Accounting Standards and GST Audit – The Detailed Interplay Analysis
7.1 AS 1/Ind AS 1: Disclosure of Accounting Policies
AS 1 deals with the disclosure of significant accounting policies followed in the preparation and presentation of financial statements. Fundamental accounting assumptions in any Financial statements are that the financial statements prepared are based on Going Concern, Consistency and Accrual system concepts.
Presentation of GST in financial statements
Currently, accounting treatment of various indirect taxes varies based on their nature and point of levy. Under IND AS, excise duty is required to be included in revenue, since it is a (manufacture) production-based tax. GST is not included in revenue, since it is levied at the time of sales. GST is a destination-based tax, which is levied at the point of supply. Hence, it is likely that revenue will not be presented including GST. For the first three months of 2017- 18 revenue would be presented at Gross for Excise Less Excise Duty paid, and for the subsequent period it would be shown only Net, hence this would bring some distortion in reading of the numbers for the users and also comparative for the previous years would be different.
7.2 AS 2/IND AS2 Valuation of Inventory
As per AS-2 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.
However, the CGST Act and the corresponding SGST / UTGST Act provides for availment of input tax credit or refund of input tax credit in specified situations. Thus, to the extent credit is availed or refund is claimed, it will not form part of cost of inventory. Input tax credit is not available (some situations) when:
- (a) Input / input services /capital goods are used for personal purposes;
- (b) Tax paid under section 10 (inward supplies from composition registrations;
- (c) Restricted credits u/s 17(5) of the CGST Act;
- (d) Depreciation claimed on tax portion / element;
- (e) Input/input services/capital goods used for exempted supply
Thus, a systematic evaluation and process is required to determine “what” credit is claimed and “what is” part of cost of inventory as per applicable accounting standard.
7.3 AS 9/Ind AS 115: Revenue Reconciliations
Revenue recognition according to Ind AS may not coincide with turnover for the purpose of GST. For example, in case of multiple element contracts, total consideration will be allocated to each component based on fair value of each element. However, the same methodology may not work for GST purpose. Moreover, GST payments and return filings are expected to be State wise (GSTIN wise). Accordingly, entities will need to devise a proper system in place, for timely State-wise (GSTIN wise) reconciliations of periodic GST filings in various states, with the amount recorded in the books of accounts.
Broad difference of point of recognition
As per AS, Revenue is to be recognized either at a point in time (when the customer obtains control over the promised service) or over a period of time (as the customer obtains control over the promised service).
Under GST, the time of supply is triggered when the invoice is raised, or payment is made whichever is earlier. This might lead to a situation wherein GST would be paid on the contract as per the date of invoice, but the revenue would not be recognized in the books because the customer may not have obtained necessary benefits from the contract. E.g.: AMC contracts, Insurance contracts, deferred and advance payments.
Time of Supply from the Accounting Standards Perspective
Para 6 – Sale of Goods
Time of sale (construed as supply for our understanding purposes) shall be when the seller has transferred the property in the goods to the buyer for a consideration. The transfer of property in goods, in most cases, results in, or coincides with, the transfer of significant risks and rewards of ownership to the buyer. However, there may be situations where transfer of property in goods does not coincide with the transfer of significant risks and rewards of ownership. Revenue in such situations is recognized at the time of transfer of significant risks and rewards of ownership to the buyer.
Para 7. Rendering of Services
Revenue from service transactions is usually recognized as the service is performed, either by the proportionate completion method or by the completed service contract method.
- (a) Proportionate completion method— Performance consists of the execution of more than one act. Revenue is recognized proportionately by reference to the performance of each act. For all practical purposes, when services are provided by an indeterminate number of acts over a specific period of time, revenue is recognized on a straight-line basis over the specific period unless there is evidence that some other method better represents the pattern of performance.
- (b) Completed service contract method—Performance consists of the execution of a single action. Alternatively, services are performed in more than a single act, and the services yet to be performed are so significant in relation to the transaction taken as a whole that performance cannot be deemed to have been completed until the execution of those actions. The completed service contract method is relevant to these patterns of performance and accordingly revenue is recognized when the sole or final act takes place and the service becomes chargeable.
Time of Revenue Recognition from the GST Perspective:
As per the provisions of CGST Act, in respect of ‘Supply of Goods’ revenue shall be recognized as per Section 12 and in respect of ‘Supply of Services’ as per Section 13 of the said Act. The Value to be considered for such transactions is as per the provisions of Section 15 of the CGST Act. However, primarily GST is triggered when the entity makes supply of goods or services or both. The definition of supply under GST is very comprehensive and includes sale, transfer, barter, exchange, rental, lease, disposal, stock-transfer etc.
