Analysis of Union Budget 2017 provisions of Income Tax Service Tax Excise Duty Custom Duty with Budget Highlights Commentary Speech, Notification, News & Articles.
Goods and Services Tax, as the name suggests is a tax on every supply of goods and/or services. GST is a metamorphic reform, which is finding its way towards the final stage i.e. implementation slowly and steadily. It is amply clear that GST is not merely an Indirect tax change but a business change since it is going to affect all the financial and non-financial functions of a business organization. Accordingly, it is imperative to study, analyze and scrutinize all the financial and non-financial functions again from GST angle.
Under the GST regime, it is proposed to upload the sales annexure/purchase annexure within the specified due date by every assessee based on which the amount of ‘INPUT TAX CREDIT’ (ITC) shall be determined, that too, electronically calculated by the system itself on the GSTN portal. To add to it, every state where a business has a presence will be required to register itself under GST Law. Given the above, it appears that there is going to be an enormous increase in the number of compliances, which an assessee shall be required to do. In such a scenario, it appears that ‘ACCOUNTING’ is going to be of utmost importance. It is going to be the driving force and shall decide the fate of GST.
The Government of India is trying to implement GST at anytime during the period April 2017 to September 2017. Hence, it appears that there is going to be a paucity of time to adopt, change and materialize the entire new system of Indirect Taxation. Given this, it is felt by the author to make the reader aware about the things that an accountant should do in advance for successful implementation of GST during the transitioning period of GST and at the same time easily comply with the current Indirect Tax related compliances. The author is of the strong belief that once accounting is in place all the other functions of the business will have to automatically fall in place.
2. Role of an Accountant under the Indirect Tax regime and under the GST regime
An accountant is a person who is an expert in the field of accounting and knows in and out of the business transactions, changes, way of business, modus operandi of the business, etc. Since the accountant is responsible for true and fair accounting, the accountant should only have one goal in mind i.e. to not let the change in law impact the speediness and accuracy of the accounting since the law is changing and not the concept of accounting.
Accordingly, as a pro-active measure, the accountant of the business should bear the following points in mind so that there is no major disruption in the business due to any accounting errors:
a. Conducting GST impact analysis
The Government of India has pro-actively taken certain measures to keep the various stakeholders of business aware about the metamorphic reform. Until date, the government has released two drafts of the model GST Law, four business processes reports on returns, payment, refund and registration. Taking into consideration such source of information, the accountant should understand the conceptual change in law; analyze the impact of the change on all the transactions from business, tax and accounting perspective. While India is on the brink of implementing GST, the accountant should also take care that the accounting of the transactions under the GST regime is in line with the methods, principles and conventions prescribed under IND-AS converged with IFRS.
If the owner of the business has appointed a consultant then the accountant should ensure that their analysis and suggestions are considered and suggested changes are implemented to the extent possible.
b. Stock of goods
Stock is an important aspect of a business. On stock of goods, following important other aspects are dependent:
i. Working capital;
ii. Input Tax credit under state VAT Act;
iii. CENVAT credit under Central Acts such as CVD/SAD;
iv. Cash realization cycle;
v. Procurement cycle
It is advisable for an accountant to maintain a “true and correct” accounting of the stock of goods as on 30 June 2017. (Assuming GST is implemented on 1 July 2017). An accurate track of stock of goods for which the movement has started prior to 1 July 2017 and which is completed post 1 July 2017 should be maintained. The accountant should obtain valuable advice/opinion from the consultants to know the correct availability of ITC on stock of goods as on 30 June 2017 and on goods, which is going to arrive at business premises’ after 1 July 2017.
The author is of the belief that the movement of stock of goods is planned in a way that the movement of goods is minimal during the period 29 June 2017 to 10 July 2017. Local or import procurements are planned so that the business is not affected. The business owners should plan a procurement of at least 15 days a month prior to the date of implementation after considering a cost benefit analysis of procuring goods in pre-GST regime and in post GST regime.
c. Working Capital
Under GST regime, the levy of tax is going to shift from origin based to destination based. Further, the ITC mechanism is going to be IT driven. Accordingly, in an ideal business scenario of lending credit period of 45 days and receiving a credit period of 45 days, the accountant should ensure that the business has a positive working capital of at least 15 days (1/3rd of lending period). Further, the accountant should ensure the following:
i. The accountant should co-ordinate in advance i.e. by 15 June 2017 with its vendors regarding the exchange of documents/e-mails regarding the monthly ITC confirmation in the post-GST regime.
