GST and its Impact on Accounting

Accounting for GST is yet
another challenge the businesses will have to accept so as to be ready for
compliance in GST Regime.

The present article is
divided into various segments to understand the impact of GST on the accounting
aspects of businesses. Provisions under GST Acts require maintenance of
records, uploading information and/or periodic reporting and producing the same
on demand.

Chapter VIII of the CGST
Act contains provisions in respect of maintenance of accounting records. The
draft Rules also provides for certain additional compliances and maintenance of
documents.

Basic records by all
registered persons

In view of section 35(1),
every registered person shall maintain books of accounts and other records
relating to each place of business at the respective place of businesses. This
section requires maintenance of a true and correct account of the following
records:

a.  Production
or manufacture of goods

b.  Inward
and outward supply of goods or services or both

c.  stock of
goods

d.  Input tax
credit availed

e.  Output
tax payable and paid and

f.   Such
other particulars as may be prescribed.

Registered person may keep
and maintain accounts and other particulars in electronic form.

Warehouse keeper/
transporter

The owner or operator of
warehouse or godown, used for storage of goods, and the transporter is also
required to maintain records of the container, consignee and other relevant
details of goods.

Section 35(6) provides
that if the records are not maintained properly or the amount of tax payable on
goods or services are not accounted for then the Proper Officer will determine
the amount of tax payable on the goods or services as if the said goods or
services were supplied as such by the person.

Additional requirements

The draft rules in respect
of accounts and records also require the registered person to keep account and
other relevant documents including invoices, bills of supply, delivery challan,
Credit and Debit notes, receipt vouchers, payment vouchers, refund vouchers and
E- way bills. Besides this, he has to maintain records in respect of imports
and exports of supplies and the cases where tax is payable on Reverse Charge
Basis.

The rule also requires to
maintain the record separately for each activity including
manufacturing, trading and provision of services. For persons other than those
who have opted for composition scheme u/s. 10, the stock records are also to be
maintained. This includes data/documents in respect of the stock which is lost,
stolen issued as gift or free samples. In case of manufacturer the records of
raw material, finished goods, generation of scrap and wastage should also be
maintained. Under the GST law, besides information and records to be
maintained, as discussed hereinabove, these persons shall be required to
maintain accounts in respect of advances received and adjusted, liability under
the reverse charge mechanism, ITC claimed, name and addresses of vendors and customers,
places where the goods are stored including for transit storage etc. The record
should maintain audit trail in case of records maintained in electronic
format.

Service provider

Service provider should
also maintain records in respect of goods used in rendering of services, input
service utilised and services supplied. In case of a works contractor
the records need to be maintained for each contract separately.

Records to be
retained/preserved

These records including
the records in respect of invoices, bills of supply etc. have to be retained
for a period of 72 months from the due date of furnishing of Annual return for
the year pertaining to such accounts and records. Thus, the records are to be
maintained for a period of six years from the year end plus for the period of
time available for filing annual return that is till the 31^st
December of the subsequent year. Therefore, effectively, records are to be
maintained for six years and nine months from the end of the year.

In case of matters which
are pending in appeal or other proceedings including enforcement actions,
records are to be kept till the matters are settled plus a period of 1 year
from the date of orders in such appeals/other proceedings.

Agent & Principal

Every agent shall also maintain
records; from authorisation received by him from each principal to receive or
supply of goods/ services on behalf of such principal, the particulars of the
value and quantity of goods or services received, value and quantity of Goods
or services supplied, details of accounts furnished and the taxes paid on
receipt or on supply of goods or services on behalf of every principal.

Similarly, carrier of
goods, consignment sales Agent, clearing forwarding agent should also maintain
records in respect of delivery/ dispatch of goods, records in respect of the
goods handled by him on behalf of the registered person.

