1. Checkpoints of MVAT Accounting in Tax Audit.
By CA Umesh Sharma

2. Journey of VAT accounting:
1st lap: Review of Guidance Note on “Accounting for State Level VAT”.
2nd lap: Review of AS-2 “Valuation on Inventories”
3rd lap: Review of AS-10 “Accounting of Fixed Assets”
4th lap: What details should be available for Sales.
5th lap: What details should be available for Purchases.
6th lap: Issues in Accounting of VAT.
7th lap: Review of Section 63 of MVAT Act 2002.
8th lap: Checkpoints summary of MVAT in Tax audit

3. 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.

5. 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”

6. 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.

7. 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”

8. 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…”

9. 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.
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?

12. 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.

13. 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”

14. 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”

15. 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.

18. 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 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 , 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.

20. 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.

21. 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) Account may be debited and Purchases Account may be Credited.

22. 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.

23. Adjustment of refund in any month of a year:
Adjustment of Refund in any month of year:
Section 50(1) & (2) amended w.e.f 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.

24. 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)

25. 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)

26. 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.

27. 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.

28. Auditors Comment on Lehman Brothers Balance Sheet:
“On the Left hand nothing is Right.
And
On the Right hand nothing is Left.”

29. Checkpoints of MVAT in Tax Audit:
Cross check the applicability of Guidance Note on “VAT Accounting” to dealer.
Check working of Sec145A under Income tax Act, 1961 i.e., Sales, Purchases, Stocks should be inclusive of tax.
Depreciation calculation on Fixed assets after Setoff of MVAT, if any.
Carried forward of Refund of MVAT not allowed to next year.
Crosscheck of liability/refund as on March end with MVAT returns filed.

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

31. Thanks