1

REFRESHING KEY ASPECTS OF VAT/CST

AND

VAT ACCOUNTING

BY

C A M A N I S H S O M A N IB.Com, FCA.

B A H E T I & S O M A N IChartered Accountantswww.bandsindina.com

1

General Rule:

Set Off is available on all purchases (Trading, Expenses and Capital Assets) made from a Trader Registered under MVAT Act who issues TAX INVOICE in a prescribed format showing VAT separately.

However, there are two exceptions to this General Rule:

1.Rule 53: Reduction of Set Off2.Rule 54: Non-Admissibility of Set Off

.

SET-OFF UNDER

MVAT ACT:

1

Reduction of set-off to be done equivalent to CST Rate (Current Rate - 2%) on following purchases:•Goods used as Fuel•Manufacturer of Tax Free Goods•Packing Material used by a dealer of Tax Free Goods•Dispatch of Goods outside the state otherwise than by sale•Purchase of Office Equipment, Furniture and Fixture•Purchases by Electric Distribution and Transmission Company

Reduction of Set Off for following as well:•Works Contract Composition Scheme/Construct Contracts Scheme•Discontinuance of Business

.

Rule 53: Reduction of Set Off

1

Set-off is not available on following cases:

•Motor Vehicles and its parts, components and accessories•Motor Sprits•Crude Oil•Manufacture of Scrap Only•Entitlement Certificate Holders•Purchase of Intangible assets (Software, etc.)•Works Contract resulting in immovable property•Purchase of Goods, the property in which is not transferred to any other person, which are used in the erection of immovable property other than Plant and Machinery.•Purchase of Liquor, if the dealer has opted for composition.•Purchase by Mandap Keepers, if the dealer has opted for composition•Purchase of Capital Goods by Hotels

.

Rule 54: Non-Admissibility

of Set Off

1

High Sea Sales•Meaning•Benefits•Examples•Controversies•Caution to be taken

Interstate Sales•Meaning•Most Common type of Sale•Rate of Tax•If against C-Form, rate of tax is 2%

Sale in Transit•Meaning•Features•Form E1/E2 from Purchase Dealer•Form C from Subsequent Dealer

.

cOncepts

CENTRAL SALES TAX

ACT:

1

Branch Transfer•Meaning•Features•F-Form to be issued by Branch

Export Sale•Meaning•Features•Direct Export•H-Form from Exporter against indirect exports

Inter State Works Contract•Meaning•Features

.

CONCEPTS

CENTRAL SALES TAX

ACT:

1

•E-filing mandatory for all dealers.

•E-Services registration has to be done and acknowledgement to be submitted.

•The E-return should be uploaded before the due date.

•The system will generate acknowledgement. The dealer can use digital signature as per the Act (Site does not provide for digital signature).

•After E-Services registration, mandatory filing of acknowledgement within 10 days to the concerned authority specified in Rule 17(2) for dealers not using digital signature has been dispensed with.

.

E-filing of Returns:

1

•Gross Turnover of all Sales (including branch transfers and any tax charged).

•Net Turnover of sales at each VAT rate (excluding tax).

•Tax charged on sales at each different rate.

•Total Tax charged and payable.

•Total of all tax-free sales (Taxable at Nil rate)

•Total of all export from India.

•Total of all inter-state sales. Total of all inter-sate branch transfers.

•Details regarding Invoice, Purchasing Party, Goods, Address, TIN Nos, etc. ( In view of E-filing of Proposed Annexure with Returns) .

Sales details to be

maintained in accounts

software

1

•The total turnover of all purchases (including any tax paid or payable). •The total of all purchases made at each different rate (excluding tax). •Tax paid on purchases at each different rate. Amount of tax not available for set-off. •Total tax available for set-off. •Total of tax-free purchases. Total of imports from outside India. •Total purchases made from outside Maharashtra. Total Consignment transfers. •Total of local purchases from registered dealers. •Total of local purchases from unregistered dealers. •Details regarding Invoice, Selling Party, Goods, Address, TIN Nos, etc. ( In view of E-filing of Proposed

Annexure with Returns)

.

Purchase details to be maintained in

account software

1

•The Cost of inventories is net of VAT Credit. •Sales are exclusive of VAT. •Fixed Assets are exclusive of VAT Credit.

.

disclosure: requirements

1

•Section 50(1) & (2) amended w.e.f 15-8-2007. This section enables a dealer or Commissioner to adjust an amount of refund of a return in the same year against any return of that year.

