOUNTING TREATMENT FOR
REFUND OF INPUT TAX
21. Input tax which cannot be adjusted against the VAT
payable over the specified period of time and input tax
paid on purchases made for exports out of the country
are eligible for refund. Any refund of input tax received
in this manner should be credited to the VAT Credit
Receivable (Inputs) Account or VAT Credit Receivable
(Capital Goods) Account, as appropriate.
VALUATION OF INVENTORIES OF
INPUTS AND FINAL PRODUCTS
22. The inventory of inputs should be valued net of input tax.
In other words, the tax on inputs will not form part of the
cost of inventories. Balance in VAT Credit Receivable
(Inputs) Account should be shown in the Balance Sheet
under the head ‘Loans and Advances’ on the ‘Assets’ side.
23. Where inputs/supplies have been obtained from small
dealers or other dealers who are exempt from VAT, the
actual cost of purchase should be considered as a part of
cost of inventory.
24. Where purchases are made from the dealers who are not
eligible under the relevant State VAT Laws, e.g., unregistered
dealers, to pass VAT credit and, therefore, cannot
issue tax invoice in accordance with the applicable
law, the inventories of such inputs should be valued at
the actual cost inclusive of the input tax.
25. While valuing inventories of final products, the value of
inputs should be net of the input tax where VAT credit
26. Inventories of capital goods, such as, components, spare
parts, accessories, tools, etc., should be valued net of
VAT credit. In other words, input tax paid on such capital
goods should not form part of their cost.
27. Output tax or VAT payable on sales is an indirect tax
which is ultimately borne by the final consumer but is
collected at each stage of distribution chain. A question
may arise as to whether VAT recovered from the customers
should be recognised as income in the profit and
loss account and, correspondingly, whether VAT
payable on sales should be treated as an expense.
28. The Framework for the Preparation and Presentation of
Financial Statements, issued by the Institute of
Chartered Accountants of India, has defined the term
‘income’ as below:
“Income is increase in economic benefits during
the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities
that result in increases in equity, other than those
relating to contributions from equity participants.”
The Value Added Tax (VAT) is collected from the customers
on behalf of the VAT authorities and, therefore,
its collection from the customers is not an economic
benefit for the enterprise and it does not result in any
increase in the equity of the enterprise. Accordingly, it
should not be recognised as an income of the enterprise.
Similarly, the payment of VAT should not be treated as
an expense in the financial statements of the enterprise.
29. In view of the above, it is recommended that the amount
of tax collected from customers on sale of goods should
be credited to an appropriate account, say, ‘VAT Payable
Account’. Where the enterprise has not charged VAT
separately but has made a composite charge, it should
segregate the portion of sales which is attributable to tax
and should credit the same to ‘VAT Payable Account’ at
periodic intervals. The amounts of VAT payable adjusted
against the VAT Credit Receivable (Inputs) Account or
VAT Credit Receivable (Capital Goods) Account and
amounts paid in cash will be debited to this account. The
credit balance in VAT Payable Account, at the year-end,
should be shown on the ‘Liabilities’ side of the balance
sheet under the head ‘Current Liabilities’.
30. Where a dealer is enjoying tax holiday and, therefore, his
liability to pay output tax is deferred for a period more
than one year under the State laws on VAT, the amount
in the ‘VAT Payable Account’ should not be reflected
as a current liability. The same should be reflected as a
19th September 2009 From India