CIRCULAR IRCON/Fin/Sys/40013/Circular/07 To 5th Oct06.

ALL THE INDIAN PROJECTS. SUB: ACCOUNTING TREATMENT FOR VAT TRANSACTIONS. It is observed from books of accounts for financial year 2005-06 that VAT paid / payable has been debited in P&L account in some of the project accounts which is not in conformity with the guidelines issued by ICAI on the subject. Accounting treatment of VAT in accordance with the guidelines issued by ICAI is enumerated below:1. Accounting treatment for VAT credit in case of VAT credit is available on input/supplies: The amount of tax paid on purchase of input/ supplies and available for VAT credit should be debited to a separate account say VAT Credit receivable (Inputs) account. Entry at the time of purchase should be recorded as follows:4% vat goods purchase account Debit (By net amount excluding VAT paid) 12.5% goods purchased account Debit (by net amount excluding VAT paid) VAT credit receivable (Inputs) account or (By total VAT paid amount) To bank or suppliers or sub-contractors a/c (by Gross amount) Valuation of inventories on specific data should be made at the net value i.e. input tax paid should not be included in the cost of purchase and the debit balance in VAT credit receivable (inputs) account should be shown on the

assets side of Balance Sheet under the head loans / advances. 2. Accounting treatment for VAT credit in case of capital goods : The accounting treatment recommended here applies to those capital goods which are eligible for the credit where VAT credit is available immediately. VAT paid should be debited to an appropriate account say VAT Credit Receivable (capital goods) Account and the balance which is not available immediately should be debited to another appropriate account say VAT credit Deferred (capital goods) Account. The amount of credit becoming available later should be credited to VAT Credit Deferred (capital goods) Account with a corresponding debit to VAT Credit Receivable (capital goods) Account. Depreciation should be charged on the original cost of fixed assets excluding VAT paid on fixed assets. 3. Accounting Treatment for liabilities adjusted from VAT credit receivable (inputs) or (capital goods) accounts: The VAT credit receivable balance pertaining either to inputs or to capital goods are available for adjusting / setting off following liabilities : a. Liability in respect of VAT payable on sales b. Liability in respect of disallowance /withdrawal of VAT credit. All liabilities adjusted out of the VAT credit receivable balance should be credited to VAT credit receivable (Inputs) Account or Vat Credit receivable (Capital Goods) Account and corresponding debit should be made to VAT payable account. If the amount utilized pertains to disallowance / withdrawal of VAT credit taken on purchase of inputs made during the year due to some reasons should be added to the cost of inputs if available in the stock. If these have already been sold, the disallowance / withdrawal should be debited to Profit & Loss account and treated as expense of the current year.

If the amount utilized pertains to disallowance / withdrawal of VAT credit on Capital Goods the same should be added to cost of relevant fixed assets. Depreciation on the revised amount should be provided prospectively. In case fixed asset no longer exists the relevant amount should be written off in the P&L account with an appropriate disclosure. 4. Accounting Treatment for refund of Input Tax : Input tax can not be adjusted against the VAT payable over the specified period and input tax paid on purchases made for exports out of the country are eligible for refund. The refund of input tax received should be credited to VAT Credit Receivable (Inputs) Account or VAT Credit Receivable (Capital Goods) Account, as the case may be. 5. Valuation of Inventories and Capital Goods : The inventory of inputs and capital goods should be valued net of Input tax as mentioned in para 1. 6. Accounting Treatment for Output Tax i.e. VAT on Sales : The VAT is collected from the customers on behalf of VAT authorities. Accordingly, it should not be recognized as an income. Similarly, payment of VAT should not be treated as an expense. The VAT collected should be credited to an appropriate account say VAT Payable Account. The Credit balance in VAT payable account at the year end should be shown on liabilities side of Balance Sheet under the head Current Liabilities. ( S.K. Pal ) AGM / Tax Copy for information to: 1. P.A. to MD / DF / DW / DP and CVO 2. All EDs and GMs in Corporate office. 3. Advisor Internal Audit.

4. Compilation Cell for creation of relevant Account heads. 5. IRCON Intranet.