•This is a one of the most significant amendment. For e.g. Dealer can adjust tax liability of Dec-07 against excess setoff / refund of Jan-08 at the year end. Of course Interest have to be paid delayed payment.

•At the year end dealer will have to claim refund for unadjusted setoff, he cannot carry forward it to subsequent year.

•Above amendment will prove handy for adjustments of tax liability and avoid unnecessary formalities of refund claim.

•Appropriate Accounting Entries are to be made to give effect of above adjustments in books of accounts based on periodicity of returns.

.

Adjustment of refund in

any month of a year:

1

Periodicity of VAT Returns:

Tax liability in previous year Periodicity

More than Rs. 10 Lakh Monthly

More than Rs. 1 Lakh but lessThan Rs. 10 Lakh Quarterly

Less than Rs. 1 Lakh Six Monthly

Due Date:

VAT return has to be filed with 21 days from the relevant period (month/quarter/six months).

.

VAT RETURNS

DUE DATES

1

Accounting treatment : •of VAT Credit in cases of Inputs/ Supplies. •on VAT Credit in case of Capital Goods. •for Liabilities Adjusted from Vat Credit Receivable Balance- Inputs and /or Capital Goods. •for Refund of Input Tax. •of VAT Credit on Goods Lying in Stock at the Inception

of the Vat Scheme. •of Output Tax, i.e., VAT on Sales. •Valuation of Inventories of Input and Final Products. •Valuation of Inventories of Capital Goods. •Illustrations

.

Guidance Note (A) 19 (issued in 2005) by

ICAI .

1

•Attention is invited to para 6 and 7 of AS-2 " Valuation on Inventories" were " Cost of Purchases" includes only those taxes, which are not subsequently recoverable by the enterprise form the taxing authorities.

•Not applicable to Unregistered dealers, Composition Scheme, CST and Non Setoff purchases within Maharashtra State.

.

Accounting treatment : of VAT Credit in

cases of Inputs/

Supplies:

1

•In View of the above, the amount of tax paid on purchases of inputs/supplies and available for VAT credit should be debited to a separate account, say, VAT Credit Receivable (Inputs) Account.(Rates wise A/c i.e., 4 or 12.5% should be maintained)

•As and when VAT Credit is actually utilized 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 i.e., VAT Tax Payable A/c.

•The Debit balance (i.e, Excess or Refund) of 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"

.

Accounting treatment : of VAT Credit in

cases of Inputs/

Supplies:

1

Special Adjustment Entries should be passed for :

•Purchases used for Sales of Taxable Goods and Exempted Goods both.•In Case of Stock Transfer/Consignment .•In Case of Job Work and Works Contract.•In Case of Exemption unit purchases.

.

Accounting treatment : of VAT Credit in

cases of Inputs/

Supplies:

1

Issue: •Whether Gross or Net setoff entries are to be passed on purchases where retention of setoff is there?

For appropriate disclosure in returns, Grossing up is recommended, to disclose the Setoff retention figure separately.

.

ISSUE

SET OFF

1

Issue:•What entries are to be passed for effect of setoff adjustments due to MVAT Audit findings, when booked are closed at the year end?

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

.

ISSUE

MVAT FINDINGS

1

•In View of the above, the amount of tax paid on purchases of eligible Capital goods should be debited to a separate account, say, VAT Credit Receivable (Capital) Account.

•(Rates wise A/c i.e., 4 or 12.5% should be maintained).

•As and when VAT Credit is actually utilized against VAT payable on sales, appropriate accounting entries will be required to record the adjustment, i.e., VAT Credit Receivable (Capital) Account should be credited with a corresponding debit to the account maintained for tax payable on Sales i.e., VAT Tax Payable A/c.

•The Debit balance (i.e, Excess or Refund) of VAT Credit Receivable (Capital) Account, at the year-end, should be shown on the " Assets" side of the balance sheet under the head "Loans and Advances".

•But generally only one VAT setoff account is maintained for inputs/ supplies and Capital goods.

.

Accounting treatment : on VAT Credit in

case of Capital Goods.

1

•Attention is invited to para 9.1 of AS-10 "Accounting of Fixed Assets", which provides as below:

The Cost of an item of fixed assets comprises its purchase price, including import duties and other non- refundable taxes or levies and directly attributable cost of bringing the assets to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price

.

Accounting treatment : on VAT Credit in

case of Capital Goods.

1

•Issue: Whether Gross or Net setoff entries are to be passed on purchases were retention of setoff is there?

