In case of purchases liable to Purchase Tax, the following procedure should be adopted: –
1. Pass a journal entry to create Purchase Tax liability as shown in pic 1. After passing this entry, the amount of Purchase Tax shall become recoverable as and when taxable goods are manufactured or goods are resold.
2. When you resale the goods or manufacture taxable goods, you should pass the entry to claim Purchase Tax recoverable as ITC. An example journal entry is shown in pic 2.
3. If you are manufacturing tax-free goods, you need to surrender your right to claim Purchase Tax recoverable as ITC. In such a case, you need to first claim the ITC as discussed in point 2 above. Since this ITC claim is not allowed, you need to reverse this ITC claim by passing a journal entry as shown in pic 3. This procedure has to be followed to surrender the Purchase Tax recoverable amount keeping in view the requirements of Worksheet 2A.
