A simple example:

30.1.xx - The total purchases that you made amount to $ 1,000 plus $ 150 VAT on inputs.
30.1.xx - The total sales you made amount to $ 4,000 plus $ 600 VAT on transactions.
15.2.xx - You paid the balance to that VAT authorities that was owing to them.

The bookkeeping records will look as follows:

Debit Credit
1. Purchases 1,000
VAT on transactions 150
Current account at bank 1,150
(30.1.xx) Purchases recorded for January

2. Current account at bank 4,600

Sales 4,000
VAT on transactions 600
(30.1.xx) Sales recorded for January

3. VAT on transactions 600

VAT on inputs 150
VAT debit and credit account 450
(30.1.xx) Transfer of surplus to debit & credit account

4. VAT debit and credit account 450

Current account at bank 450
(15.2.xx)Payment of VAT reported for January

What is value added tax (VAT)? What will be

Journal Entries for VAT?
VAT is a tax on the amount by which the value of an article has been increased at each stage of
its production or distribution.

When Goods are bought and you have to pay both purchase value and VAT input or paid both, at
that time, following journal entry will be passed.
Purchase Account Dr. (Value of Purchase)

VAT Input Account Dr. ( VAT on Purchase)

Cash or Bank or Name of Creditor Account Cr. (Value of Purchase + VAT input)

When Goods are Sold and you have to receive both Sale Value and VAT Output or received
both, at that time, following journal entry will be passed :

Cash or Bank or Name of Customer Account Dr. (Value of Purchase + VAT output)

Sale Account Cr. (Value of Sale)

VAT Output Account Cr. (VAT on Sale)

When We pay the Net VAT (Payable) to Government. At that time, following journal entry will
be passed:

Net VAT Payable Account Dr. ( Excess of VAT Output over VAT Input)

Bank Account Cr.

A value-added tax (VAT) is a type of consumption tax that is placed on a product whenever
value is added at a stage of production and at final sale.

When Goods are bought and you have to pay both purchase value and VAT input or paid both, at
that time, following journal entry will be passed.

Purchase Account Dr. (Value of Purchase)

VAT Input Account Dr. ( VAT on Purchase)

Cash or Bank or Name of Creditor Account Cr. (Value of Purchase + VAT input)
Debit note
•S h al l i s s u e De bi t N ot e i f l e ss V AT sh o wn i n V AT C h al l a n
•Shall use "Form VAT -12KA" as Debit Note.
• S h a l l deposit the Debit Note within next working day to the relevant Circle Revenue Officer
•S h al l a dj u st t h e co ns equ e nc e s i n t he c ur r ent , a c cou nt a nd ot h e r r et u rn
Forms\Mushak12 Ka.JPG

Credit Note
Circumstances of Issuance of Credit Note:
•Cancellation of Challanfor any reason
•Sales Return -Partial or Full Quantity
•Changes in supplied goods or services
•Excess VAT shown in VAT Challan
•Shall use "Form VAT -12" as credit note.
•Shall deposit the Credit Note within next working day to the
r e l e v a n t C i r c l e Revenue Officer.
•Shall adjust the consequences in the current account and other
return.

Exception-Credit note shall not be issued under the following circumstances:

•If the goods return after 30 days of delivery.
• I f t h e g o o d s r e t u r n d u e t o b a d
q u a l i t y Forms\Mushak12.JPG

How to treat VAT in books of accounts

May 11, 2005

Part I: How VAT works

In a VAT registered person's books of account, VAT should not be included in income or
expenditure account. This is because a VAT registered person is a collector of tax, which is
neither his income nor expenditure.

Hence, VAT should be shown in the books of account under a separate liability account, which is
ultimately reflected in the balance sheet under creditors. Like any other outward payment, VAT
is also a liability. In some cases where VAT is overpaid, it will be shown as an asset under
debtors.

Capital Goods
In the case of capital goods purchased for business, only the principal sum should be capitalized
leaving the VAT element as a recoverable sum (Input Tax). For example, if machinery worth Rs
10 lakh was purchased and VAT amounting to Rs 1,25,000 paid on it, then only the original
value of Rs 10 lakh is capitalized under 'machinery' account. The VAT amount of Rs 1,25,000
should be debited to the VAT account and ultimately reflected as Input Tax.

