This article explains the differences in law on account of the availability of Value Added Tax (VAT) credit and the appropriate accounting treatment for the same. It also focuses on the Institute of Chartered Accountants of Indias (ICAI) guidance note on "Accounting for State Level Value Added Tax" for disclosing the accounting treatment for VAT.

ValueAdded Tax (VAT) is a modern and progressive tax system, which is implemented in over 130 countries. After much procrastination, most of the Indian state governments have agreed to change over to the VAT system providing uniformity. A few remaining states have agreed to VAT in principle and are likely to join it later. The essence of VAT is that it provides credit/set-off for input tax, i.e., tax payable on purchases, against the output tax, i.e., tax levied on sales. The concept of VAT has originated to eliminate the ‘cascading effect of taxes.’ Although it is a legislation generally beneficial to traders and aims at making Indian markets competitive in the liberalized economy, it met with considerable opposition at the time of it’s inception, mainly on account of the need to maintain minimum statutory information by law.

Value Added Tax can be defined as a tax on the value added at each stage of the production and distribution process and can be aptly described as an ideal form of consumption taxation since the value added by a firm represents the difference between its receipts and cost of purchased inputs.

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