GST Considerations While Finalising Books of Accounts: A Practical Guide

Introduction:

While finalising the books of accounts, accountants and tax professionals generally focus on compliance with the applicable Accounting Standards and the provisions of the Income-tax Act. However, in the case of an assessee registered under the Goods and Services Tax (GST) law, it is equally important to review the financial statements from a GST compliance perspective also.

Generally, the books of accounts are finalised as follows:

1. Companies – In accordance with the Accounting Standards or Indian Accounting Standards (Ind AS), as applicable, issued under the Companies Act, 2013.
2. Other entities – In accordance with the Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI) and Generally Accepted Accounting Principles (GAAP).

In practice, most registered persons primarily prepare and finalise their financial statements from an accounting perspective and often overlook certain critical GST implications. Such omissions may result in avoidable disputes, reversal of Input Tax Credit (ITC), interest, or penalties during departmental audits or assessments.

This article highlights some of the important GST-related aspects that should be considered while finalising the books of accounts of a registered person. For ease of understanding, the discussion assumes a simple balance sheet of a small business entity.

Below is the Simple balance sheet prepared by M/s. Ram and Co

1. Property, Plant and Equipment (PPE)

While reviewing the Property, Plant and Equipment schedule, the following GST aspects should be verified:

(a) Capitalisation of Assets

The assessee should ensure that the cost of capital assets does not include the GST component where ITC has been availed. Section 16(3) of the CGST Act, 2017 specifically prohibits claiming depreciation on the GST component if ITC has been claimed.

Accordingly, capitalisation should exclude the GST amount wherever ITC is admissible.

(b) Construction of Immovable Property

Where expenditure relates to the construction of immovable property, compliance with Sections 17(5)(c) and 17(5)(d) of the CGST Act should be verified.

Where ITC is restricted under these provisions, the necessary reversal should have been made in the relevant GSTR-3B return.

(c) Purchase of Motor Vehicles

Where motor vehicles are purchased for transportation of persons having an approved seating capacity of not more than 13 persons (including the driver), the assessee should verify whether ITC is blocked under Section 17(5) and, wherever applicable, ensure that the credit has been reversed in GSTR-3B.

(d) Capital Goods Sent to Job Workers

Where capital goods are sent to a job worker, the assessee should ensure compliance with Section 19 of the CGST Act, including timely filing of Form ITC-04, maintenance of prescribed documentation, and proper tracking of the movement and condition of such assets.

(e) Component-wise Capitalisation

Where applicable, separate components should be capitalised independently instead of being merged with the cost of an immovable property.

Example: Ceiling fans fixed in a building should be capitalised separately rather than forming part of the building cost.

(f) Disposal of Capital Assets

On disposal of capital assets, compliance with Section 18(6) of the CGST Act should be ensured. GST should be discharged in the prescribed manner.

Where capital assets are sold as scrap, tax should be paid on the transaction value determined under Section 15 of the CGST Act.

2. Investments

Purchase of Gold and Silver

Many businesses purchase gold or silver as investments rather than for use in the course or furtherance of business.

The assessee should verify that ITC has not been claimed on such purchases merely because the invoices appear in the auto-generated GSTR-2B. Where ITC has been inadvertently availed, appropriate reversal should be made.

3. Trade Receivables (Sundry Debtors)

For practical purposes, trade receivables may be classified into:

• Domestic Debtors
• Foreign Debtors

(a) Domestic Debtors

Before finalising receivables, the assessee should review whether any credit notes or debit notes are required.

Where such adjustments are necessary, they should be issued within the time limit prescribed under Section 34 of the CGST Act.

Failure to issue credit notes within the prescribed time may result in denial of reduction in output tax liability.

Accordingly, a year-end review of receivables is highly recommended.

(b) Foreign Debtors

For export transactions, the assessee should ensure that export proceeds are realised within the period prescribed by the RBI or within the time permitted under the GST law.

Delayed realisation may invite disputes regarding the eligibility of zero-rated supplies.

Exchange Rate for Export Invoices

For exports of goods, GST invoices should be prepared using the exchange rate notified by Customs for valuation purposes.

The exchange rates prescribed under AS-11 or Ind AS-21 should not be used for GST valuation.