Unregistered Traders

In the case of unregistered traders, VAT paid will become part of their cost since they are not
eligible to claim Input Tax. For them VAT will increase the cost of all goods as applicable. In
particular, the VAT on fixed assets shoud be added to the cost of the fixed assets concerned. So
in the above example, the capitalized machinery cost will be Rs 11,25,000 for an unregistered
trader.

Loss of Goods in Transit

Sometimes goods for which Output VAT has already been charged are lost or destroyed in
transit before reaching the premises of the purchaser.

If the goods are lost or destroyed while being transported by the supplier and before being
delivered to his customer, and VAT has already been charged on those goods, then the supplier is
entitled to issue a credit note to remove the VAT because a 'sale' has not taken place since
delivery has not taken place.

If, however, the goods are lost or destroyed in transit already in the custody of the purchaser, the
VAT, which had already been charged, must remain because a 'sale' had already taken place
when the supplier handed over the goods to the customer or his transport agent.

VAT on Trade

VAT is charged on the supply of goods in India. It is charged on any supply of goods made or
provided in India where it is a taxable supply made by a taxable person in the course of
furtherance of any business carried on by him.

'Supply' includes:

 Sale, supply or delivery of goods to another person.

 Sale or provision of taxable supplies to another person.
 Appropriation by a registered person to taxable goods for his own case.
 Making of a gift of taxable goods.
 Letting of taxable goods on hire, lease or other transfers.
 Any other disposal of taxable goods.

Where sale takes place in the course of import of goods into or export of goods out of the
territory of India, such sale shall not be liable to VAT. VAT is also not payable on sale of goods
that takes place in the course of inter-sale trade or commerce.
VAT for Works Contracts

When a contractor starts a works contract, he buys building materials and other inputs for the
project and pays VAT on these goods. He does not have to file a VAT Return although he has
paid VAT on buying building materials for his works contract.

But if he receives an advance, he must pay VAT in the current or following tax period. When the
work is going on and he receives a part payment, he has to file the VAT Return showing this
amount and pay VAT accordingly. On completion of the contract, he is owed some retention
amount for making good any defects. Where the retention amount is receivable after completion
of works, VAT shall become payable in the tax period when retention money is due to be
received.

In case the contractor has sub-contractors to carry out some part of the works, VAT is payable by
the sub-contractor on his portion of sub-contract. On paying VAT to sub-contractor, the main
contractor can claim it against the VAT payable on the amount received by him on its portion of
the main contract.

Is VAT payable if he builds his own house or builds for his staff? Where a person puts up his
own building, whether for office or for residential use, the purchases made by him thereof are for
purpose of use/ consumption in the building.

Since he is not making any sale, he is not liable to pay VAT in such a case. However, for the
purchases he makes from a registered dealer, the dealer will collect VAT from the owner of the
building. So he cannot claim his VAT.

What happens to his VAT payments when he has not been paid by government agencies? VAT is
payable on consideration received or receivable on sale of goods. It is payable by seller of goods
irrespective of the fact whether the seller receives VAT amount from purchaser or not.

Even where VAT is not collected from purchaser of goods, it is still payable to the government
by the seller. The same would also apply even in case where purchaser is a government agency.

Under the previous Sales Tax laws, a contractor could use two methods of calculating Sales Tax.
One method consisted of calculating the price and the quantity of building materials (cement,
steel, timber, hardware and electrical goods to name the major ones) and to arrive at the total
value of these inputs.

Then the current rate of Sales Tax was applied and the total figure was arrived at. The second
method was the composition method. Here Total Contract Value 'TCV' was charged at 4 per cent
Sales Tax.

Another alternative of the composition method was termed 'Abatement for Labour' as in
Karnataka. The value of labour input is fixed at 30 per cent and the balance of 70 per cent is
taxable at the rate of 4 per cent.
Delhi has separate laws for works contracts.

Under VAT, two options have been proposed:

 VAT on the materials value of Works Contracts with Input Credits.

