VAT Details

Introduction

VAT is a system of indirect taxation, which has been introduced in lieu of sales tax. It is the tax paid by the producers, manufacturers, retailers or any other dealer who add value to the goods and that is ultimately passed on to the consumer. VAT has been introduced in India to ensure a fair and uniform system of taxation. It is an efficient, transparent, revenue-neutral, globally acceptable and easy to administer taxation system. It benefits the common man (consumer), businessman and the Government.
VAT enhances competitiveness by removing the cascading effect of taxes on goods and makes the levy of tax simple and self-regulatory, ensuring flexibility to generate large revenues.
The cascading effect is brought about by the existing structure of taxation where inputs are taxed before a commodity is produced and the output is taxed after it is produced. This causes an unfair double-taxation. However, in VAT, a set-off is given for input tax (tax paid on purchases). This results in the overall tax burden being rationalized and a fall in prices of goods.
VAT makes the tax structure simple, hassle-free and export-oriented. The integration of VAT with Tally will help you in the smooth functioning of your business and eliminate the complications that might otherwise arise in VAT.
Concept of VAT

The essence of VAT is in providing set-off for input tax and this is applied through the concept of input credit/rebate. This input credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax. Value Added Tax (VAT) is based on the value addition to the goods, and the related VAT liability of the dealer is calculated by deducting the input credit from the tax collected on sales during the payment period.
This concept is explained with an example, in the Computation of VAT section.
VAT works in two different ways:
1. If VAT-registered business receives more output tax than the taxes paid as input, they will need to pay the difference to the Commissioner of Taxes (State).
2. If the input tax paid is more than the output tax collected,
o You can carry forward the Input credit and adjust it against the output tax in the subsequent months.
o You can have the Input Credit refunded to you by the Government at the end of the current or following year.
o You can receive refunds for Input Credit on exports within a period of three months.
General terminologies used in VAT

Term
Description
Input tax

Output tax

Input Credit

Composite Dealers
This is a tax paid on purchases

This is a tax charged on sales

The amount of Input tax that is permitted to be set off against Output tax.

Dealers with annual gross turnover not exceeding a certain threshold (threshold - decided by the respective State Governments) can opt for a composition scheme whereby they will pay tax as a small percentage of their gross turnover. However, retailers opting for this composition scheme will not be entitled to Input Credit. The State Governments fix the periods and the procedures for the payment of the lump sum.

Justification of VAT

VAT was adopted because the Sales Tax system is complex and induces non-compliance. It has been found to be a hindrance in the economic growth of Industry, State and the Country. This causes a huge loss of revenue to the government.
VAT also helps in eliminating the dreaded cascading effect of Tax.
For instance, in the existing structure, inputs are taxed before a commodity is produced and the output is taxed after it is produced. This causes an unfair double taxation with cascading effects. However, in VAT, as a set-off is given for input tax as well as tax paid on previous purchases, overall tax burden will be rationalized and prices in general will fall. VAT thus makes the tax system simple and transparent.
Advantages of VAT over Sales Tax

· As VAT is a multi-point tax with set-off for tax paid on purchases, it prevents repeated taxation of the same product.
· Simple and Transparent: In the Sales tax system the amount of tax levied on the goods at all stages is not known. However, in VAT, the amount of tax would be known at each and every stage of goods sale or purchase.
· VAT has the flexibility to generate large and buoyant revenues, as it levies tax on value additions.
· Zero rating of tax on exports is possible in case of VAT.
· Fair and Equitable: VAT introduces uniform tax rates across the state so that unfair advantage cannot be taken while levying the tax.
· Procedure of simplification: Procedures related to filing of returns, payment of tax, furnishing declaration and assessment are simplified under the VAT system so as to minimize any interface between the tax payer and the tax collector.
· Ability to provide same revenue to the Government with lower rates of tax.
· Tax does not become a cost of doing business.

VAT Rates

According to the White Paper, there are 550 categories of goods under the VAT system. They are classified into the following four groups, depending on the VAT rate:
VAT @ 4%
The largest number of goods (270) comprising of basic necessity items such as drugs and medicines, agricultural and industrial inputs, capital goods and declared goods are under 4% VAT rate.
Exempted from VAT
There are about 46 commodities under the exempted category. This includes a maximum of 10 commodities that each state would be allowed to select, from a broader approved list for VAT exemption. The exempted commodities include natural and unprocessed products in unorganized sector as well as items, which are legally barred from taxation.
VAT @ 1%
This is for a specific category of goods like gold, silver, etc.
VAT@12.5%
The remaining commodities are under the general VAT rate of 12.5%.
Note: The few goods that are outside VAT as a matter of policy would include liquor, lottery tickets, petroleum products, as the prices of these items are not fully market-determined. These items will continue to be taxed under the sales tax act of the respective states.

