QueryParagraph 8 of IAS 18 “Revenue” states as follows:
“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. Therefore, they are excluded
from revenue. Similarly, in an agency relationship, the gross inflows of
economic benefits include amounts collected on behalf of the principal
and which do not result in increases in equity for the entity. The
amounts collected on behalf of the principal are not revenue. Instead,
revenue is the amount of commission.”
Paragraph 47 of Ind AS 115
“Revenue from Contracts with Customers” states, “An entity shall
consider the terms of the contract and its customary business practices
to determine the transaction price. The transaction price is the amount
of consideration to which an entity expects to be entitled in exchange
for transferring promised goods or services to a customer, excluding
amounts collected on behalf of third parties (for example, some sales
taxes). The consideration promised in a contract with a customer may
include fixed amounts, variable amounts, or both.”
IAS 18 and
its replacement IFRS 15 (Ind AS 115) have established a principle that
is very broad and may not be conclusive in determining the presentation
of certain indirect taxes. For example, both the standards may result in
requiring sales tax to be presented as a tax collected from the
customer on behalf of the government; however, the presentation of
excise duty may not be abundantly clear.
The current Indian GAAP AS 9 ‘Revenue Recognition’ states as follows with respect to presentation of excise duty.
The
amount of revenue from sales transactions (turnover) should be
disclosed in the following manner on the face of the statement of profit
or loss:
Turnover (Gross) XX
Less: Excise Duty XX
Turnover (Net) XX
The
amount of excise duty to be deducted from the turnover should be the
total excise duty for the year except the excise duty related to the
difference between the closing stock and opening stock. The excise duty
related to the difference between the closing stock and opening stock
should be recognised separately in the statement of profit or loss, with
an explanatory note in the notes to accounts to explain the nature of
the two amounts of excise duty.
AS 9 is very prescriptive and
does not establish a clear principle for requiring a net presentation of
excise duty. Besides it contains a fatal flaw. On the one hand, it
requires a net presentation, which may mean that excise duty is
collected from the customer on behalf of the government. On the other
hand, it requires excise duty to be included in the cost of inventory,
which may mean that excise duty is paid by the manufacturer as part of
its cost of producing the inventory. Both these principles are
absolutely contradictory to each other. Therefore, AS 9 may not be very
helpful in determining the presentation of excise duty under Ind AS.
Arguments supporting a gross presentation of excise duty under Ind AS
Excise
duty is a duty on manufacture or production of excisable goods in
India. The law in India provides that a duty of excise on excisable
goods which are produced or manufactured in India shall be levied and collected at the time of removal of goods from factory premises or from approved place of storage. The taxable event is the manufacture or production of an excisable article and the duty is levied and collected at a later stage for administrative convenience. The levy of excise duty is not restricted only to excisable goods manufactured and intended for sale. It is also leviable on excisable goods manufactured or produced in a factory for internal consumption. Although the duty is usually paid only when the goods leave the warehouse, this is described as merely a practical expedient. The duty becomes payable once the goods are manufactured and is payable even if the goods are not sold (eg., are scrapped or utilised for own use). Further, scrapping of inventory post manufacture nullifies the whole transaction and any credit availed on inputs needs to be reversed. Thus the manufacturer is not acting as an agent for the tax authority.
The excise duty recovered should be included as part of revenues. The excise duty is a tax on manufacture and the risk of financial loss relating to non-recovery of this duty is with the manufacturer. This duty is similar to any other cost of production and is payable by the manufacturer irrespective of whether it ultimately recovers it from another party or even if it does not sell the goods ultimately. Therefore, the Company is not necessarily recovering these taxes on behalf of the government. In other words, the Company is not acting as an agent for the tax authority but is acting as principal for the whole amount.
Excise duty may be levied on different basis for different industries. These may be linked to the transaction value or Maximum Retail Price (MRP) or based on a specific valuation or a volume-based determination. In the case of sales tax or VAT , levy is on the basis of the sales price charged to customer. Therefore it appears that excise duty is more a cost of production rather than a levy on sales.
Arguments supporting a net presentation of excise duty under Ind AS
The excise duty should be reduced from revenues. From a manufacturer perspective, excise duty is a regulatory levy which is ultimately borne by the consumers. It does not add any value to the goods sold and hence, including it in revenue will not reflect the real revenue of the manufacturer.
IAS18.8 specifically states that 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. The excise duty collected from the customer (as evidenced in the excise invoice) is only a recovery of excise duty paid by the company and therefore does not result in an increase in equity. The excise duty is also similar to a value added tax and accordingly not to be included within revenues. In spirit, the excise duty mechanism is not substantially different from the way sales tax operates, and hence excise duty should be presented in the same manner as sales tax. In other words, revenue is presented net of excise duty.