On the contrary, in ‘financials’ revenue is recognized when the goods are sold, or services are rendered. No revenue is recognized when the fixed assets are sold / disposed of, except for profit on sale of such assets or when goods are transferred to the branches.
Value of revenue recognition from a GST perspective
Such transactions would result in difference between the revenue reported under GST when compared to the ‘financials.
Value of supply of goods or services or both under GST law is the transaction value i.e. the price actually paid or payable for the said supply and would include any duties and taxes paid under any other law other than GST, incidental expenses incurred to meet such supplies, interest charged if any etc.
Valuation of contracts under Ind AS might differ on certain aspects from GST Laws. For example, the contract value may not include any duties and taxes paid which is refundable, interest on delayed payment, expenditure incurred by the recipient etc. These differences might lead to differences in valuation of contracts.
Accounting and financial reporting is one such aspect which needs to be carefully analysed. Further, with the set of entities moving on to the Ind AS financial reporting framework, it is pertinent to understand the interplay of GST and Ind AS and some aspects of it are discussed in the following paras:
Supplies without consideration: As per Schedule I of the CGST Act- GST is leviable on certain transactions even if such transactions are made without consideration – like supply of goods from principal to agent, disposal of business assets, supplies to related parties etc. Under Ind AS transactions without any consideration would not form a part of the financial statements and would be a treated as a non-balance sheet item / off- balance sheet item.
Post sales discounts: Usually if the entity has a practice of granting discounts to its customers on post-sale basis, then for providing such discounts the entity may raise a financial credit note which will not be subjected GST but would be reported as discounts in the financial statements.
Other Aspects for Consideration
Transitional provisions under GST: The transitional provisions under GST Laws i.e. section 142(1) of the CGST Act, state that a registered person under GST would be required to raise a tax invoice for the goods returned by him to the supplier, if such goods were bought by him in the pre-GST regime. Thus, a registered tax payer under GST would be obligated to raise a tax invoice and the same would form a part of his turnover under GST Laws. However, as per Ind AS while reporting it in the financial statements it would be treated as a reduction from purchases and not as turnover.
7.4 AS10/IndAS16:AccountingforFixedAssets/Property,PlantandEquipment Accounting Standard 10: Accounting for Fixed Assets
The cost of fixed Asset comprises of its purchase price including import duties and other non- refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use.
Administration and other general overhead expenses are usually excluded from the cost of fixed assets because they do not relate to a specific fixed asset. However, in some circumstances, such expenses as are specifically attributable to construction of a project or to the acquisition of a fixed asset or bringing it to its working condition, may be included as part of the cost of the construction project or as a part of the cost of the fixed asset.
Ind As 16: Property, Plant and Equipment
The cost of Fixed Assets is the amount of cash or cash equipment paid or the fair value of the other consideration given to acquire an assets at the time of its acquisition or construction or where applicable the amount attributable to that assets when initially in accordance with the specific requirement of other Indian accounting standard.
Fixed Assets: From GST Perspective
As per Section 18(3) where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.
In Nutshell, Input tax credit shall not be allowed on the tax component of the cost of capital goods and plant and machinery if depreciation on such tax component has been claimed under the provisions of the Income Tax Act, 1961.
7.5 AS-11 / Ind AS 21: Treatment of exchange differences
Rule 34 of the CGST rules provides the basis to determine the rate of exchange of currency,other than Indian Rupees, for determination of value when transaction has been executed in cases other than Indian currency.
Goods: The rate of exchange for determination of value of taxable goods shall be the applicable rate of exchange as notified by the Board under section 14 of the Customs Act, 1962 for the date of time of supply of such goods in terms of section 12 of the CGST Act. As per Section 14 of the Custom Act 1962 “rate of exchange” means the rate of exchange—
- determined by the Board, or
- ascertained in such manner as the Board may direct,
for the conversion of Indian currency into foreign currency or foreign currency into Indian currency. CBIC issues the notification from time to time for rate of exchange to be applied.
Services: The rate of exchange for determination of value of taxable services shall be the applicable rate of exchange determined as per the generally accepted accounting principles for the date of time of supply of such services in terms of section 13 of the CGST Act.
However, up to 26th July 2017 the rate of exchange for the determination of the value of taxable goods or services or both was applicable reference rate for that currency as determined by the Reserve Bank of India on the date of time of supply in respect of such supply in terms of section 12 or, as the case may be, section 13 of the Act.
