Dear Sir,
You are supposed to charge VAT if your turnover exceed 5lacs/10lacs during the year.
You don't need to pay entire VAT which you charge from customer to the govt. So your margin is not getting thin. You need to pay only the differential amount to the govt. (I.e. vat charged from customer less vat paid to distributor)
Please feel free to call/revert in case of any doubts
Thanks and Regards
Abhishek Dugar
CA CS B.Com