Accounting treatment of CENVAT refund under notification no 187/6/2015
In order to support the survival of exporter of services in international market and for the growth Indian economy, the Central Board of Excise and Custom department has provided the facility of refund of CENVAT credit under rule 5 of CENVAT credit rules, 2004. Though through this relief, Export houses were able to trade in international market as their pricing model was no longer including cost towards CENVAT Credit. But at other side the exporters are struggling with liquidity problem and opportunity cost of piled up CENVAT credit eligible for refund under rule 5.
For effective achievement of purpose of rule 5, Central Board of Excise and Custom has taken much needed step to contribute towards speedy refund if piled up CENVAT credit in the account of exporter through notification no. 187/6/2015-Service Tax- dated 10th November 2015. According to this notification, service exporter can apply for instant payment of 80% of refund claim under rule 5 of the CENVAT credit rule, 2004, which have been filed on or before 31-3-2015 which has not been disposed of as on the date of the issue of circular. For refund under this notification the exporter need to file a certificate furnished by the statutory auditor of the Company in the prescribed format under this notification.
The focus is now on accounting treatment of refund under this notification. For purpose of fair accounting treatment, it is important to have perusal of para 3.1 of the notification as follows:
At the outset, the relevance of the certificate has to be clearly understood. It is not a substitute for verification by the refund sanctioning authority. It will ensure diligence on the part of the claimant and the statutory auditor, which will make him eligible for provisional payment of 80% of claimed amount. It had been clarified in the circular that the decision to grant provisional payment is an administrative order and not a quasi –judicial order and should not be subject to review. There is thus no reason to treat either the certificate or the provisional payment with fear or suspension.
From the above para of notification, it is clear that the amount refunded by the department is provisional in nature and is subject to assessment. Since the refund is not through final order, the same should be recorded as liability in the books of accounts and netted off with CENVAT credit asset once assessment is done. Accounting entry for the same should be:
Bank A/c Dr.
To refund from CBEC
Further the same should be disclosed in following manner in Non-Ind-AS compliant Schedule III.
Short term loan and advances
Balance with government authorities XXX
(Net of provisional refund received Rs. XX (Previous year Rs. XX)
Further as per revised Accounting standard 29 “Provisions, Contingent Liabilities and Contingent Assets” under Companies (Accounting Standards) Amendment Rules, 2016, contingent liability is defined as:
(a) a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or
(b) a present obligation that arises from past events but is not recognised because:
(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
(ii) a reliable estimate of the amount of the obligation cannot be made.
From the above definition, for the fair presentation, the Company should disclose the refund received as contingent liability also.