The definition of Turnover as mentioned in the Companies Act, 2013 was worded in such manner that turnover includes taxes and other duties collected at the time of sale/provision of services.
This issue has been addressed by the Companies Amendment Act, 2017.
Definition prior to Amendment
Section 2(91) – TURNOVER means the aggregate value of the realization of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year.
The breakdown of the above definition is:-
Issues in Definition Prior to Amendment
The words “aggregate value” & “realization” used in definition mandated that any nature of amount collected by the Company in the course of sales / provision of services should be included in Turnover.
This meant that the government taxes and duties shall be included in turnover.
Whereas, the amount of turnover should be the revenue earned by the Company and should not logically & ideally include taxes and duties.
Also, the words “realized” led to an impression that only amounts received (and not amount due) should be counted in Turnover which is against the basic principles mercantile accounting system.
Explanation of issues involved while strict interpretation of earlier definition, by way of
1. Gross Sales = 1,000/- and GST = 180/- => Turnover = 1,180/-
2. Cash Sales = 5,00/- and Credit Sales = 2,00/- => Turnover = 500/-
3. Cash Sales = 2,500/- and payment for last year sales recd. = 2,00/- => Turnover = 2,700/-
Thus, this definition was not in consonance with the definitions used in the AS – 9
Recommendations in the Company Law Committee Report
The Company Law Committee constituted by MCA vide office order 04/06/2015, in its report recommend to make changes /improvements in certain definitions under Companies Act, 2013, in order to remove ambiguities and make the definitions more objective.
Excerpt from the said committee report regarding changes in definition of Turnover is as under:-
“Section 2(91) of the Act defines the term “turnover” to mean the aggregate value of the realization from the sale, supply or distribution of goods, or on account of services rendered, or both, by the company, during a financial year. It was suggested that excise duty and other taxes might be specifically excluded from the purview of this term. The Committee noted that the term has been used in the Act, mainly in the provisions giving prescriptive power on the basis of the criteria of a company‟s turnover. Accounting Standard 9 specifies gross turnover to be the amount of revenue from sales transactions. It was suggested by the Institute of Chartered Accountants of India (ICAI) that the definition of turnover should mean the amount of revenue recognised as per the applicable Accounting Standards followed by the company. The Committee, therefore, recommended that the definition of the term „turnover‟ be revised to read “turnover” means the gross amount of revenue recognized in the profit and loss account from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year.”
Amended Definition is as under:-
“Turnover” means the gross amount of revenue recognized in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year.”
[Effective from 09/02/2018 vide notification S.O. 630(E)] The breakdown of the above definition is:-
The substitution of earlier definition with the new one, has addressed the above said issues.
Applicability of / Exemptions from various provisions based on Turnover thresholds
Since, the amendment of the definition has led to changes as to what shall and what shall not constitute Turnover, therefore it is quite relevant to re-check of applicability of / exemptions from provisions which have Turnover as one of the criteria. The chart for the said purpose is as follows:-
Disclaimer: The entire contents of this article have been prepared on the basis of relevant provisions and information existing at the time of preparation. The observations of the author are personal view and the author does not take any responsibility of the same and this cannot be quoted without the written consent of the author.