Computation of VAT and Profit
Raw Material SuppliarPrice of Raw material 100
Input Tax Paid 10
Selling Price 110

Supplirs Collect 110/- from manufacturer and pays to the Govt

Manufacturer




A.Cost of Goods 100
B.Input Tax 10
c.Total Purchase cost 110

D.Product Oprice 120
E.Output Tax Charged 12
Total selling bPrice 122

G.Vat PayableE-B 2
Profit= F-G-C 20

Retailer






A.Cost of Goods 120
B.Input Tax 12
c.Total Purchase cost 132

D.Product Oprice 150
E.Output Tax Charged 15
Total selling bPrice 165

G.Vat PayableE-B 3
Profit= F-G-C 30
Consumer







The above diagram depicts computation of (10 %) VAT at each stage of business. Hence, it is not the manufacturers and retailers but only the consumer who has paid 10% VAT to the government. The profits for manufacturers and retailers thus remain unaffected



VAT in Tally

Features of VAT in Tally
VAT is completely integrated with Tally. The VAT functionality in Tally supports the following features, making it easier for computation:
o Quick & easy setup
o Fast & error-free voucher entry
o Pre-defined list of sales & purchase classifications
o Complete tracking of each transaction till annual returns
o Printing of Tax invoice
o VAT computation report
o Better VAT-returns management
o Monthly Return
o
Enabling VAT

Go to Gateway of Tally> Accounts info. > F11: Features > Statutory & Taxation. Set Enable Value Added Tax (VAT) and Set/Alter VAT Details to Yes as we need



VAT Details
State: Karnataka
Type Of dealer :Regular
Regular VAT Applocable From:2006

On enabling Set/Alter VAT Details to Yes, Tally will prompt with VAT Details Screen.





VAT Details
· Select the State name.
· Set Type of Dealer? to Regular
· Enter the Regular VAT Applicable From date
· Accept the screen to save.
Note: All Classifications and Statutory forms shown here are based on the Karnataka State Model.
Configuring Ledger for VAT Reporting

VAT Classification
The VAT Classification is a list of VAT rates, which describes the nature of the Business Activity and the type of transaction. These are in-built in the system and will be updated if and when any statutory changes take place.
Some of the VAT classifications are:
o Input VAT @ 4%
o Input VAT @ 1%
o Input VAT @ 12.5%
o Output VAT @ 1%
o Output VAT @ 4%
o Output VAT @ 12.5%
o Purchases - Capital Goods
o Purchases - Exempt
o Purchases from unregistered dealers
Depending on the type of the business, type of transaction, and the statutory requirements of your State, you will need to select the appropriate classifications from the list during Ledger creations, voucher entries, etc.
The Sales and Purchase transactions are segregated based upon the classification selected during voucher entry and shown in the VAT computation. In the VAT Computation you can view the classification-wise VAT and Nett Values.
Ledger Masters
The VAT Classification will be displayed as a drop down list in the Ledger Masters. Tally gives the flexibility to the user, to either have the classification selected in the Ledger Master tagged to all transactions, Or, select different classifications each time during voucher entries. This is explained in detail in the Vouchers and Transactions section.
The Ledgers that are affected by VAT are:
o Purchase Ledger
o Sales Ledger
o Duties and Taxes Ledger
o Direct Expenses/Income
o
Creating a Purchase Ledger for VAT

The following additional fields pertaining to VAT can be seen in the Ledger entry screen.
Go to Gateway of Tally > Accounts Info > Ledger > Create/Alter

Ledger Creation: in tally
Name: :Purchase @4%


Under : Purchase Accounts
Maintain Bill By Bill : NO
Inventary values are Effected : Yes
Statutary Information
Used in Vat Returns: Yes Accept Yes/No

Used in VAT Return
Set this to Yes if you wish to select VAT/Tax class for this Ledger.
Note: Tally gives the flexibility to the user to either have the classification selected in the Ledger Master tagged to all transactions Or select different classifications each time during voucher entries. For more details refer Vouchers and Transactions.
The rest of the Ledger creation process is the same as in default Tally.
In the above example we have selected a VAT classification of 4%.
VAT classification - Purchase-Exempt
Let us take an example of a VAT exempted transaction below.

