Issue 1: Should
the revenue be presented gross or net of GST under Ind AS?
Paragraph 8 of Ind AS 18 Revenue states as below:
“Revenue includes only the gross
inflows of economic benefits received and receivable by the entity on its own
account. Amounts collected on behalf of third parties such as sales taxes,
goods and services taxes and value added taxes are not economic benefits which
flow to the entity and do not result in increases in equity.”
An entity collects GST on behalf of the government and not on its own
account. Hence, it should be excluded from revenue, i.e., revenue should be net
of GST. This view is consistent with the guidance given in the Guidance note on
Ind AS Schedule III issued by ICAI and will apply irrespective of pricing
arrangement with customers, say, fixed prices inclusive or exclusive of GST. It
may be noted that GST net presentation does not impact the presentation of
excise collected from customers and paid to the government for periods till 30th
June 2017. Excise duty will be included in revenue and presented as an expense
in accordance with Ind AS principles.
Issue 2: How
should a company treat the GST paid on raw material/ finished goods inventory
purchased and available as GST input tax credit? Should it be included in
valuation of inventory at the quarter/ year-end?
Paragraph 11 of Ind AS 2 Inventories states as below for
refundable taxes:
“The costs of purchase of inventories
comprise the purchase price, import duties and other taxes (other than those
subsequently recoverable by the entity from the taxing authorities), and
transport, handling and other costs directly attributable to the acquisition of
finished goods, materials and services.”
Thus, only those taxes are included as costs of inventory which are not
subsequently recoverable by the company from taxation authorities. Since
GST paid on raw material/ finished goods inventory purchased is available for
set-off against the GST payable on sales or is refundable, it is in the nature
of taxes recoverable from taxation authorities. Accordingly, input tax paid
should not be included in the costs of purchase, to the extent
utilisable/refundable.
On similar lines, Ind AS 16 Property, Plant and Equipment (PPE)
requires that the cost of an item of PPE comprises – purchase price, including
import duties and non-refundable purchase taxes, after deducting trade
discounts and rebates (emphasis added). Hence, similar accounting will
apply to the GST Input Credit available on purchase of items of PPE. To the
extent not utilisable/refundable, the same may be included in cost of goods
sold, inventory or PPE as the case may be.
Issue 3: How is
GST paid on inter-branch transfers accounted for? It is assumed that sales
depots have obtained requisite registration and other documents. Hence, they
will be able to obtain full credit for GST paid on supply of goods.
For reasons already mentioned (refer issue 2), the valuation of
inventory at the branches should not include GST. The GST paid on branch
transfer of inventory should be reflected under an appropriate account such as
“GST Input Tax Credit (GITC) Receivable Account.”
Issue 4: As on
30th June 2017, the factory is holding substantial stock of
inventory on which no excise duty is paid, since those were not cleared from
the factory. How should the company value such inventory and the input tax
credit (ITC) on the inputs for manufacturing the inventory?
1. Since excise duty is not payable on such inventory (as per
notification of CBEC), no provision for excise duty is required. Consequently,
the inventory valuation will not include excise duty.
2. After 30th June, the Company will pay GST on supply.
3. The ITC credit on procurement for manufacturing the inventory will
be recorded as GST Input Tax Credit (GITC) Receivable Account, provided the
Company has adequate documentation and is reasonably certain of receiving the
ITC.
Issue 5: As on
30th June 2017, the sales depot of the entity is holding substantial
stock of inventory on which excise duty was paid, since those goods were
cleared from the factory. How should the company value such inventory and the
excise duty paid? The Company is entitled to ITC subject to submission of
proper documents. The Company has sufficient documentation available.
Paragraph 11 of Ind AS 2 Inventories states as below for
refundable taxes:
“The costs of purchase of inventories
comprise the purchase price, import duties and other taxes (other than those
subsequently recoverable by the entity from the taxing authorities), and
transport, handling and other costs directly attributable to the acquisition of
finished goods, materials and services.”
Since the tax is a recoverable tax, inventory lying at the depot should
be valued at net of excise duty paid to the extent the company will be able to
receive ITC. The corresponding ITC should be reflected under the other
appropriate account such as “GST Input Tax Credit (GITC) Receivable Account.”
Issue 6: After
initial recognition, how should the “GST Input Tax Credit (GITC) Receivable
Account” be treated in the financial statements?
Balances in the GITC Receivable Account, pertaining to both inputs and
PPE, should be reviewed at the end of each reporting period. If it is found
that the balances or a portion thereof are not likely to be used in the normal
course of business or not refundable (even in inverted duty structure), then,
notwithstanding the right to carry forward such excess credit under GST Law,
the non-useable excess credit should be adjusted in the financial statements.
The irrecoverable input credit should generally be added to COGS or inventory
or PPE, as applicable.
