GST though is a tax reform; however, an entity will need to see how it impacts it accounts, its accounting processes and disclosures. In subsequent paragraphs an attempt has been made to analyze such impacts.

Detailed impact on Financial Statements:-

STATUS OF EXCISE DUTY LIABILITY ON MANUFACTURED INVENTORY AS ON 30TH JUNE, 2017

As per Ind As 37, Provisions, Contingent Liabilities and Contingent Assets, Para 10, “liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.” Excise Duty is a duty on manufacture or production of excisable goods. After GST implementation, excise duty would not became payable on removal of goods from factory subsequent to GST regime, instead the appropriate CGST, SGST, IGST will be payable.

After considering the issue, Central Board of Excise and Customs (CBEC) has also issued a notification (NO. 12/2017) which exempts all excisable goods (except petrol, natural gas, tobacco products, petroleum crude, high speed diesel, and aviation turbine fuel) from the whole of excise duty leviable thereon, if they follows following conditions :-

i.The goods should have been manufactured on or before June 30th, 2017, but not cleared from factory on July 1st, 2017.

ii.The appropriate CGST, SGST, IGST, as the case may be, shall be payable on such goods, if cleared on or after July 1st, 2017.

Impact:- No Liability for excise duty should be created in the books of account in respect of such inventories as at June 30th, 2017. Therefore, only the selected item on which excise duty is still liable to be paid will require provision.

It will have adverse impact on the Profit & Loss account as the opening stock was loaded with Excise Duty, while closing stock is not.

RECOGNITION OF REVENUE (REVENUE WILL FALL TO THE EXTENT OF 8% TO 16% OR SUCH PERCENTAGE OF EXCISE DUTY, DEPENDING UPON ITS LEVY ON THE PRODUCTS.

GST collected on the behalf of government at the time of sale of product or service should be excluded from revenue, the reason behind this is collected GST is remitted to government in full which do not increase equity of the entity.

The treatment of GST on sale of goods differs from that of excise duty, which is considered as a tax on manufacture/ production and consequently treated as cost of goods manufactured.

As per Ind As 18, Revenue Para 8 “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.”

Impact :- After implementation of GST, turnover of entities like manufacturing concerns fill fall subsequently i.e., nearby 8% – 16% or the rate of duty on its products.

PRESENTATION OF INPUT TAX CREDIT

As per Ind As 32, Financial Instruments, presentation Para AG12, “Liabilities or Assets that are not contractual (such as income taxes that are created as a result of statutory requirements imposed by governments) are not financial liabilities or financial assets.”

Impact: – As per above interpretations, as input credit is not based on contract between the entity and the tax authorities, but arising from statue, hence, it is not a financial instruments. Accordingly, GST input credit shall be presented as “other non-current/current assets” in the balance sheet.

 

IMPLICATIONS ON EXISTING INDIRECT TAXES INCENTIVE SCHEMES

Currently so many entities enjoys incentive schemes. For example some manufacture units has option to refund the amount which was deposited as VAT or deferment of payment of VAT collected from customers. These incentives are accounted as government grants in accordance with Ind As 20, Accounting for Government Grants and Disclosure of Government Assistance.

After introduction of GST, the amount and timing of such indirect taxes incentives may change significantly and could have consequential accounting implications.

Example:-

Under the duty drawback scheme, the exporters are provided with a refund of the customs and excise duties paid on the imported inputs. The GST legislation has a provision on a duty drawback for these inputs. This implies a refund of the taxes paid on both imported as well as domestic inputs. The duty drawback scheme majorly helps those exporters who produce goods that are not being taxed but still have to pay taxes on the inputs used in their manufacture and the timing of refund impacts their cash flows.

Due to a higher rate of tax under the GST, exporters might face a cash crunch due to the blockage of working capital. Hence, they have expressed the need for an exemption mechanism instead of first paying tax and then claiming a refund.

INVENTORY VALUATION

As per Ind AS 2, Inventories Para 11, “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. Trade discounts, rebates and other similar items are deducted in determining the costs of purchase.”

Impact:- As per above interpretation, if any entity eligible to recover paid GST at the time of purchase of inventories (eg. By way of credit or refund), the same shall be excluded at the time of valuation of inventories.

Note:- Input Tax Credit (ITC) is unavailable for claim u/s 16(9) under the following specific circumstances:

  • If goods and services are acquired for personal use.
  • If one has paid tax in GST composition scheme for goods and services received.
  • In case an immovable property is built apart from plant and machinery using the goods and services and this immovable property is not transferred.
  • In the case where employees have used the goods and services for personal purposes.
  • When the cost of capital goods depreciation is claimed, then Input Tax Credit cannot be claimed.

An entity, therefore, needs to have a robust process so that inventory is valued appropriately. An entity, therefore, needs to evaluate, on which item the Purchase will need include GST I,e, only in the cases when its credit is denied or depreciation is claimed. Problem will come specially in the case of Capital Spares, Components lying in store. One should also view its opening inventory to ensure that this is complied.