Ledger Creation:in tally
Name: :Purchase Exempt


Under : Purchase Accounts
Maintain Bill By Bill : NO
Inventary values are Effected : Yes
Statutary Information
Used in Vat Returns: Yes Accept Yes/No

Used in VAT Returns
Set this to Yes and select Purchases - Exempt from VAT/Tax class for this Ledger.
In above select Purchase exempt and Save by Accepting above EX Accept Yes/No

Accept the screen to save.

Creating a Supplier ledger
Create a ledger for the Supplier from whom you are buying the VAT exempted item:
Ledger Creation:in tally
Name: :Suppliar


Under : Sundry Creditors
(Current Liabilities) Accept Yes/No

Creating a Sales Ledger for VAT

Like in the Purchase Ledger screen, select the required VAT/Tax classification in the Sales Ledger as well.
Go to Gateway of Tally > Accounts Info > Ledger > Create/Alter
Ledger Creation: in tally
Name: : Sales @4%


Under : Sales Accounts
Maintain Bill By Bill : NO
Inventary values are Effected : Yes
Statutary Information
Used in Vat Returns: Yes Accept Yes/No

Used in VAT Return
Set this to Yes if you wish to select VAT/Tax class for this Ledger.
Note: Tally gives the flexibility to the user to either have the classification selected in the Ledger Master tagged to all transactions Or select different classifications each time during voucher entries. For more details refer Vouchers and Transactions.
The rest of the Ledger creation process is the same as in default Tally.
In the above example we have selected a VAT class of 4%.
The rest of the settings are the same as in default Tally.

Creating a VAT Ledger under Duties and Taxes

The ledger for Input VAT is shown below:

Ledger Creation:in tally
Name: :Input VAT @4%

Under : Dutiesan Taxes
(Current Liabilities)
Type of Duty/Tax:VAT
Default VAT/Tax Class: Input VAT @4%

Maintain Bill By Bill : NO
Inventary values are Effected : NO
Percentage of Cal:4%:
Method Of Calculation:ON VAT Rate
Accept Yes/No

Type of Duty/Tax
On the selection of group Duties and Taxes, the list of Tax Types CST, others and VAT, is displayed. Select VAT for VAT related transactions.
Note: If you have VAT and TDS enabled, the list will also include TDS.
VAT/Tax Class
Like in the Purchase and Sales Ledger, this is a drop down list containing the VAT classifications. Select the appropriate classification or select Not Applicable if you wish to select the classifications at the Voucher level.
Percentage of calculation
This field will display the VAT rate that you selected in the VAT/Tax class field.
Method of calculation
This will display On VAT Rate if you have selected VAT under Type of Duty/Tax.

Output VAT
Ledger Creation:in tally
Name: :Output VAT @4%

Under : Dutiesan Taxes
(Current Liabilities)
Type of Duty/Tax:VAT
Default VAT/Tax Class: Output VAT @4%

Maintain Bill By Bill : NO
Inventary values are Effected : NO
Percentage of Cal:4%:
Method Of Calculation:ON VAT Rate
Accept Yes/No

On selection of CST
Ledger Creation:in tally
Name: :CST On Sales

Under : Dutiesan Taxes
(Current Liabilities)
Type of Duty/Tax:CST
Default VAT/Tax Class: Inter State Sale

Maintain Bill By Bill : NO
Inventary values are Effected : NO
Percentage of Cal:4%:
Method Of Calculation: ON Total sales
Accept Yes/No

Type of Duty/Tax
On selection of CST for Type of Duty/Tax, you can select either Inter-State Purchases or Inter-State Sales for Tax Class. Once you select this, you need to manually enter the Percentage of Calculation.
Method of Calculation
Once you enter the Percentage of calculation, select the Type of Duty from the drop down list.
Creating a VAT ledger under Direct Expenses/Income

Direct Expenses/Income
The VAT/Tax Classification is selected in the same manner as for the Sales and Purchase Ledger screen
VAT /Tax Class
Select Purchase@12.5%
The VAT related fields in the Direct Expense ledger is the same as for Purchase and Sales Ledgers.

Ledger Creation :in tally
Name: : Freight

Under : Direct Expenses
Statutary Information
Used in Vat Returns: Yes Accept Yes/No

The VAT related fields are same for Direct Income Ledger as well.

