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Treatment of Exempted Stock

Open an A/c for Purchase Exempted and attach VAT Class: 'Purchase Punjab Exempted without Notional ITC'. While making purchases pass the journal entry as under: -

  
A/c Head
V.Class
Debit
Credit
Purchase Exempted
Purchase Pb. Exempted without Notional ITC
10000.00
 
Party A/c
 
 
10000.00


For selling these exempted goods open a separate Sale A/c and attach VAT Class: 'Sales Punjab (Exempted Cost)'  with it. if you sell 50% of the above goods for Rs. 6000.00 then it indicates that goods worth Rs. 5000.00 are sold at a profit of Rs. 1000.00.  Journal Entry will be as under:-
  
A/c Head
V.Class
Debit
Credit
Party A/c
 
6000.00
 
Sale Exempted Cost
Sales Punjab (Exempted Cost)
 
6000.00

          
Now Gross profit of Rs. 1000.00 has been credited to Sale Exempted Cost A/c. This Amount should be transferred to relevant sales A/c. There may be two methods for transferring the amount of profit to relevant sales A/c.

Method1 (VAT is paid over & above the Gross Profit Part of sale)
In this case Entry shall be passed as under:-
  
A/c Head
V.Class
Debit
Credit
Sale Exempted Cost
Sales Punjab (Exempted Cost)
1000.00
 
Vat Expenses A/c
 
125.00
 
Sale 12.5% A/c
Sales Punjab Taxable 12.5%
 
1000.00
Vat Output A/c
Output Tax
 
125.00

Method2 (Gross Profit part of sale is considered inclusive of VAT)
In this case Entry shall be passed as under:-

  
A/c Head
V.Class
Debit
Credit
Sale Exempted Cost
Sales Punjab (Exempted Cost)
1000.00
 
Sale 12.5% A/c (Incl. Tax)
Sales Punjab Taxable 12.5%(Incl. Tax)
 
1000.00


See Help Topic: Sales Inclusive of Tax

Treatment of Incentive received against Exempted Purchases

When incentive is received we pass an entry like:
A/c Head
V.Class
Debit
Credit
Supplier A/c
 
1000.00
 
Incentive Received A/c
 
 
1000.00

Department of the opinion that dealer should pay the VAT on incentive because incentive is also in the nature of Gross Profit earned. To male payment of VAT on incentive the following entry may be passed.
  
A/c Head
V.Class
Debit
Credit
Incentive Received A/c
 
1000.00
 
Vat Expenses A/c
 
125.00
 
Sale 12.5% A/c
Sales Punjab Taxable 12.5%
 
1000.00
Vat Output A/c
Output Tax
 
125.00

This entry is passed as per Method 1 as explained above. You may alter the entry if you want to use Method 2 as discussed above.