pri 19 Important GST points while finalizing balance sheet 19 Important GST points while finalizing balance sheet

Manas Joshi

Manas JoshiCurrently every business organization is engaged in finalizing books of accounts and preparation of Balance Sheet for the financial year 2017-18. This financial year is divided into two indirect taxes provisions namely, pre-GST (Excise, Service Tax and VAT) and post-GST. This being the first financial year since GST implementation, it becomes important to understand the legal provisions under GST law while finalizing books of accounts and preparation of Balance Sheet. Therefore, in order to safeguard the interest of the business organizations and provide some idea regarding GST audit preparation, I am taking this opportunity to discuss the following important GST points while finalizing Balance Sheet:

1. Reconciliation of sales / other income as per books of accounts with GSTR-1 / GSTR-3B outward liability – During any audit, any officer / auditor is going to rely on value reported in CA certified books of accounts and therefore, it is highly advisable to reconcile value of outward supply shown in books of accounts with the value reported in GSTR-1 / GSTR-3B. It may be noted that value as per books of accounts and value reported in GST returns cannot be matched due to some of the following GST legal provisions:

a. Inter-state stock transfer is treated as outward supply though it is not a sale transaction;

b. Recovery from employees is treated as outward supply though it is not a sale transaction;

c. In many cases, companies are charging GST on free samples / FOC supply which is not reported as sale;

d. Any amount recovered from vendor on account of penalty is treated as outward supply though it is not a sale transaction.

2. Reconciliation of GSTR-3B & GSTR-1 & subsequent adjustment / rectification of returns – In few cases, I have observed that there is a difference between value of outward supply reported in GSTR-3B and value of outward supply reported in GSTR-1. This may happen due to changes in transaction at the later stage or any other reason. Logically value of outward supply should be matched and therefore, if there is any difference, then in that case, it would be advisable to rectify the differential value at the time of filing GSTR-1 / GSTR-3B for the subsequent month(s).

3. Reconciliation of ITC credit ledgers & GST liability ledgers – Logically speaking, ITC closing balance as on 31st March 2018 should match with ITC balance reflected on GST portal under input tax credit ledger and cash ledger (like PLA balance).

4. Classification of goods / services and respective rate – Verification is advisable mainly in case of composite supply. In such a case, company is required to classify such supply and GST rate pertaining to principal supply of goods or service.

5. Matching of ITC on imported goods with ICEGATE – Government system has started matching of IGST value of a particular month reported in GSTR3B (under IGST credit on imported goods) with IGST value reflected on ICEGATE portal. This value may not match due to certain reasons, mainly in case of month end import consignments. In such a case, reconciliation with IGST value as reflected on ICEGATE portal is going to play a vital role.

6. Admissibility of input tax credit (ITC) – While finalizing ITC, it is advisable to go through the “negative list” given u/s 17(5) of CGST Act, 2017. In other words, ITC is available on all such goods / services which are used in the course of business except list of goods / services given u/s 17(5) of the CGST Act, 2017.

7. Verification of “place of supply” to check whether correct GST is charged – Verification is advisable mainly in cases where “Bill To” person is different than “Ship To” person. In such a case, “place of supply” is location of the “Bill To” person rather than location of the “Ship To” person.

8. Reverse charge liability in case of goods / services – It is advisable to reconcile value reported in GSTR-3B with respective expense ledger. For example, transport expenses for GTA, legal expenses / professional fee for Legal service etc.

9. Verification of “Other Income” ledger – It is advisable to go through every transaction reflected in “Other Income” ledger to confirm as to whether GST is applicable on any of such transaction for which tax invoice is not prepared. For example, penalty / damages recovered etc.

10. Supply of services free of cost to branches located to other States – As per Section 25 of the CGST Act, 2017 read with clause 2 of Schedule – I to the CGST Act, 2017, any support given by head office to its branches / factory is to be treated as “outward supply” and accordingly, IGST will be applicable. In such a case, companies are definitely not preparing any commercial invoice however, as per above legal provisions, tax invoice is required to be prepared and IGST liability needs to be paid.

11. Non-availment of ITC in case of FOC receipts – As per Section 7 of the CGST Act, 2017, GST is not required to be charged in case of supply of free samples or FOC. However, it is seen that many companies are charging GST on free sample or FOC supply for easy compliance of Rule 42 of CGST Rules, 2017 (i.e. non-requirement of reversal of ITC on free sample or FOC supply). If any company has received any goods as free sample or under warranty or FOC along with tax invoice of the supplier, then in that case, it would be advisable not to claim input tax credit since there is no question of making payment to the vendor, which is one of the pre-condition of availment of credit.

12. Creditors more than 6 months (180 days) – As per the proviso to Section 16(2) of the CGST Act, 2017, company is required to make payment of basic value plus GST to the respective supplier within a period of 180 days from the date of tax invoice. It may be noted that if such payment is not made within 180 days from the date of tax invoice, then in that case, input tax credit availed against such tax invoice is required to be reversed (by adding output tax liability) along with interest.

13. Adjustment of advance in earlier month – Upto 14th November 2017, GST was payable even on receipt of advance against goods. In such a case, GST liability was required to be reduced at the time of raising tax invoice in the subsequent month(s). It is seen that in few cases, companies have inadvertently not reduced GST liability and paid full GST amount as mentioned in tax invoice which has resulted in excess payment of GST. Such excess payment can to be adjusted in financial year 2018-19 at the time of filing GSTR-3B of any month.