 Composition tax of 4 per cent on works contracts without Input Credits. This is more
likely to happen.

Zero Rating

Under the VAT laws, certain supplies or goods or persons are taxed at zero rate. No tax is
charged on such supply. In all other aspects it is treated as 'a taxable supply' and accordingly, the
rate of tax charged on it is nil.

Subject to the satisfaction of the Commissioner for VAT, the following supplies are taxed at zero
rate:

 The export of goods.

 The supply of goods to designated foreign aid/ funded capital investment projects where
the agreement specifically provides for tax exemption, provided that the supplies are
acquired prior to payment of taxes.
 The supply of goods to a Special Economic Zone (SEZ) eligible for duty and tax free
importation.
 The supply of goods to any person or organization specified in the VAT Act such as
embassies, UN bodies and other multinational organization.
 Ship stores supplied to international sea and air carriers on international voyages or
flights;
 The supply of goods to exporters under conditions prescribed by the Commissioner.
 The supply of taxable goods under a contract to an official aid funded project where the
agreement specifically provides for remission of tax.

Supplies Made in Preparation of Goods for Exports

Some manufacturers of wrapping or packaging materials who pack goods for export and some
clearing and forwarding agents who handle goods for local exporters argue that no VAT should
be charged on such materials because exported goods are zero-rated.

These arguments are not legally valid as these are two different supplies. These traders export
nothing in these circumstances. They merely make taxable supplies in India for local traders in
the export business. Their supplies are, therefore, taxable.

The issue of zero-rating only arises when an exporter exports the goods out of India. If the
exporter chooses to apply for registration and is duly registered, he will reclaim the ITC or Input
Tax Credit or VAT charged to him by these traders in which case the goods will go to the export
market free of VAT. If, however, he chooses not to be registered for VAT, then he cannot
reclaim ITC.
Zero-rated status has been given to numerous public bodies, privileged persons and institutions.
Taxable goods are zero-rated when imported or purchased before clearance through the customs
or purchased before the imposition of tax by or on behalf of the specified public bodies,
privileged persons and institutions subject to the limitations specified.

Zero-Rated Goods

These are mainly essential goods. However, the list of these goods must be referred to for any
specific query.

Input Tax Deduction Exclusions

If you become a registered tax person, you are entitled to ITC for VAT paid on inputs relating to
your taxable supplies. However, such deductions can only be made if you are in possession of a
tax invoice showing VAT charged to you by your supplier or a customs entry for imported
goods.

What will be the journal entry when VAT

paid on purchases is more than VAT collected
on sales, i.e. input greater than output?
Before knowing the journal entries, I am explaining VAT. VAT is value added tax. India is
adopting VAT formula from western countries. Before this, sale tax was collected. Value added
tax is charged on purchase and sale. On purchase, it will be VAT input. On sale, it will be VAT
Output. Excess of VAT output over VAT input will deposit in state Govt. account. If you are
buying or selling the Good which are under VAT, you have to keep its record.

For recording, you have to pass following journal entries of VAT.

1. When Goods are bought and you have to pay both purchase value and VAT input or
paid both, at that time, following journal entry will be passed.

Purchase Account Dr. (Value of Purchase)

VAT Input Account Dr. ( VAT on Purchase)

Cash or Bank or Name of Creditor Account Cr. (Value of Purchase + VAT input)

Reason of this Journal Entry :

We have bought the goods, it increases our current asset. Increase of asset will always debit.
VAT input is also our current Asset or Negative Current Liability because We paid this to our
creditor or supplier (for paying govt.) but still our net liability has not been fixed. If we received
VAT output same to VAT input, then VAT Input account will automatically written off. If VAT
input will be more than VAT Output, we have to Get money from Govt. So, VAT input account
will be Debit. If we are final consumer, we need not show the VAT Input account, its cost will be
included in purchase account. So, purchase expense will increase and debit in our journal entry.

