Accounting for VAT & CST in Tally ERP 9

 

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. Particulars Debit Credit Sales 12.5% 150000 Vat on Sales 12.5% 18750 Purchases Vat 12.5% 110000 Vat On Purchases 12.5% 13750 CST Sales 2% 70000 CST 2%(on sales) 1400 CST Purchases 2% 40000 CST 2%(on purchases) 800 Vatable Expenses 12.5%(Net) 50000 Vat 12.5% VAT 6250 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 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. CST is centrally levied though collected by state and it is revenue for state government. VAT is purely a state level tax. If credit is given for CST paid in OMS purchases then state (in which goods are purchased) will have to part with its revenue from its treasury which no state will accept.

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 Particulars Amount Particulars Amount Purchases Sales Local 12.5% 110000 Local 12.5%    150000 OMS 2% 40000 OMS 2% 70000 220000 Cst 2% 800 150800 Gross Profit    69200 220000 220000 Expenses 50000 Gross Profit 69200 Net Profit 19200 69200 69200 Balance Sheet as on 31.03.2XXX  Liabilities Amount Assets Amount Net Profit 19200 Current Assets Sundry Debtors 240150 Current Liability Creditors For Goods 164550 Creditors For Expenses 56250 Bank Overdraft 150 240150 240150 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 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 Particulars Amount Particulars Amount Purchases Sales Local 12.5% 110000 Local 12.5% 150000 OMS 2% 40000 OMS 2% 70000 220000 Cst 2% 800 150800 Gross Profit    69200 220000 220000 Expenses 56250 Gross Profit 69200 Net Profit 12950 69200 69200 Balance Sheet as on 31.03.2XXX  Liabilities Amount Assets Amount Net Profit 12950 Current Assets Sundry Debtors 240150 Current Liability Creditors For Goods 164550 Creditors For Expenses 56250 Bank Overdraft 6400 240150 240150 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 Particulars Amount Amount Particulars Amount Amount Purchases Sales Local 12.5% 110000 Local 12.5% 150000 Vat 12.5% 13750 Vat 12.5% 18750 OMS 2% 40000 OMS 2% 70000 CST 2% 800 164500 CST 2% 1400 240150 Gross Profit    75600 220000 220000 Expenses (50000+6250) 56250 Gross Profit 75600 Vat Paid NIL Cst Paid 150 Net Profit 19200 Balance Sheet as on 31.03.2XXX  Liabilities Amount Assets Amount Net Profit 19200 Current Assets Sundry Debtors 240150 Current Liability Creditors For Goods 164550 Creditors For Expenses 56250 Bank Overdraft 6400 240150 240150 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 Particulars Amount Amount Particulars Amount Amount Purchases Sales Local 12.5% 110000 Local 12.5% 150000 Vat 12.5% 13750 Vat 12.5% 18750 OMS 2% 40000 OMS 2% 70000 CST 2% 800 164500 CST 2% 1400 240150 Gross Profit    75600 220000 220000 Expenses (50000+6250) 56250 Gross Profit 75600 Vat Paid 5000 Cst Paid 1400 Net Profit 12950 69200 69200

Balance Sheet as on 31.03.2XXX  Liabilities Amount Assets Amount Net Profit 12950 Current Assets Sundry Debtors 240150 Current Liability Creditors For Goods 164550 Creditors For Expenses 56250 Bank Overdraft 6400 240150 240150 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 Basic Price    779663 Octroi 38025 Vat 12.5% 102211 Insurance Charges  23388 RTO Charges          68708    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%   Dr.    10000              To 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                    To Debtors                           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:      So in general abovementioned accounting is considered for recording local and interstate transaction. If VAT Act of particular state requires some specific treatment then that is to be followed. For instance in some state Vat Set off on purchases of fixed assets available immediately whereas in some other state it is available over a period of time.