In some cases, it may so happen that the company is not able to avail
input credit for reasons such as: it has not got proper registration, not
maintained proper documentation or not filed proper returns or the vendor has
not uploaded credit. In such cases, GST Input Credit disallowance is in the
nature of expense for the company. The same should be written off to P&L
immediately.
It may be noted that GITC is not a financial
instrument; hence Ind
AS 109 Financial Instruments is not applicable. Though impairment rules
of Ind AS 109 do not apply, the impairment rules of Ind AS 36 Impairment
of Assets will apply. Therefore, GITC that may not be recovered or
recovered after significant time period should be impaired for
non-recoverability and time value of money under Ind AS 36.
Issue 7: How should
a company present the “GITC Receivable Account” in the balance sheet?
The GITC Receivable Account represents an amount receivable due to
statutory right and against contractual right. Hence, it is a non-financial
asset and should be presented as such in the balance sheet.
The amount should be classified as current and non-current asset
depending upon the classification criteria as laid down under paragraph 66 of
the Ind AS 1 Presentation of Financial Statements and Ind AS compliant
Schedule III, viz., the following criteria. Particularly, the criteria at (a)
and (c) will be more critical.
‘An entity shall classify an asset as current when:
(a) It expects to realise the asset, or intends to sell or consume it,
in its normal operating cycle,
(b) It holds the asset primarily for the purpose of trading,
(c) It expects to realise the asset within twelve months after the
reporting period, or
(d) The asset is cash or a cash equivalent (as defined in Ind AS 7 Statement
of Cash Flows) unless the asset is restricted from being exchanged or used
to settle a liability for at least twelve months after the reporting period.
An entity shall classify all other assets as non-current.’
Issue 8: Under
the GST regime, dealers may face losses on their inventory at 30th
June; for example, ITC benefit may not be available with respect to certain
local taxes or cess. To compensate dealers for the losses, the manufacturing
company has decided to provide cash compensation to dealers. How should the
company treat such compensation to dealers, particularly whether it should be
reduced from revenue or shown as an expense?
Paragraphs 9 and 10 of Ind AS 18 provide as below:
“9. Revenue shall be measured at the
fair value of the consideration received or receivable.
10. The amount of revenue arising on a
transaction is usually determined by agreement between the entity and the buyer
or user of the asset. It is measured at the fair value of the consideration
received or receivable taking into account the amount of any trade discounts
and volume rebates allowed by the entity.”
Paragraph 18 of Ind AS 18 states as below:
“18. Revenue is recognised only when it
is probable that the economic benefits associated with the transaction will
flow to the entity. In some cases, this may not be probable until the
consideration is received or until an uncertainty is removed. For example, it
may be uncertain that a foreign governmental authority will grant permission to
remit the consideration from a sale in a foreign country. When the permission
is granted, the uncertainty is removed and revenue is recognised. However, when
an uncertainty arises about the collectability of an amount already included in
revenue, the uncollectible amount or the amount in respect of which recovery
has ceased to be probable is recognised as an expense, rather than as an
adjustment of the amount of revenue originally recognised.”
Based on the above, the following two views seem possible under Ind AS
18:
(a) The cash compensation paid to dealer is effectively a cash incentive
paid by the company. This reduces consideration received/ receivable for sale
of goods and fair value thereof. Consequently, it should be reduced from
revenue since Ind AS 18 requires revenue to be recognised at fair value. This
would also be the view under Ind AS 115 Revenue from Contracts with
Customers, which requires any cash compensation paid to customer or
customer’s customer to be reduced from revenue.
(b) The circumstances for compensation arising from the extraordinary
situation did not prevail at inception, when the original sale agreement was
signed between parties. At the time of recognition, there was no uncertainty
regarding the revenue receivable. Nor the company had any explicit/ implicit
obligation to provide cash compensation. Rather, the company has decided to
provide cash compensation to the dealer in exceptional circumstances arising
purely after recognition of the original sale transaction. This expense was
incurred to maintain harmony and good relationship with dealers and is not
reflective of the fair value of the revenue. The compensation should be seen as
a distinct activity from the original revenue. Thus, it can be presented as an expense rather than
reduction from revenue.
The author believes that from an Ind AS 18 perspective, both the views
are acceptable.
Issue 9:
Consider that a company has entered into contract for supply of goods for INR
10,000 plus GST @ 18%, i.e., total invoice amount of INR 11,800. The sale
agreement involves deferred payment at the end of the 18th month. It
is a ‘zero percent’ financing arrangement. The management has determined that
the present value of sale consideration including GST amount discounted at
market rate of interest is INR 9,900. How will the company reflect this
transaction in the financial statements?
Though the company will recover the amount from the customer at a later
date, it needs to pay the GST immediately to the government. Consequently, the
company will pass the following entry to recognise sale/ supply of goods:
Debit
Receivable from customer
(discounted
amount) INR 9,900
Credit Sale of goods INR 8,100
Credit GST payable INR 1,800
Going forward, interest on receivable from customer will be recognised
using market rate of interest, i.e., the rate used for original discounting.