Owner or operator of godown
or warehouse and transporters

Every owner or operator of
godown or warehouse and a transporter should maintain accounts and submit
details regarding his business electronically on common portal in form GST
ENR -01. On submission of such information, a unique enrolment number
shall be generated and communicated to the said person that is the owner/
operator of godown or a transporter. Such enrolment once granted in one State
or Union Territory would be deemed as registration by such person in all the
States or Union territory. Moreover, the operator of the godown should store
the goods in such a manner that they can be identified item wise and owner wise
and should facilitate physical verification for inspection by the proper
officer on demand.

It is clear from the above
that the GST Act and the Rules provide for elaborate guidelines for
maintenance, retention and production of accounts and records to facilitate
determination of correct liability under the GST law. The other objective is to
maintain records in such manner that it facilitates cross matching of
information when processed on the Common Portal. The data to be uploaded on the
common portal requires transaction wise, HSN/SAC code wise, State wise data to
be uploaded of inward as well as outward supplies. Thus, for maintaining
accounting records a registered person will be required to reorganise its
accounting department, the information technologies software and also
appropriate training to its staff.

In view of the above legal
requirements to maintain accounts and records, the businesses are expected to
re-energise and rearrange its entire system of accounting.

Chart of accounts to be
maintained

Traditionally the accounts
include accounts in respect of excise duty payable, State VAT and CST account
Payable as also accounts in respect of CENVAT available and input tax credit
available. However, in view of the change, the following ‘Charts of Account’
will have to be created and maintained in the accounting system.

Chart of Accounts:

Under GST all these taxes
(excise, VAT, service tax) will get subsumed into one account, and following
new accounts have to be created.

–   Input CGST a/c

–   Output CGST a/c

–   Input SGST a/c

–   Output SGST a/c

–   Input UTGST a/c

–   Output UTGST a/c

–   Input IGST a/c

–   Output IGST a/c

–   Electronic Cash Ledger (to be maintained on
Government GST portal to pay GST)

–   Electronic Credit Ledger (to be maintained on
Government GST portal to pay GST)

–   Electronic Liability Ledger (to be maintained
on Government GST portal to pay GST)

It may be noted all these
records are to be maintained state wise, hence if a person is having
registration under the GST Act, say in five states, the above chart of accounts
need to be multiplied by five times.

Accounts to be maintained
under GST Regime

To summarise, every
registered taxable person shall keep and maintain, at his principal place of
business, a true and correct account of production, inward and outward supply
and such other records as specified under Goods and Services Tax Act.

Having discussed the basic
records to be maintained and chart of account required, let’s discuss other
challenges, some of them in respect of transition to the GST, in the book
keeping.

Reconciliation statements
to be maintained

A. Reconciliation of financial records
maintained at GSTN portal:

Since the concept of
supply is so wide that practically speaking, everything debited to Profit &
Loss A/c & credited to Profit & Loss A/c barring exceptions like
salaries & wages, interest and depreciation / amortisation of expenses,
etc., are all either inward supply or outward supply. Moreover, despatches to /
from branches, addition and disposal of assets etc are also added to the
aggregate supply. In the circumstances, there would be differences between
financial books of account and the ‘aggregate turnover’ reported in GSTR-1.
Even currently, such reconciliation is required to be made. However, the type of
transactions which will get reflected in the reconciliation statement would
increase substantially. To highlight one,in case of where the Head office
placing order on the vendor asking the vendor to directly despatch the goods to
the branch outside the state, would require generating an additional document
between Head office and the respective branch and treat that transaction as
‘supply’ in view of section 10(1)(b) of the IGST Act. Obviously, the financial
accounting system do not recognise this type of peculiar transaction.
Similarly, the reconciliation exercise should also involve the amount lying in
the tax credit ledger maintained at the Govt portal. Typically, the credit
reversed on account of mismatches, orphaned entry or non-payment to vendor will
get reflected only on the GSTN portal; however, in the financial books these
items will continue as claimable credits. Therefore, reconciliation of these
numerous entries and taking appropriate decisions in each of these cases is
very important.