14. Any foreign payment made (apart for import of goods) for which CA Certificate is obtained – all foreign payments excluding payments against import of goods may attract IGST towards import of service under reverse charge.

15. Any recovery from employees – Recovery of any amount towards transport charges, mobile expenses, notice pay, canteen expenses etc. would attract GST. Such recovery is to be treated as outward supply and GST is applicable at the appropriate rate. However, since employer-employee are related parties, valuation will play a vital role.

16. Any value of goods written off in the books – as per Section 17(5)(h) of the CGST Act, 2017, if any company writes off any value of goods (whether raw material or WIP or finished goods), in such a case, respective ITC needs to be reversed.

17. Sale of used cars – In case of sale of used cars, Compensation Cess was required to be paid apart from GST. Such Compensation Cess was payable upto 24th December 2017. I have observed that many companies have paid GST at appropriate rate at the time of sale of company owned cars however, Compensation Cess has remain unpaid.

18. Reversal of ITC in case of exempted / non-GST supply – As per Section 17(1) and 17(2) of CGST Act, 2017 read with Rule 42 of CGST Rules, 2017, companies are required to reverse input tax credit of common goods / services used for providing taxable as well as exempted supply. Such reversal is required to be made as per the formula given under Rule 42 of CGST Rules, 2017 on proportionate basis.

19. ITC on pre-paid expenses – It is seen that many companies have paid certain amount in the financial year 2017-18 which is pertaining to services to be received during the financial year 2018-19. Such expenses are treated as “pre-paid expenses”. For example, lease line expenses, rent, insurance etc. It is seen that companies have claimed ITC on such services since tax invoices are booked and payment is made. However, one of the pre-condition of availment of taking credit is that such service is received. In case of pre-paid expenses, service is not actually received and therefore, this would amount to excess availment of credit.

The above list is certainly not the exhaustive list. It is just an attempt to cover as many as GST related points to be considered while finalizing Balance Sheet and for GST audit preparation.

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  1. Ranjana Pandey says:

    If we forget to mentioned reverse charge expenses in gstr-3B but same has been reflected in balance sheet. Does it attract any tax liability?



  3. Sunil Pandya says:

    This article shows ITC on certain prepaid expenses, one is Insurance, but how can someone include in itc, as itc is availed on goods and services which are taken for manufacture the goods or provide services.

  4. Ajay Dhandhukiya says:

    Dear Sir,

    I credited expense ledger against recovery of the same expense booked, but auditor saying me that I should have to pay GST on it, as credited expense ledger means showing income.

    Kindly suggest about it.

  5. Rajukutty Joseph says:

    What is your opinion if I said an overlapping of flow of statutory documents should happened – means balance sheet to be filed with IT audit report filing on 15/10/2018 and GST audit up to 31/03/2018. Can we incorporate the changes of GST Audit in B/S – Reply soon

  6. Syed Nayaz says:

    Dear Sir,
    POINT No.17:
    You have mentioned compensation cess is payable up to 24/12/2017 on sale of company used cars. What about sale of company used car after 24/12/2017? I believe Cess is applicable from 01/07/2017 to till date, there is no gap in between.

    Plz advice

  7. C P Ethirajan says:

    Regarding ITC on prepaid expenses, I have one point to be added. Strictly speaking one can avail only 1/12th the ITC every month on payment made towards AMC/Fire Insurance which is valid for one year.

  8. P.Manohara Gupta says:

    I appreciate for valuable inputs given in the article “19 important GST points while finalising Balance sheet”.
    I have a query with regard to treatment of Excise Duty provided on closing stock as on 31.3.2017 or duty paid stocks lying at Depots for which duty refund is received as per transitional provisions, what should be accounting entry and disclosure in the financial statements with regard to opening stock( Which was valued inclusive of duty)

  9. rajiv mangrulkar says:

    it is not clear from point on.1 above, whether on bhalf expenses and on behalf payments – inter company, intra company office/sites/factory in different states with different gst registrations – can that be treated as outward supply of services.

  10. rajiv mangrulkar says:

    01.are the above points applicable to govt. undertakings, psu and state and central govt agencies for public utility works of roads, highways, canals, dams, mining, power etc. most of these employers are not gst registered do not follow gst format of billing. i.e gst non compliant.

    02. the input claims as per gstr 2/2a and 1 of supplier reveals huge gap whether the receiver of inward supplies can go ahead with gst inputs claimed as per suppliers bills irrespective of whether same is credited in gstin portal of not?

    03. gst on gta and legal consultants after abolition of RCM in principal either sec 9 (3) or (4) cannot be followed partly, hence mandatory to get gst registered and liability should not be on receiver of service.

    04. changes in rates in different dates for work contract services of 18/12/5 % respectively difficult to implement on accrual basis in remotely areas working construction industry where trained manpower in gst is rare to comply gst .

    05. focus of business is more on compliance of tax laws – direct/indirect instead of business and generating revenues to survive in business and then to clear the tax, interest,penalty burdens.

    06. gst compliance is feasible only when the books of accounts are maintained on cash basis instead of accrual basis which will clash with company act.

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July 2021