4. Inventory (Closing Stock)

While finalising inventory, GST implications should be examined in respect of:

• Goods lost or destroyed
• Goods sent on sale or approval basis
• Goods sent for job work
• Goods in transit
• Goods received in multiple lots

(a) Goods Lost or Destroyed

ITC attributable to goods lost, destroyed or otherwise rendered unusable should be reversed wherever required under Section 17(5).

Any shortages identified during stock verification should be appropriately analysed and necessary reversals should be made to avoid future disputes.

(b) Goods Sent on Sale or Approval Basis

Where goods are sent on approval basis, an invoice should be issued if the goods are neither approved nor returned within six months from the date of removal.

The inventory records and GST liability should be adjusted accordingly.

(c) Goods Sent for Job Work

The assessee should ensure compliance with Section 19 of the CGST Act and timely filing of Form ITC-04.

Any loss occurring during the job work process should also be appropriately accounted for.

Where statutory conditions are not satisfied, the deemed supply provisions should be examined and necessary GST compliance ensured.

(d) Goods in Transit

Where purchase entries have been recorded but goods have not yet been physically received, ITC should not be availed until actual receipt of goods in accordance with Section 16 of the CGST Act.

(e) Goods Received in Lots

Where goods are received in instalments or lots, ITC can be availed only upon receipt of the final lot.

Accordingly, the assessee should verify compliance before claiming ITC.

Inventory finalisation should therefore be undertaken not only from the perspective of Accounting Standards (AS-2/Ind AS-2) but also from the GST compliance angle.

5. GST Cash Balance

The balance available in the Electronic Cash Ledger generally arises due to excess tax payments or GST-TDS credits.

The assessee should reconcile the balance appearing on the GST portal with the balance reflected in the books of accounts.

In the case of GST-TDS, accounting entries should preferably be passed only after the credit is reflected and accepted on the GST portal rather than merely based on customer intimation.

This ensures proper reconciliation between the books and the GST portal.

6. GST Receivable (Input Tax Credit)

Where ITC is available in the Electronic Credit Ledger, the receivable should be presented appropriately in the financial statements.

Since CGST and SGST cannot generally be cross-utilised, they should be disclosed separately instead of presenting a combined GST receivable balance.

7. Trade Payables (Sundry Creditors)

Trade payables may be analysed under two categories:

• Domestic Creditors
• Foreign Creditors

(a) Domestic Creditors

While reviewing trade payables, Rule 37 of the CGST Rules should be considered.

Where payment to suppliers has not been made within 180 days from the date of invoice, ITC reversal may become applicable.

In addition, businesses operating multiple GST registrations should carefully review inter-branch accounting adjustments.

For example, where one branch purchases goods from a supplier while another branch settles the payment, proper accounting entries should be passed. Failure to do so may incorrectly indicate an unpaid liability, leading to unnecessary ITC reversal under Rule 37 along with interest.

Accordingly, creditors should be reviewed from both an accounting and GST compliance perspective.

(b) Foreign Creditors

Special attention should be given to payments made to foreign service providers.

The assessee should verify whether GST under Reverse Charge Mechanism (RCM) has been discharged on all applicable import of services and appropriately reported in GSTR-3B.

A vendor-wise review of foreign creditors is advisable to ensure complete GST compliance.

8. Security Deposits

Security deposits are generally refundable and therefore do not attract GST.

However, where such deposits are forfeited against any supply, the taxability of the forfeited amount should be examined.

A periodic review of the security deposit ledger is therefore recommended.

9. Advances Received from Customers

GST is generally payable on advances received towards the supply of services.

Accordingly, before finalising the books of accounts, the assessee should review all customer advances and ensure that GST has been discharged wherever applicable and properly reported in the GST returns.

Conclusion

Finalisation of financial statements should not be viewed merely as an accounting exercise. A comprehensive year-end review from the GST perspective is equally important to ensure compliance, avoid future litigation, and minimise the risk of interest, penalties, and denial of ITC.

The above points are some of the key practical areas that professionals and taxpayers should examine while finalising the books of accounts of a GST-registered person. A timely GST review not only strengthens statutory compliance but also facilitates informed business decisions and smooth departmental assessments.

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Disclaimer: The views expressed in this article are personal views of the author and are intended solely for educational and informational purposes. Readers are advised to refer to the relevant provisions of the GST law and seek professional advice before taking any action based on this article.

Author Contact: CA Venkat Tippaluri | Email: Cavenkat1997@gmail.com | Mobile: 8792082575