B. Reconciliation of GSTR with the financial / MIS
reports

The GSTR requires
reporting of the transaction wise and HSN wise and SAC wise information. Thus,
aggregate of the turnover of sales as per particular HSN code – say bulk drug
should tally with the sales reflected of bulk drug in the financial accounts.
The disposal of assets in the financial books and its valuation and/or
taxability under the GST act will be quite different. This may also require
reconciliation.

In view of the above
background certain accounting challenges which requires attention and IT
support are discussed herein below in brief.

Listed below are some of
the transactions or documents that requires cross references, tracking, taking
corrective actions and/ or review at regular intervals. The accounting team and
the persons in the organisation who created those records, will have to get
involved in the process so that these transactions get attended at the
earliest. Help from the accounting software and other MIS reports generated in
this respect will certainly help in the process. Needless to say, allowance of
ITC, credit notes/debit notes, credits for TDS and TCS etc is dependent on the
actions from the vendor/customer of the company. Early resolution of these
entries goes a long way in proper accounting and determination of liability of
payment of taxes, profitability as also drawing of state of affairs on the
Balance Sheet day.

As mentioned herein above,
IT support would facilitate to a great extent in compiling the information
required and its reporting need while filing the GSTR. Some of these challenges
are enumerated/ highlighted hereunder:

1.   Linkages
of debit note/ credit note with original invoices.

2.   Adjustment
of advance received against a supply and tracking of receipt voucher and
payment voucher. Returns requires reference of the transaction no/id to be
mentioned to enable to correlate each of these transactions of adjustments of
‘advances’.

3.   Generation
of electronic way bill and mention thereof on the supply invoice.

4.   Tracking
and monitoring of mismatches / unmatched orphaned entries for claim of ITC.

5.   Monitoring
and verification of ITC reversal.

6.   Statistical
information in respect of number of invoices raised during the period.

7.   Claim of
ITC in case of proportionate allowance on a provisional basis while filing the
returns and the review therefore to carry out adjustments, if any, at the year
end.

8.   Tracking
transactions / information normally not part of the financial books of account
but are required as ‘supply’ to be reported in GSTR-1 e.g. barter and exchange,
free issues do not get captured in the financial records. However, these are
now required to be reported in GSTR-1. Further, valuation of the barter and
exchanges etc. requires framing of company policy in this respect.

9.   Creating
and updating product master and service master with the respective HSN / SAC
codes.

10. Discipline
in maintaining records. Traditional book keeping wherein generally, the rate
difference / quantity difference is in purchase / service inward invoices is
over written on the invoice and recomputed. This practice will have to be given
a good bye and system of issuing debit notes/ credit notes has to be introduced
and followed strictly. Similarly, the overall discipline in accounting,
classifying and reporting HSN and SAC codes will have to adhered to.

11. The IT
software should prompt an alert or determine the ‘place of supply’ [POS] and
‘location of supplier’ [LOS] so that errors in determining intra-state or
inter-state supplies is eliminated / minimised. Similarly, the software should
select the invoice type like ‘tax invoice’ or ‘bill of supply’ in appropriate
cases.

12. The
delivery challan should have cross reference of invoice number. Even in case of
stock transfer advices attracting IGST, similar references of tax invoice be
given.

13. Cancellation
of invoices: ERP packages normally do not allow cancellation of invoice once
generated. To nullify the wrong issuance of invoices, credit note is required
to be issued. Care should be taken that such wrong issuance of invoices and
rectifying credit notes, do not get reported in the GSTR.

