According to the provisions of IndAS, indirect taxes like sales tax, VAT, GST etc. that are recovered by the supplier from his customer should not form part of the supplier’s turnover as the tax is collected by the supplier on behalf of third parties. But in the opinion of the author, for reasons explained below, the supplier does not collect indirect taxes on behalf of third parties and therefore such taxes collected should form part of the turnover of the supplier and the present provision of the IndAS on this is erroneous and needs rectification.
Provisions of IndAS
IndAS 115 which has come into force from 1.4.2018, states in paragraph 47, as follows –
“Determining the transaction price
47 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.” [Emphasis by way of underline added]
IndAS 115 replaced IndAS 18 – Revenue w.e.f. 1.4.2018. Paragraph 8 of IndAS 18 stated as follows –
“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. 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.” [Emphasis by way of underline added]
The Fallacy
In the view of the author, both IndAS 115 and IndAS 8 suffer from a gross fallacy that it considers the recovery of indirect taxes like sales tax and VAT (by the seller) and GST (by the supplier), is on behalf of third parties (as shown in the underlined part of para 47 of IndAS 115 and para 8 of IndAS18 above). In other words, IndAS considers that the charge of the Sales tax/VAT is on the buyer and the charge of GST on the recipient of the supply. But if one were to go through the relevant legislations in some detail it will become apparent that the charge of the tax is on the seller/supplier alone and so he is not a “collector” of tax.
Relevant legal provisions
Central Sales Tax Act (CST Act) 1956
Section 6 – The liability to pay the tax on Inter-state sales is on the selling dealer, in other words, the seller of the goods and not the buyer.
Section 7 – Person liable to pay tax (i.e. the seller) has to get registered.
West Bengal VAT (WBVAT) Act 2003
Section 10 – The liability to pay the tax on sales is on the selling dealer.
Section 23 – Person liable to pay tax (i.e. the seller) has to get registered.
Central Goods And Service Tax Act (CGST Act) 2017
Section 9(1) – states that the GST shall be paid by the “taxable person”
Section 2(107) – taxable person is the person liable to be registered u/s 22 or 24.
Section 22/24 – person to be registered is the ‘supplier’ of goods or services.
So it is the supplier of the goods or service that is liable to pay the GST under the CGST law. The provisions are the same in the State GST Acts also.
Thus a close study of the various Acts clearly show that the charge of tax is on the seller/supplier alone. Nowhere in the various Acts is it mentioned that the buyer is liable to pay the tax and that the role of the seller/supplier is to collect the tax from the buyer as a “tax collector”.
It is also significant to note that wherever an exception has been made and the tax is levied on the buyer under reverse charge (as under section 11 of the WBVAT Act 2003 on purchasers of Raw Jute or Section 9(3) of the CGST Act) it is the buyer that has to get registered and pay the tax and the seller/supplier does not have to charge the tax.
The fact that the assessment of the tax is done in the hands of the seller/supplier only (except in the case of reverse charge), and not on the buyer, further reinforces the proposition that the seller/supplier of goods /services is not a tax collecting agent. If he were so, the assessment would invariably have been on the buyer.
Though the seller/supplier almost always recovers the indirect tax from the buyer, he is not under any legal obligation to do so and theoretically he may in fact choose not to collect the tax but still he will remain liable to the government for the tax because the charge is on him and him alone and not on the buyer.
For the aforesaid reasons, the seller/supplier is NOT a ‘tax collector’ who ‘collects tax on behalf of third parties’ as stated in the standard. He pays the tax on HIS OWN ACCOUNT because it is he who is liable under the indirect tax laws for payment of the tax and the law does not fix any responsibility or liability on the buyers of the goods/services to pay any tax.
Therefore any recovery of the indirect tax from the buyer by the seller/supplier is akin to recovery of any other costs of the goods/services (like raw material cost, wages cost, transport cost etc.) with the sole exception being that the cost of the tax is disclosed separately in the invoice. If the seller/supplier does not recover, say his transport cost, it would be a loss to him. Similarly, if he does not recover the sales tax/VAT/GST it would also be a loss to him because he would have to pay the tax to the government and there is no legal provision that the buyer has to reimburse the tax to the seller/supplier. So if the seller/supplier chooses not to recover from his buyer, at the time of finalizing the contract, the indirect tax that would be payable by him to the government, the law will not compel the buyer to reimburse the same to the seller/supplier.
Extract of some judgments of the Courts that show that in case of indirect tax law, the charge of tax is on the supplier of goods/services and therefore he is not a “Collector of taxes on behalf of third parties”.
RC Tobacco Ltd. vs UOI [2005] (188) ELT 129 (SC) – Para 54 of the judgment – “However we cannot lose sight of the fact that although excise duty like other indirect taxes may be passed on to the customer of the goods under the law as it now stands, it is the manufacturer of the excisable goods to whom the excise authorities will look for payment. How the manufacturer will adjust its liability with its customers does not concern the respondents nor can they be asked to recover their dues from persons who may have ultimately taken on the responsibility to pay the excise duty as a result of an agreement with the manufacturer. [See in this connection State of Rajasthan v. J.K. Udaipur Udyog Ltd. – (2004) 7 SCC 673, 692” [Emphasis added].
American Remedies P Ltd. vs Govt. of AP [1999] (113) STC 400 eq. (1999) 2 SCC 117 (SC 3 member bench) – An assessee is liable to pay sales tax and the question whether he has collected it from consumer or not is of no consequence. [Same view in Mahaluxmi Rice Mills vs State of UP AIR 1999 SC 147 (SC Constitution Bench); State of Rajasthan vs. J.K. Udaipur Udyog (2004) 137 STC 438 (SC)].
Conclusion
For the reasons set out above, it is the view of the author that the indirect taxes charged by the seller/supplier to the buyer of the goods/services is only a recovery of his costs and is a part of the price. Hence the same should form part of his Revenue/Turnover and for this reason it is suggested that the aforesaid paragraph 47 of IndAS 115 needs a review and the ICAI, in conjunction with the NACAS, may consider accordingly.
Author Bio
A thought provoking article. The view seems to be correct and the standard does seem to be erroneous in that indirect taxes recovered should not form part of turnover.