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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.

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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 interstate purchases cannot 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.

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

Case 3: Set Off on Expenses is taken.

(inclusive method of accounting is followed u/s 145A)

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% 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
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.