Amount of excise duty forming part of the sale price of the goods is required to be indicated separately in all documents relating to assessment of duty, e.g., excise invoice used for clearance of excisable goods. It is, however, open to a manufacturer to recover excise duty separately or not to make a separate recovery but charge a consolidated sale price inclusive of excise duty. The incidence of excise duty is deemed to be passed on to the buyer, unless contrary is proved by the payer of excise duty. The buyer can subsequently claim a credit for the amount of excise duty paid (or deemed to be paid) as part of the purchase price. Further, the excise duty paid as a result of purchase of inputs for production/manufacture (as was included in the price of purchases), is available as a duty credit which is set off against the duty payable on production. As a result, effectively, there are no excise duty costs borne by the entities from purchase or production/sale of the goods and costs are borne by the ultimate consumers. In other words, the mechanism relating to excise duty is not materially different from sales tax, and hence the same principles should apply.
The excise duty rates are prescribed by the law and full amount paid is included in the invoice value to be recovered from customers. Further the obligation to make the payment arises only at the time of dispatch to customers. The duty is levied based on invoice value and is required to be separately stated on the invoice itself creating a constructive obligation to transfer the impact of any change in rates to the customers. The above analysis seems to indicate that while legally manufacturers/producers could have the primary obligation to pay the duty; the collection mechanism indicates that they are acting as collection agents.
In case a certain product is exempt from excise (not dutiable) at the time of manufacture, but subsequently is made dutiable on the date of removal for sale, such goods will continue to not be chargeable to excise – considering the status on date of manufacture. However, if a certain rate of duty is applicable at the time of manufacture (say 8%), but changes by the date of removal (say 12%), the rate prevailing at the time of removal (12%) will apply. This provides a mixed indicator of whether excise duty is a cost of manufacture or a duty on sales. Sales tax is usually calculated as a percentage of price charged to the customer. Therefore, if there is a change in the tax rate between manufacture and sale, the price charged to the customer (inclusive of tax) will need to be adjusted for the new tax rate.
In case of sales return, credit is allowed for the excise duty originally paid. Similarly excise duty is refunded if goods that left the factory are returned back to the factory. This operates similar to sales tax. For example, sales returns usually within a period of 6 months are considered for adjustment in sales tax liability.
-Assessment under US GAAP
In the absence of specific guidance under IAS 18/ other IFRS, reference has been made to other GAAP (US GAAP EITF Issue 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent). Under the EITF 99- 19, the various indicators supporting the gross and net presentation are summarised below-
Whether an entity is acting as a principal or agent in collecting excise taxes on behalf of the authorities is a matter of judgment, and no one factor may support a
conclusion on its own, and the relative strength of each indicator may be considered
a. Whether the entity is exposed to financial risks in respect of the excise Duty.
i. General inventory risk
Gross presentation-Excise is levied once goods leave an entity’s warehouse (i.e. even where goods are used for internal consumption and irrespective whether they are sold or not). Thus, an entity would bear the risk of the excise duty where goods may not be sold.
Net presentation- Excise duty may be recovered in cases where goods are damaged, obsolete, or not sellable and thus in this case, the inventory risk for
excise duty would not lie with the entity.
ii. Credit risk
Gross presentation- An entity is required to pay excise on the goods, irrespective of whether they are sold or not. While the amounts can be recovered from the customers on sale, the credit risk will lie with the entity if receivables are not collected.
Net presentation- No matters to support.
b. Whether the entity has the discretion to determine the price of the goods charged to the customer (in respect of the excise duty)
Gross presentation- An entity is required to disclose the amount of excise duty forming part of the sale price of the goods is required to be indicated separately in all documents relating to assessment of duty, e.g., excise invoice used for clearance of excisable goods. It is, however, open to a manufacturer to recover excise duty
separately or not to make a separate recovery but charge a consolidated sale price inclusive of excise duty. Further, an entity would have the final authority in determining the final selling price of the product and may decide to recover a part or the whole excise duty from its customers.
Also, excise is determined as a percentage of the production cost rather than the sales cost.
Net presentation – If excise increases/decreases would mandate (by law) the price of the goods to increase/decrease, the discretion to determining price in respect of
excise may not lie with the entity.
-Guidance Note on Accounting Treatment for Excise Duty
The relevant extracts are given in the table below. Excise duty is a duty on manufacture or production of excisable goods in India. Section 3 of the Central Excise Act, 1944, deals with charge of Excise Duty. This Section provides that a duty of excise on excisable goods which are produced or manufactured in India shall be levied and collected in such manner as may be prescribed. This prescription is contained in the Central Excise Rules, 1944 which provide that excise duty shall be collected at the time of removal of goods from factory premises or from approved place of storage (Rule 49). Rate of duty and tariff valuation to be applied is the one in force on that date, i.e., the date of removal (Rule 9A) and not the date of manufacture. This difference in the point of time between taxable event, viz., manufacture and that of its collection has been examined and discussed in a number of judgements. For instance, the Supreme Court in the case of Wallace Flour Mills Co. Ltd. vs. CCE [1989 (44) ELT 598] summed up the legal position as under:
“It is well settled by the scheme of the Act as clarified by several decisions that even though the taxable event is the manufacture or production of an excisable article, the duty can be levied and collected at a later stage for administrative convenience. The Scheme of the said Act read with the relevant rules framed under the Act particularly Rule 9A of the said rules, reveals that the taxable event is the fact of manufacture of production of an excisable article, the payment of duty is related to the date of removal of such article from the factory.”