As per the Accounting Standard: A foreign currency transaction is any transaction that is denominated in or needs to be settled in any foreign currency. Such foreign currency transactions must be recorded, on initial recognition in reporting currency, by applying the exchange rate between the foreign currency and the reporting currency to the foreign currency amount at the date of the transaction.
AS 11: In the books of account foreign currency transactions are recorded as per applicable Accounting Standards. AS-11 deals with the Effects of Changes in Foreign Exchange Rates. Following are some of the principles to record foreign currency transaction:
Thus, different exchange rates may be applied for supply of goods for paying tax under the GST regime and in accounting valuation. This can be one of the reasons for turnover differences in GSTR 9C between financial statements and GSTR 9. A comparative statement for difference in foreign exchange as per Rule 34 of the CGST Rules and AS-11 should be made, and difference in turnovers because of difference in foreign exchange rates will be reported in GSTR 9C.
Reporting at Balance Sheet Dates: Exchange differences which arise on reporting the enterprise’s monetary items at the rates different from the ones at which they’re recorded initially must be recognized the income or as an expense. However, there will no GST impact of the same.
7.6 AS 12/Ind AS 20: Accounting for Government Grants
- (i) As per Accounting Standards: Government grants are assistance provided by the Government in cash or kind to an entity for past or future compliance with certain conditions. Accounting treatment of Government Grants in Income based approach, provides for an appropriate amount in respect of such earned benefits, estimated on a prudent basis, to be credited to income for the year even though the actual amount of such benefits may be finally settled and received after the end of the relevant accounting period.Under the GST Laws, as per Sec 15(2)(e) of the CGST Act “the value of supply shall include subsidies directly linked to the price excluding subsidies provided by the Central Government and State Governments”.
- (ii) Going by the above discussion it may be inferred that Government Grants would not be treated as Revenue for the purpose of GST.
7.7 Accountingstandard–18:RelatedPartydisclosures Accounting standard Requirement
Application of this Accounting standard from GST Perspective:
This Standard should be applied in reporting related party relationships and transactions with related parties. The requirements of this Standard apply to the financial statements of each reporting enterprise as also to consolidate financial statements presented by a holding company.
Name of the related party and nature of the related party relationship where control exists should be disclosed irrespective of whether or not there have been transactions between the related parties.
It would be relevant to note that Related Party as per Accounting standard 18 and related party as defined under valuation provision under GST may not be the same but GST auditor can refer notes to accounts where related party disclosures have been made to identify possible related party transaction from valuation perspective. Since, in case of related party transaction, valuation rule 28 will apply, Auditor may check whether auditee has carried out transactions with related party as per valuation rule 28 or not.
7.8 AS-29 / Ind AS 37: Provisions contingent liabilities and assets
As per the Accounting Standard, a provision is a liability of uncertain timing or amount that arises from a past event that is expected to result in an outflow of the entity’s resources. A contingent liability is a present obligation with uncertainties about either the probability of outflow of resources or the amount of the outflows, and possible obligations whose existence is uncertain. A contingent asset is a possible asset whose existence is uncertain. A provision is recognized for a legal or constructive obligation, if there is a probable outflow of resources and the amount can be estimated reliably. Probable in this context means more likely than not. A constructive obligation arises when the entity’s actions create valid expectations of third parties that it will accept and discharge certain responsibilities.
Contingent liabilities are recognised only if they are present obligations assumed in a business combination – i.e. there is uncertainty about the outflows but not about the existence of an obligation. Otherwise, contingent liabilities are disclosed in the notes to the financial statements.
Contingent assets are not recognised in the balance sheet. If an inflow of economic benefits is probable, then details are disclosed in the notes to the financial statements. A provision is measured at the ‘best estimate’ of the expenditure to be incurred. Warranty and replacements are the examples where provisions may be required to make in financials in terms of Ind AS 37 as explained above.
Treatment of the provisions, warranties and replacements under GST: If a warranty is given with the supply of any goods or services, it shall be treated as a composite supply of the original principal supply. However, GST will be applicable on warranty amount if recovered from customer.
In this chapter an effort has been made to bring out certain issues that would have an implication while an auditor conducts the GST audit. The illustrations / examples considered in the chapter are not exhaustive. However, several other issues may crop up in a real business environment which needs to be borne in mind.
He is Founder Member at AGA Advisory, Practicing Chartered Accountant, Editor in Chief at Chartered Online and Fellow Member of ICAI. AGA has been Handling matters related to Taxation, Audits, Assurances, Corporate Laws and Finance field etc since 2010 with clients across multiple domains & cities. He has authored Books, panelled on TV-Talk Shows and conducted seminars / Trainings at various forums. Link to Complete Profile of AGA and CA Ankit Gulgulia (Jain)