Refreshing

Vat Accounting and

Returns.
By Ca. Umesh Sharma 1
Refreshing Journey for:
„ Review of Guidance Note on “Accounting for State
Level VAT”.
„ Review of AS-2 “Valuation on Inventories”
„ Review of AS-10 “Accounting of Fixed Assets”
„ What details should be available for Sales.
„ What details should be available for Purchases.
„ Issues in Accounting of VAT.
„ Review of Section 63 of MVAT Act 2002.
„ Returns and e-filing issues.

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Our Journey.., to cross the Dead line and complete the Tax
Audit Assignments.

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Guidance Note (A) 19
(issued in 2005) by ICAI
„ Covers following paras:
„ Objective.
„ Salient features of VAT system.
„ 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. 4
Accounting treatment :
of VAT Credit in cases of Inputs/ Supplies:

“ 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.

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 Accounting treatment :
of VAT Credit in cases of Inputs/ Supplies:

„ 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”
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 Accounting treatment :
of VAT Credit in cases of Inputs/ Supplies:

„ 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.

„ 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 Setoff retention figure
separately.
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 Accounting treatment :
of VAT Credit in cases of Inputs/ Supplies:

„ 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”
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 Accounting treatment :
on VAT Credit in case of Capital Goods.

„ 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…”

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 Accounting treatment :
on VAT Credit in case of Capital Goods.

„ 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. 10
 Accounting treatment :
on VAT Credit in case of Capital Goods.

„ Special Adjustment Entries should be passed for :

„ Purchases of eligible capital goods were setoff is available after
retention like Office Equipments, Furniture and Fixtures and
Computers.

„ Not applicable to assets like building, etc, and OMS

purchases.

„ Depreciation should be charged on the original cost of fixed

assets excluding Vat Credit.

„ Special Care should be take for Project Stage were setoff is

available on plant and machinery only.

„ Fixed Assets Register and Schedule to Balance Sheet should

also be reconciled. 11
 Accounting treatment :
on VAT Credit in case of Capital Goods.

„ 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?
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 Accounting treatment :
on VAT Credit in case of Capital Goods.

„ 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.
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 Accounting Treatment:
for Output Tax, i.e, VAT on Sales

„ 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”

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 Accounting Treatment:
for Output Tax, i.e, VAT on Sales

„ “ 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”

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 Accounting Treatment:
for Output Tax, i.e, VAT on Sales
„ 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.) 16
 Accounting Treatment:
for Output Tax, i.e, VAT on Sales

„ 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. 17
 Accounting Treatment:
for Output Tax, i.e, VAT on Sales
„ Closing Entry of Vat Payment at the end of period as per
return;

„ The amounts of VAT(CST) payable adjusted against the VAT

Credit Receivable (Input or Capital) Account.

„ And amounts paid in cash/bank will be debited to VAT

Payable 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”

„ In Case of Deferment Holder Dealer, his 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.
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 Accounting Treatment:
for Output Tax, i.e, VAT on Sales

„ Payment of deposit or Rs.25,000 at the

time of voluntary registration.

„ Deposit is payable from 15-8-2007 while Voluntary

Registration beside the Fees of Rs.5000/-.

„ It will be help full to pay through separate challans as both

the amounts are separate and deposit is adjustable against
tax liability and Fees is not adjustable.

„ Hence Separate entries should be made for deposit paid and

it should be transfer to Vat Payable Account when it is
utilized and Fees paid should be expense off in the year of
payment. 19
 Accounting Treatment:
for Refund of Input Tax

„ “Any refund of input tax receivable should be

credited to the VAT Credit Receivable (Inputs) or
(Capital) Account, as appropriate.”

„ 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.

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 Accounting Treatment:
for Output Tax, i.e, VAT on Sales

„ ISSUE:
„ BAD DEBT WRITTEN OFF AND CREDIT OF
SETOFF?

„ The VAT credit for Bad Debts written off is

presently available only in the state of Delhi.
Which requires separate entries in books and
disclosure.

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 Accounting Treatment:
for Goods Returns

„ 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) 22
Account may be debited and Purchases Account may be Credited.
 Accounting Treatment:
for Debit Notes or 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.

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Adjustment
Adjustment of
ofrefund
Refundininany
anymonth
monthof of
a year:
year:

„ 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.

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 What details should be available from Accounting
Entries of Sales in a Accounting Software:

„ 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)
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 What details should be available from Accounting
Entries of Purchases in a Accounting Software:

„ 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)
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 The Dealer may in Accounting Policies make
following disclosure:

„ The Cost of inventories is net of VAT Credit.

„ Sales are exclusive of VAT.

„ Fixed Assets are exclusive of VAT Credit.

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 Auditors Comment on Guidance Note:

„ Guidance note is mandatory to follow.

„ Applies to all dealers including non corporate.

„ If not followed, auditor to comment on statutory

audit report.

„ MVAT Auditor may also comment in Observation

in MVAT Audit report.

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Auditors Comment on Lehman Brothers
Balance Sheet:

“On the Left hand nothing is Right.

And
On the Right hand nothing is Left.”

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Revised returns and its issues:
„ ISSUE:
„ Whether Circular 26T of Sept 2006 is still valid
for filing of one revised return for the month of
March to give effect of all observations in audit
report of year 2007-2008?

„ Not applicable were periodicity is mentioned in 26T

Circular’s Q&A, i.e. specific answers and were in
future section or rule is amended otherwise. General
answers are still applicable on Form 704.

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Revised Returns and MVAT Audit
Report:
„ ISSUE:
„ In case were MVAT Audit reports are already
filed and now returns are revised, Where is the
provision for revision of Audit Reports?

„ No Such provision to file revised Audit Report. No

need to revise Audit Report if revised returns are filed
after date of filing of audit report base on
retrospective amendments, subject to audit report is
correctly prepared on the basis of existing returns on
record of dealer.
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All returns are to be revised or single
return in case of refund?
„ Section 53(2A) is substituted. Refund has to be claimed
at the year end after filing of all returns correctly and dealer
other EOU, PSI units, shall be able to claim refund at the year
end by applying in Form 501.

„ Revised returns for incorrect period are to be corrected.

For e.g. a dealer is required to file quarterly return but
has filed monthly return. To claim refund he will have to
file quarterly return.

„ Which is contradictory to Circular 26T of 2006. Also

Refer circular no 56T of 2007 Dt.23-8-2007.

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E-filing of Returns:
„ Dealers filing Monthly and Quarterly returns are
required to file MVAT and CST returns electronically.
„ The E-return should be uploaded before the due
date. The system will generate acknowledgement in
two copies of the E-return filed.
„ The dealer can use digital signature.
„ The who has not signed by using digital signature
shall file copy of acknowledgment within 10 days to
the concerned authority specified in Rule 17(2).

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Thanks
for allowing me to refresh the look….,

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