2. When Goods are Sold and you have to receive both Sale Value and VAT Output or
received both, at that time, following journal entry will be passed

Cash or Bank or Name of Customer Account Dr. (Value of Purchase + VAT output)

Sale Account Cr. (Value of Sale)

VAT Output Account Cr. (VAT on Sale)

Reason of this Journal Entry :

When we sell any goods we receive cash or bank. If we sell the goods on credit, we have to get
money from our customer. So, Receivable money from our customer is just like given loan. So, it
is also increase of our current asset. So, in case of cash sale, we will debit cash or bank account.
In case of credit sale, we will debit to debtor or customer account. We will credit to sale account
because in sale, we transfer the ownership of goods to other party. So, it is decrease of our
current asset. So, sale account will be credit. All the amount of VAT which we will receive on
sale will not go to our pocket. It is the money of Govt. Because Govt. can not get the money of
tax from each part, so, we have obtained the tax on the behalf of Govt. So, it is increase in our
current liability. So, this account will credit.

3. When We pay the Net VAT (Payable) to Government. At that time, following journal
entry will be passed.

Net VAT Payable Account Dr. ( Excess of VAT Output over VAT Input)

Bank Account Cr.

Reason of this Journal Entry :

When we will debit VAT Payable account, it means, we are decreasing our current tax liability.
Every payment through bank account will decrease our current asset, so bank account will credit.
We have to show only excess of VAT output over VAT Input because the VAT which we have
to pay already through purchasing need to pay again. So, we will deduct VAT input from VAT
output.

4. When there is the Change in VAT input or VAT output Rates, at that time following
Entry will be passed.
I have already explained that State Govt. can change the VAT Rates and its applying date. So, if
you have passed the journal entries with old rate, you need to adjust your VAT Entries. Different
accounting software have different procedure to adjust it more fastly, you can learn the
procedure at here. Adjustment journal entry will be different, if we have different case. Means,
VAT input same but increased VAT Output. Or VAT input increased but same the VAT Output.
If both VAT input and VAT out has increased. Following is its example

Because VAT is increased from 4% to 5%. It means net increase in input vat is only 1%. Total
purchase is Rs. 1000. Total purchase's 1% is Rs. 10 and surcharge is 10% which is calculated on
Rs. 50 and it will be Rs. 5. So, total value of vat increase is Rs. 15.

It means our (creditors) current liability will increase. So,

VAT input account Dr. 15

Creditor Account Cr. 15

Accept the voucher entry.

Pass next voucher entry for adjusting vat output.

Because VAT Out is increased from 4% to 5%. It means net increase in Output vat is only 1%.
Total sale is Rs. 2000. Total sale's 1% is Rs. 20 and surcharge is 10% which is calculated on Rs.
100 and it will be Rs. 10. So, total value of vat increase is Rs. 20+ 10 = Rs. 30

It means our (debtors) current asset will increase. So,

Debtor Account Dr. 30

Output VAT Account Cr. 30

Difference between VAT output and VAT input is Rs. 15 and if we pay this Rs. 15 to Govt.
following entry will pass.

VAT Payable Account Dr. 15

Bank Account Cr. Rs. 15

**At the Time of Purchase;

Purchase A/c -Dr

Input VAT- Dr.
 To Supplier A/c

At the Time of Sale

Vendor A/c- Dr.

To Sales A/c
To Output VAT A/c

At the End of Month/tax period

Output Vat A/c- Dr

To Input VAT A/c

Balance of Input VAT at the End of Accounting Year is Current Asset under head Advances for the Firm &
It should be reflected as VAT Receivable.

 Vat collected from Customer is credited into “ Vat Payable account” .

Vat paid on purchase is debited into “ Vat receivable Account” .

At he end of month the balance of Vat receivable is transferred to Vat payable.

In case balance in vat receivable is higher, only the amount equal to vat payable is transferred
and the balance is left in Vat receviable.
The balance in VAT receivable is claimed in next month.

The balance in vat payable after transfer from vat receviable is paid to the government.

 When purchases are made:

Purchases A/c dr

Input VAT A/c dr

To. Sundry creditors A/c

When sales are made :

Sundry debtors A/c dr

To output VAt A/c

To Sales A/c

When input VAT is greater than Output VAT,

Output VAT A/c dr

Input VAT credit A/c dr

To Input VAT A/c

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