Issue 10:
Consider that the company has entered into fixed price construction contract
which includes all taxes at the rates prevailing when the agreement was signed.
No variation is allowed due to change in indirect tax rates. Due to
applicability of GST, the taxes applicable on the company have increased. How
should the company reflect such impact in its financial statements?
GST is pass through on the company, i.e., the company
collects GST on behalf of the government. Hence, revenue should be net of GST
Payable to the government, irrespective of the
fact that the company has signed
an all-inclusive contract with its
customers. Consequently, the increase in tax rate due to the GST
applicability which cannot be absorbed by customer will reduce overall
construction revenue/margins. The company should reflect such reduction as
change in estimate while determining construction revenue/margins to be
recognised based on Ind AS 11 Construction Contracts principles. The
company will make Ind AS 8 Accounting Policies, Changes in Accounting
Estimates and Errors disclosures related to change in estimate. If due
to increase in the GST rate, the overall contract has become loss making, Ind
AS 11 would require an expected loss on the construction contract to be
recognised as an expense.
Issue 11: How
does the introduction of GST impact indirect tax incentive schemes such as
advance authorisation/ EPCG schemes and various export promotion schemes under
the foreign trade policy (FTP)? How should these schemes be accounted for under
Ind AS and GST regime?
At the time of writing this article, the status of indirect tax
incentive schemes under the GST regime is not very clear. It is expected that
the Government will introduce appropriate changes in the law/ foreign trade
policy to clarify these impact.
Based on non-authoritative FAQs issued by the Finance Ministry, the
following applies:
– As
the GST Law stands today, while the exporters will continue to get the benefit
of BCD (Basic Custom Duty) exemption, the Integrated GST (IGST) that has
replaced CVD (Countervailing duty) and SAD (Special Additional Duty) is not
exempt. This would mean the importer will have to pay IGST and claim refund or
utilise it against output liability, if any. Midterm review of the Foreign
Trade Policy is likely to align FTP with GST. Representation has been made to
allow IGST exemption in case of Advance Authorisation, EPCG and other such
benefits. IGST paid would be presented as GITC Receivable Account.
– The benefit of Merchandise Exports from India
Scheme (MEIS) and Service Exports from India Scheme (SEIS) for its utilisation
against procurement tax (earlier Central excise and Service tax) is no longer
available under GST. However, they may be utilised to pay basic custom duty or
additional duties of customs not covered under GST.
Therefore, MEIS and SEIS scripts at 30th June, may be
usable. The entity will have to evaluate the extent to which it can be used.
Since the scripts are also transferable, the possibility of utilisation is
high. To the extent it cannot be used, or refund is not available, the same
will have to be written off.
– There
is no clarity in respect of State incentives or Package schemes and the
Area-based exemptions made available to industry, which had made investment in
the state. Fact remains that under GST, the exemption could be only by way of
refund or utilisation of tax credit after paying tax. For example, in a State,
the entity may be entitled to sales tax exemption for a certain number of
years. Under GST, the entity will have to pay GST, and claim refund of SGST
from the State Government. The entity will have to evaluate the extent to which
they will be able to receive refund; to the extent refund is not available,
impairment would be required.
This is an area where the companies should maintain a close watch.
Further clarity on this matter will emerge in the near future.
The author believes that accounting impact on such incentive schemes can
be analysed in detail only after clarity from the Government. In the interim,
the related principles in Ind AS 20 Accounting for Government Grants and
Disclosure of Government Assistance will continue to apply to these
schemes.
If the government does not provide incentive schemes which were
previously available to the company, then this may indicate an impairment of
assets/ onerous contracts. Consequently, it is imperative that the companies
evaluate the impact of applying Ind AS 36 Impairment of Assets and Ind
AS 37 Provisions, Contingent Liabilities and Contingent Assets carefully.
Issue 12: At
the time of dispatch of goods, a company raises an invoice and incurs GST
liability. Does that automatically result in revenue recognition under Ind AS?
Under Ind AS 18, revenue from the sale of goods shall be recognised when
all the following conditions have been satisfied:
(a) the entity has
transferred to the buyer the significant risks and rewards of ownership of the
goods;
(b) the entity retains
neither the continuing managerial involvement to the degree usually associated
with ownership nor the effective control over the goods sold;
(c) the amount of revenue
can be measured reliably;
(d) it is probable that the
economic benefits associated with the transaction will flow to the entity; and
(e) the costs incurred or
to be incurred in respect of the transaction can be measured reliably.
It may so happen that an
invoice is raised and GST liability is incurred, but because the above conditions are not fulfilled,
revenue cannot be recognised under Ind AS.
