Tax Audit Report

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

22 June 2011 Dear Experts,

Kindly guide whether to show the VAT collected on sales along with sales and VAT paid on purchases along with the Purchases in the Trading Account. Eg. Sales Rs. 1000/- + VAT collected Rs. 50/- Total sales Rs. 1050/- and like wise for purchases.

I have come across some of the audit reports that gives this treatment and shows the VAT paid by challan in the Profit & Loss Account.

Whether this treatment is correct? Whether this method reflects the true amount of profit? Whether section 145A of the Income Tax Act gets affected?

Other treatment that is common is, not to show the VAT at all in the trading and profit & loss account and to show it directly as payable or receivable in Balance Sheet?

Kindly guide on both the methods and also suggest which is the appropriate method?

CA Ashwani Agarwal

CA Ashwani Agarwal (Expert)
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23 June 2011 The second method is the correct method as VAT is neither an income nor an expense of the entity. When an entity pays VAT on purchases it becomes advance VAT paid(Asset) and when it collects VAT on sales, the entity is liable to pay the same to the govt. So it becomes liability. We can set off both from one another and only pay the balance amount to the govt.