Supreme Court in another case, viz., CCE vs. Vazir Sultan Tobacco Co. [1996 (83) ELT 3] held as under:
“We are of the opinion that Section 3 cannot be read as shifting the levy from the stage of manufacture or production of goods to the stage of removal. The levy is and remains upon the manufacture or production alone. Only the collection part of it is shifted to the stage of removal.”
The levy of excise duty is not restricted only to excisable goods manufactured and intended for sale. It is also leviable on excisable goods manufactured or produced in a factory for internal consumption. Such intermediate products may be used in manufacture of final products or for repairs within the factory or for use as capital goods within the factory. Excisable goods so used for captive consumption may be eligible for exemption under specific notifications issued from time to time. Finished excisable goods cleared from the place of removal may also be eligible for whole or partial duty exemption in terms of notifications issued from time to time. Such exemption, subject to specified limits, if any, may relate to a manufacturer, e.g., a small scale industrial unit. Exemption may be goods specific, e.g., handicrafts are currently wholly exempt from duty. The exemption may also be end-use specific, e.g., goods for use by defence services. Excisable goods can be removed for export out of India either whoIly without payment of duty or under bond or on payment of duty under claim for rebate of duty paid.
Excisable goods, after completion of their manufacturing process, are required to be kept in a storeroom or other identified place of storage in a factory till the time of their clearance. Each such storeroom or storage place is required to be declared to the Excise Authorities and approved by them. Such storeroom or storage place is generally referred to as a Bonded Storeroom. Dutiable goods are also allowed, subject to approval of Excise Authorities, to be removed without payment of duty, to a Bonded Warehouse outside factory. In such cases, excise duty is collected at the time of clearance of goods from such Bonded Warehouses.
Amount of excise duty forming part of the sale price of the goods is required to be indicated separately in all documents relating to assessment of duty, e.g., excise invoice used for clearance of excisable goods (section 12A). It is, however, open to a manufacturer to recover excise duty separately or not to make a separate recovery but charge a consolidated sale price inclusive of excise duty. The incidence of excise duty is deemed to be passed on to the buyer, unless contrary is proved by the payer of excise duty (section 12B).
In considering the appropriate treatment of excise duty for the purpose of determination of cost for inventory valuation, it is necessary to consider whether excise duty should be considered differently from other expenses. Admittedly, excise duty is an indirect tax but it cannot, for that reason alone, be treated differently from other expenses. Excise duty arises as a consequence of manufacture of excisable goods irrespective of the manner of use/disposal of goods thereafter, e.g., sale, destruction and captive consumption. It does not cease to be a levy merely because the same may be remitted by appropriate authority in case of destruction or exempted in case goods are used for further manufacture of excisable goods in the factory. Tax (other than a tax on income or sale) payable by a manufacturer is as much a cost of manufacture as any other expenditure incurred by him and it does not cease to be an expenditure merely because it is an exaction or a levy or because it is avoidable. In fact, in a wider context, any expenditure is an imposition which a manufacturer would like to minimise.
Excise duty contributes to the value of the product. A”duty paid” product has a higher value than a product on which duty remains to be paid and no sale or further utilisation of excisable goods can take place unless the duty is paid. It is, therefore, a necessary expense which must be incurred if the goods are to be put in the location and condition in which they can be sold or further used in the manufacturing process.
Excise duty cannot, therefore, be treated differently from other expenses for the purpose of determination of cost for inventory valuation. To do so would be contrary to the basic objective of carrying forward the cost related to inventories until these are sold or consumed. As stated above, liability to excise duty arises even on excisable goods manufactured and used in further manufacturing process. In such a case, excise duty paid (if the same is not exempted) on the intermediary product becomes a manufacturing expense. Excise duty paid on such intermediary products must, therefore, be included in the valuation of work-in-process or finished goods manufactured by the subsequent processing of such products.
Since the point of time at which duty is collected is not necessarily the point of time at which the liability to pay the duty arises, situations will often arise when duty remains to be collected on goods which have been manufactured. The most common of these situations arises when the goods are stored under bond, i.e., in a bonded Store Room, and the duty is paid when the goods are removed from such bonded Store Room.
Divergent views exist as to whether provision should be made in the accounts for the liability in respect of goods which are not cleared or which are lying in bond at the balance sheet date.
The arguments in favour of the creation of liability are briefly summarised under:
a) The liability for excise duty arises at the point of time at which the manufacture is completed and it is only its collection which is deferred; and
b) failure to provide for the liability will result in the balance sheet not showing a true and fair view of the state of affairs of the enterprise. The arguments against the creation of the liability, briefly summarised, are as under:
a) Though the liability for excise duty arises at the point of time at which the manufacture is completed, it gets quantified only when goods are cleared from the factory or the bonded warehouse;
b) the actual liability for excise duty may get modified by the time the goods are cleared from the factory or bonded warehouse;
c) where goods are damaged or destroyed before clearance, excise duty may be waived by the competent authority and therefore the duty may never be paid; and