14. The
invoicing / accounting software should have built in rule / concept to
determine the following:

a.  Interstate
and intra state

i.   Location
of supplier

ii.  and
place of supply

for different types of supplies

b.  Rate of
tax

i.   HSN or
SAC code classification

ii.  Composite
supply

iii.  Mixed
supply

c.  RCM –
inward supply

i.   LOS and
POS thereof

ii.  Rate of
tax

iii.  Claim
of ITC

iv. Creation
of payment voucher

v.  Reporting

d.  Bill to
ship to type of transaction

i.   POS and
LOS thereof

ii.  HO
placing order on behalf of branch factory etc. – generation of document and
recognising of the tax liability

15. The
concept under the GST Act in respect of supply, intra-state, inter-state,
composite supply, mixed supply, etc. are totally new and requires them to be
made understood to the accounting, commercial, logistics and other staff in the
organisation.

16. Mechanism
to rectify errors in intra state vis-a-vis inter-state supplies – Such wrong
classification of transaction needs to be attended to as this would result into
claim of refund of wrong deposit and/or paying incorrect taxes. Appropriate
accounting entries need to be passed in books.

17. Claims on
account of goods return / deficiency in services, etc.

18. Revision
in pricing etc. Issue of D/N or C/N. passing of the tax credit or recognising
the additional tax liability.

19. Fixation
of responsibility in the organisation in tracking and monitoring of the items
of reconciliation statements

20. Maintenance
and distribution of ISD – input service credit.

a.  transfer
of credit to the state wise electronic credit ledger in the financial books

21. Inter
branch reconciliation.

22. Policy
determination in respect of inter-branch service billing and its valuation.

23. State
wise Trial Balance: It is observed that majority of the ERP software in the
present configuration of accounts do not facilitate drawing of state-wise Trial
Balance. Currently the assessment under state VAT Acts poses practical
difficulties in the assessment proceedings as the officers at times, demand
either state-wise Trial Balance and/or a certificate from a chartered
accountant certifying the sales and purchase turnover in the State. Now that
the software is either amended or configured for GST compliances, the software
should be able to generate state wise Trial Balances.

24. Transition
– TRAN-1. In the transition to GST, Form TRAN 1 is required to be submitted
declaring the carry forward of tax credit from CENVAT or State VAT returns into
ST, claiming of duty/ tax credit in respect of stock etc. This Form also
requires to generate certain information and supporting documents such as:

a.  data /
documents / statement required for submission of TRAN-1

b.  back up
documents and reconciliation statements in support of TRAN-1

25. Accounting
challenge in case of goods return in GST period where the sale was effected in the
pre-GST period. As per provisions contained in section 142(1), if the goods
return effected by the registered dealer, it would be treated as independent
supply under the GST and the customer would charge the applicable GST say SGST
and CGST. This will get reflected in the GSTR-1 of the customer as also
supplier. However, in the financial books; the entry would be to reversal of
the original sales / service income. On GSTN portal this would be tracked as
ITC claimable and appropriate adjustment would happen in the electronic credit
ledger. In the financial books, actually speaking, the original VAT or the
service tax payable will have to be reversed. As against this the GSTR – 1
would show fresh purchases / inward in the hands of supplier and fresh outward
supply in hands of the customer. Surely, the financial books will not recognise
this and would result into reconciliation item with financial books. Please
note, hundreds of such types of transactions will be required to be tracked and
this would have to be tracked state-wise based on the original sales offered
under the respective State VAT / service tax returns. It is quite possible that
the return could be intra state whereas the original sale was inter state sales
and was booked in the CST return. All such situations are likely to complicate
the tracking mechanism.

26. Physical
stock vs. book stock as on 30^th June 2017: In the transition to GST,
stock held as on 30^th June is required to be uploaded and credit, if
any, in respect of CED or VAT is to be carried forward to GST regime.
Reconciliation / rectification entries in respect of the physical vs. book
stock may have to be passed in the pre-GST period so as to avoid disallowance
of ITC etc in the GST Regime.

27. Credit
note in respect of scheme discount pertaining to Pre-GST period be passed in
the pre-GST period so that the reduction in the VAT liability, if any, can be
claimed in the pre-GST period. Similarly, the issue of free goods in respect of
supplies effected during the pre-GST period be issued in the pre -GST period.