For appropriate disclosure in returns, Grossing up is recommended, to disclose the retention figure separately.

Issue:

Whether Setoff can be avail, if Depreciation is taken on full value of Asset? Yes, if Income is booked for Setoff amount via Debit to VAT Credit Receivable (Capital) Account and Credit to Misc Income A/c. But no such reference in Guidance Note or in MVAT Act or rules?

.

ISSUE

CAPITALGOODS

1

•Issue;If Excess retention is taken on Assets, which is to be reversed after capitalization of assets, what entry

is to be passed?

If the amount utilized out of VAT Credit receivable balance pertains to any disallowable/ withdrawal of VAT credit on capital goods, the same should be added to the cost of the relevant fixed assets. For accounting purpose, depreciation on the revised unamortized 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 written-off in the profit and loss account with an appropriate disclosure.

.

ISSUE

CAPITAL GOODS

1

•Issue: A question may arise as to whether VAT recovered

from the customers should be recognized as income in the profit or loss account and correspondingly, whether VAT payable on sales should be treated as an expense"

Here attention is invited to "The Framework for the Preparation and Presentation of Financial Statement ", issued by ICAI, were the term "income" is defined, which is 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 results in increase in equity, other than those relating to contributions from equity participants"

.

ISSUE

DISCLOSURE OF VAT ON SALES AND PURCHASES

1

VAT is collected from customers on behalf of the VAT authorities and therefore, its collection from the customers is not an economic benefit for the dealer and it does not result in any increase in the equity of the dealer.

Accordingly, it should not be recognized as an income of the dealer. Similarly, the payment of VAT should not be treated as on expense in the financial Statements of the dealer.

Which is contradictory to Section 145A of Income Tax Act, 1961, same is to be disclose in reverse way in separate disclosure to Tax Audit Report.

In view of above, as per "GN " it is recommended that the amount of tax collected from customers on sale of goods should be credited to an appropriate account, say, VAT (CST) Payable Account. (Rate wise Collection account are to be maintain for discloser in returns.)

.

ISSUE

DISCLOSURE OF VAT ON SALES AND

PURCHASES

1

•Issue:

How impact of Composition Tax, Inclusive Tax on sales in works contract , etc is to be given in books of accounts?

Where the dealer 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 as per returns.

.

ISSUE OUTPUT VAT COMPOSITIO

N

1

•Closing Entry of Vat Payment at the end of period

as per return

VAT payable to be adjusted against the VAT Credit Receivable (Input or Capital) Account.

Amounts paid in cash/bank to be debited to VAT Payable Account.

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”

Deferment Holder Dealer’s liability to pay output tax is deferred for a period more than one year under the PSI, the same should be reflected as a long-term liability.

Debit balance in VAT Payable Account at the year end should be transferred to the VAT Credit Receivable (Inputs) Account and it should be grouped under Loans and Advances.

.

CLOSING ENTRIES

VAT

1

From F.Y. 2007-2008, no refund is carry forward able to next year, hence separate account should be maintain at the year end, so it is not utilized in next year and can be separately shown in books.

.

CLOSING ENTRIES

VAT

1

•ISSUE:

Whether VAT Credit is available on Bad Debts?

The VAT credit for Bad Debts written off is presently available only in the state of Delhi.

.

Issue

Bad debts

1

•ISSUE: When shall Entries of Goods Returns is to be taken in Books?

Entries of Debit or Credit Note of goods returns can be taken in books as soon as goods are received or return back or at any time in a FY.

But effect in return will be taken only in the period when entries are passed. For the purpose of benefit of section 63(5)(a) and (b) of MVAT Act, 2002, and effect on it on sale or purchase price, such good should be return within 6 months from the date of sale or purchase as the case may be.

Thus while passing entries of goods return the reference of sale or purchase date should be given. In case of Goods Return on Sales, Sales Account may be debited and VAT payable Account may be credited. In Case of Goods Return on Purchases, VAT Receivable (Input) Account may be debited and Purchases Account may be Credited.

.

Issue

Goods return

1

Issue

DEBIT /CREDIT nOTES

•ISSUE:

What Shall be Impact of Debit Notes or Credit Notes on Sales or Purchase Price?

Entries of Debit or Credit Note will effect Purchases or Sales price under MVAT only when tax is shown separate. Such credit notes or, as the case may be, debit notes, shall be accounted for in the return in the period in which appropriate entries for debit notes and credit notes are taken in the books of accounts.

.

3131

QUESTIONS ??

3232

THANK YOU