This Article deals with the nuances of the GST framework for Import Trade viz a viz the challenges laid down while adhering to the Accounting Standard AS 11 – The Effects of Changes in Foreign Exchange Rates
Lets understand a typical Import illustration –
|Date||Transaction||Customs Rate||RBI Rate||SBI Rate|
|Preferred by Auditors ( though RBI archives do not provide now and it is now sourced from geojit.com)||Preferred by Company’s Management|
|26.03.2021||A Supplier from Germany loads the goods on a vessel bound to India having invoice value of USD 10,000 on CIF basis payable in 90 days from B/L||1 USD = INR 73.25||1 USD = INR 73.35||1 USD = INR 73.80|
|27.03.2021||Date on the Bill of Lading||1 USD = INR 73.25||1 USD = INR 73.40||1 USD = INR 73.85|
|28.03.2021||The Customer receives the documents viz Bill of Lading, Invoice copy, Packing List. The date on B/L is of 27.03.2021||1 USD = INR 73.25||1 USD = INR 73.00||1 USD = INR 73.50|
|31.03.2021||Year End Date||1 USD = INR 73.35||1 USD = INR 73.50||1 USD = INR 74.00|
|30.04.2021||The Customer in India files the Bill of Entry||1 USD = INR 74.00||1 USD = INR 74.10||1 USD = INR = 74.60|
|01.05.2021||The Customer’s CHA has cleared the goods from the customs and the goods are delivered to the buyer’s warehouse the same day||1 USD = INR 74.00||1 USD = INR 74.25||1 USD = INR 74.65|
Under CIF the risk in the goods passes from the seller to the buyer at the time the goods are loaded and stowed on board the vessel. – Assumed
|Question||Answer as Per Accounting Standard|
|When should the Buyer should account for this purchase||The Buyer should recognise the Import Purchase on 27.03.2021 ideally but since there is no document available as on that date, it is advisable to record the Import Purchase on 28.03.2021 ( the date on which the bill of lading copy etc is received from the seller )|
|Whether the outstanding amount of USD 10000 payable to the German Seller be restated as per AS 11 on 31.03.2021 ?||Yes. The exchange gain / loss arising on account of the the payables in foreign currency must be restated as per AS 11|
|How would such stock not lying with us be reported in the Financials as on 31.03.2021 ? Will it be restated ?||The Stock though not lying with us immediately but the risks and rewards of the stock are now lying with us, hence such stock would be reported in the financials as “Goods In Transit” forming a part of the “Closing Stock” under “Current Assets”. As per AS 11, Stock being a Non-Monetary item shall not be restated.|
|How will a query from the GST Department for Import Booking in FY 2020-21 without any corresponding bill of entry, customs and IGST payment corresponding to such purchase be explained ?||The explanation would suggest that the transaction is a part of the reconciliation of the total Purchase of goods being goods in transit.|
|How will a query from the GST Department for Import Booking in FY 2021-22 without any corresponding import purchase corresponding to such customs and IGST payment be explained ?||The explanation would suggest that the transaction is a part of the reconciliation of the total Purchase of goods being goods in transit.|
If you thought all you questions were answered satisfactorily, then lets come to the confusing part.
Confusion 1 – If the date of recording is finalised, lets finalise which conversion rate we shall apply.
Confusion 2 – While the customs bill of entry suggests a very conclusive proof for a conversion rate which is acceptable and also be easily explained to the GST Department or for that matter Income Tax department however, the date of recording of the Import Purchase would again have a different conversion rate.
Confusion 3 –
The Import Purchase price on the date of accounting i.e 28.03.2021 is INR 7,30,000 ( RBI Rate – preferred by Auditors )
Hence the actual cost of my goods on the day the bill of entry was file would be INR 7,40,000 ( as per Customs rate )
Further, if the purchase is converted at the SBI rate which is closest rate at which the actual remittance would take place, the stock would value at INR 7,35,000.
1. So the Management is now worried to the fact if the language of business is the language of accounts ?
2. Whether the costing of the stock provided by the Accountant is correct or they are actually making lesser margins based on incorrect costing details provided by the Accountant ?
3. And if recording the transactions in line with the Accounting standards but not in ease of the GST and Income Tax Law , where they would end up paying more administrative costs ?
4. And if the recording of transactions in line with accounting standards only would lead to a material misstatement while the financial statements are drawn up ?
1. Whatever conversion rate you choose i.e RBI / SBI / Customs / XE.com / OANDA.com – apply consistently year on year basis.
2. If you felt that the difference in purchase amounts above from 7.3 Lakhs to 7.4 Lakhs to 7.5 lakhs is not something material, imagine that if it’s a contract worth USD 10 lakh or the changes in exchange rate is atleast 3 to 5 Rupees which is very much possible or if you are an Importer having atleast 10 consignments which are in Transit as on the year end 31st March
3. The below opinion shall not apply in case of a Import Transaction which is ultimately sold on High seas sales basis
IN MY OPINION – emphasis supplied
There is only one straight jacket formula or opinion in this case –
It is advisable to record an Import Purchase on the date mentioned on the Bill of Entry with the applicable conversion rate mentioned thereon along with the customs duty and IGST amount which would also be converted on the same conversion rate.
This would achieve
1. Costing Aspects of the Stock would be more appropriate
2. Clarity during GST as well as Income Tax Assessments
3. Will not be a Material Misstatement of the Financial Statements
4. Ease of Recording – to the Accountant
5. Administrative Convenience – No reconciliations
6. Mismatch possibilities reduced between the Customs and the Income Tax Data
Let me know your feedbacks and questions on this. Also, if you want a similar article on the Export Leg of Goods, mention in the comment below.
Author Details: CA Raj Doshi, Prop. R C D & Co., Chartered Accountants Email : [email protected], Mobile : 9820803593
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