ii. The prior period debit notes/credit notes are settled in pre GST regime since the valuation rules and the tax impact of the same are slightly different in pre-GST regime and post-GST regime.
iii. A system is brought in place just as banks i.e. the business should have KYC norms of its customer/vendors so that there is no leakage in the ITC in respect of un-registered dealers.
d. Opening balances of Credits
Section 167 of the Model GST Law prescribes the mechanism through which an assessee shall be allowed to avail the ITC carried forward from the previous returns. In order to ensure that the opening balance of credit is correct, it should be ensured that the accountant undertakes the following:
i. The monthly/quarterly state VAT returns for the period January 2017 to June 2017 are appropriately filled and submitted.
ii. As a pro-active measure, the business should ensure that a CA certifies after appropriate verifications, the following as on 31 March 2017 as well as on 30 June 2017 since both pertain to two separate accounting years:
The above CA certificate shall prove to be immense help to the accountant and the business at the time of GST audit (if any) conducted under Section 63 or Section 64 or Section 65 of the Model GST Law. The CA certificate shall be useful for adjudication of demand notices (if any) received under Sections 66 or Section 67 or Section 72 of the Model GST Law.
e. Important aspects of past Indirect Tax regime
In respect of the past Indirect taxes, the accountant should ensure the following:
i. Reconciliation of state CST forms with the books of accounts;
ii. State WCT TDS related compliances for which the due date falls after 1 July 2017; is completed;
iii. Maintenance of books as if a new company is incorporated in the post GST regime;
iv. Bank reconciliations;
v. Any major acquisition of fixed assets, purchases is planned in advance considering the logistics cost, ITC leakage (if any), and ITC availability/non-availability.
f. Revision of old agreements which had been entered prior to the implementation of GST and which is in force post implementation of GST
The owners of the business should take a business call after analyzing the taxation aspects as to whether the old agreements require revision or not. The owners should ponder over revision in respect of the following
i. Contract for sale of a free product along with the principal product;
ii. Repair and Maintenance contracts;
iii. Deployment and employment contracts;
iv. Contract for continuous supply of goods/services;
v. Installation and Constructions contracts;
vi. Media companies in respect of copyright agreements;
vii. Replacement and warranty arrangements;
viii. Lease, franchise and trademark agreements.
g. Treatment of advances
The advances received against provision of services was chargeable to certain Indirect tax levies (service tax specifically), however, under GST, advances received against any type of supply is taxable. Accordingly, the accountant at the time of receipt of any advance during the period 1 April 2017 onwards should document the following:
i. The advance is towards supply of goods or supply of services or both and the proportion of supply in case of supply of both goods/services;
ii. The type of good required to be supplied; (e-mail correspondence from customer)
iii. The date of receipt of advance;
iv. The place from where such supply of good and/or service shall be made in future;
v. The place of delivery of goods or the place of receipt of services; (e-mail correspondence from customer)
If the accountant documents all the above information then no problem shall arise as to the taxability of a particular transaction under the post GST regime. It would prove a dual benefit:
i. Correct applicability of tax i.e. either CGST+SGST or IGST as a whole;
ii. Correct applicability of rate of tax.
h. Important IT changes
While there are plethora of IT changes that will accompany with implementation of GST, the accountant should ensure that the following IT changes are taken care:
i. A separate tax ledger for every tax i.e. CGST, SGST, IGST on output side;
ii. A separate tax ledger for every tax i.e. CGST, SGST, IGST on input side
i. Decision of any re-construction in the business
Considering the practical nature of regulations, the author is of the strong belief that any re-construction in business should be considered keeping a framework that it is completed by 31 May 2017 so that there is a leeway of 1 month before GST is implemented. Further, in the post GST regime, the re-construction process should be taken up only after 30 September 2017 (assuming GST is implemented on 1 July 2017) so that the Income tax related compliances and other Indirect tax related compliances are bought into place.
While the GST consultant of the business is, busy in first stage of implementation of GST i.e. GST impact analysis, the accountant should ensure that all the points mentioned above in Para 2 are complied. This will help the accountant; business and the consultant in successful conduct of second stage of implementation of GST i.e. fine tuning of operations.
(The author is a qualified Chartered Accountant with specialized experience in the field of Indirect Taxes and under GST and can be reached at the following e-mail Id – email@example.com and – firstname.lastname@example.org)