Vouchers and Transactions

The entire Data entry and Reporting architecture is based upon VAT Classifications selected during voucher entry.
The Vouchers that are affected by VAT are as follows:
o Purchase
o Sales
o Debit Note
o Credit Note
o Journals
Creating a Purchase Voucher (As Invoice) for VAT

Invoice can be classified into As Item Invoice and As Accounts Invoice. The VAT functionality though, is the same for both.
Given below are examples of transactions in Item Invoice with implementation of VAT.
As Item Invoice
The selection and display of the VAT classifications in the vouchers differ according to the settings in the F12: Configuration screen.
F12: Configuration screen
Configure Invoices/delivery Notes/Orders
Accept supplementary Details:Yes
Other Options
Allow selection of VAT/Tax class during Entry:Yes
Use Common Ledger A/c for Item Allocation - NO
If you wish to use more than one ledger during a voucher transaction, you have to set this to No. This way, you need to select a ledger for every item during voucher entry. When you set this to No, you can see the VAT/Tax Class at the header region of the screen if the Allow Selection of VAT/Tax Class during entry field is set to Yes.
Allow Selection of VAT/Tax Class during entry?-YES
Once you select Yes, you have the option to select the VAT classifications in the field VAT/Tax Class which is in header region of the Voucher screen. If it is set to No, the VAT/Tax Class will not be displayed in the voucher screen and the classifications will be taken from the Ledgers.
Consider the following examples
· Example 1: Purchase@4%
The following is the entry for the purchase of item1 when VAT classification is Purchase @ 4%. This classification is selected from a drop down list at the header region of the screen as shown below.

Account Vocher Creation:
Purchase no:3
Party Ac Name:Suppliar
VAT/Tax class:Purchase@4%
Name of Item
Stock iteam QTY Rate Amount
Note: In the VAT/Tax Class field, there is an option called Not Applicable. You can select this option if you need different classifications for each item during voucher entry.
You will need to select the Duties and Taxes ledger after you are done with the entry of all items.

Account Vocher Creation:
Purchase no:4
Party Ac Name:Suppliar
VAT/Tax class:Purchase@4%
Name of Item
QTY Rate Amount
Stock iteam 150 100 15000

Input VAT @4% 4% 600
It will now calculate the VAT amount and add it to the Amount to give you the total.

F12: Configuration screen
Configure Invoices/delivery Notes/Orders
Use common leder acc for item allocation:Yes

Use Common Ledger A/c for Item Allocation-YES
When you wish to use the same Ledger for all items in a transaction, you can set this to Yes. Thus, you need not select a Ledger each time you enter an item during the voucher transaction.
The following example to demonstrate the functioning of Assessable Value is shown by setting this field to Yes.
Assessable Value: It is the value on which VAT is to be calculated. The value is arrived at after making proper deductions towards Trade discounts if any, and adjustments towards Excise/ED Cess payable. It is up to the user to calculate this and enter it under the Assessable Value column. This manual entry gives flexibility to the user to make the calculations as per the local statutory requirements.
As this example does not include discount or Excise/ED Cess taxes, the Assessable Value will be Rs. 5000, which is retrieved from the Amount column.
Let us assume we have:
o A discount of Rs.200 on purchases
o Excise tax of Rs.800 (16% of 5000)
o ED Cess of Rs.16 (2% of 800)
1. Subtracting the discount amount: 5000 -200 = 4800
2. Adding the Excise tax amount : 4800+800= 5600
3. Adding the ED Cess amount : 5600+16= 5616
Therefore, our Assessable Value amount is Rs.5616.
VAT is now calculated on this amount automatically on the selection of the tax ledger (Rs.224), as shown below.

Account Vocher Creation:
Purchase no:4
Party Ac Name:Suppliar
Purchase Ledger: Purchase@4%
VAT/Tax class:Purchase@4%
Name of Item
QTY Rate Amount
Stock iteam 100 50 5000

Discount -200
Excise 16% 800
ED cess 2% 16
Input VAT@4% 4% 224.64

The entries are to be passed similarly for Sales Voucher and Credit/Debit notes.
· Example 2: Purchase-Exempt
This example is to demonstrate the working of Tally in the VAT exempted transactions and also to show the type and patterns of reports generated for such transactions.
We are passing the following entry for the purchase of the VAT exempted item.
Account Vocher Creation:
Purchase no:4
Party Ac Name:Suppliar
Purchase Ledger: Purchases
VAT/Tax class:Purchase-Exempt
Name of Item
QTY Rate Amount
Stock iteam 100 50 5000

As it is exempt from VAT, this particular transaction does not affect the VAT amount in any way. Similarly for Inter-state Sales/Purchases.
Note: In the Voucher mode there is no option for selection of the VAT classification at the header region. Therefore, the VAT classification selected in the Ledgers will apply always.
Creating a Sales Vouchers (As Invoice) for VAT

Functionality of Sales Voucher is similar to that explained in the Purchase Voucher. However, in order to understand the calculation of VAT, let us take the following example:


Account Vocher Creation:
Sales:4
Party Ac Name:Customer
Sales Ledger: Sales
VAT/Tax class:Sales@4%
Name of Item
QTY Rate Amount
Stock iteam 8 15 1200

OUT PUT VAT @4% 4% 48

Assessable Value: The calculation is similar to that explained in Purchase voucher.
Printing Configuration
The Printing Configuration screen after the addition of new features will appear as follows:

INVOICE Printing Configuration
See IN Tally

Tax Invoice
You will see the following new sections pertaining to VAT in the Invoice:
Title of Document
This field prints the title entered in the Voucher Type Master.
E-mail
The e-mail address of your Company (as specified in the Company Master) will also be printed in the Sales Invoice, just below the address.
VAT %
This column can be enabled by setting Print VAT % to Yes in the Printing Configuration screen. The rate of VAT from the VAT classification selected during voucher entry is printed in this column.
VAT Analysis
This field prints the VAT amount on the total Net Value. That is, Rate of VAT, Assessable Value and VAT Amount is printed at the bottom right of the screen.
VAT Amount (In words)
Prints the VAT amount in words.
Company's TIN/LST No.
Prints the Company's TIN or LST number.
Company's CST No.
Prints the CST number entered in the Company master.
Buyer's TIN/Sales Tax No.
Prints the buyer's TIN or Sales Tax number, as the case may be.
Date & Time
The field Print Date & Time in the Printing Configuration screen needs to be set to Yes in order to print the date. However, in case Excise details are enabled the Date & Time is printed regardless of the setting in the Printing Configuration screen.
Declaration
The declaration entered in the Sales Voucher type Master will be printed. If it is not entered in the Sales Voucher type, Tally will print the following line by default:
"We declare that this invoice shows the actual price of the goods described and that all particulars are true and correct".
If you do not require this, you can set Print declaration to No in the Printing Configuration screen shown above.
Generated by
By default the Generated by field will display This is a Computer Generated Invoice. However, you can change it if required. This is printed at the bottom of the Invoice.
Copies of the Invoice
For five or more copies of the Invoice, each copy will be marked as follows:
Original - Original Buyer's Copy
Duplicate - Duplicate Seller's Copy
Triplicate - Triplicate Transporter's Copy
Quadraplicate - Extra copy
Fifth and above - Extra Copy

Creating / Altering Sales Voucher Type Master for VAT

New Fields
The following are the new fields added in the Sales Voucher Type Master.
Go to Gateway of Tally > Accounts Info > Voucher Types > Alter
Default Print Title
You can set the title for the Tax Invoice in the Default Print Title field. This is helpful since you need not change the title in Print Configuration each time you use different voucher types. For example, you can set it as Tax Invoice for Local Sales and Bill of Sale for Retail Invoice.
Is Tax Invoice
If Is Tax Invoice is set to Yes and the number of copies to be printed is more than one then the copy type is printed as follows:
1.Original – Buyer’s Copy
2. Duplicate – Seller’s Copy
3. Triplicate – Transporter’s Copy
4. Quadruplicate – Extra Copy
5. Extra Copy
If Is Tax Invoice is set to No, and the number of copies to be printed is more than one, then the copy type is printed as follows:
1. Original
2. Duplicate
3. Triplicate
4. Quadruplicate – Extra Copy
5. Extra copy
Declaration
Provision is made to enter the Statutory declaration if applicable. The same will be printed in the Tax Invoice.

Vocher Type Alteration
(See In Tally)
Note: If the declaration field is left blank, Tally's default declaration will get printed in the Invoice.
Voucher Class
Given here is an example of how a Tax Invoice having items with multiple tax rates can be generated using Voucher Class.
If you press Enter on Name of Class in the screen displayed above you will see the following screen:
You can make the entries as required.
Vocher Type Alteration
See in Tally
Override using Item default
It is possible to enter a Tax Invoice having multiple items with different VAT Rates. Item default refers to the Sales Ledger account that you may have set for a stock item.
If you set Override using Item default to Yes and specify a Sales Ledger in the Class Table the sales Ledgers set in the item masters will still be considered.
Setting Sales Ledger in the Item Master
Consider the Item Masters shown below:

Stock Item Creation
See in Tally

Set Set/Modify Default Ledgers for Invoicing to Yes.
The following screen displays
Accounting Vocher Creation
See in Tally
When entering Sales Invoices with the Voucher class, note that you will not be able to edit Assessable Value Field. If you have an additional ledger say, Discount Ledger there is a facility to edit the Assessable Value manually in the sub screen that pops up when you press Enter on the Output VAT Ledgers.
In the above example, the discount has been deducted from the assessable value.
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