1. In today’s time, neither Goods and Services Tax (‘GST’) nor accounting under IND AS is novel and though most of the principles under both the concepts are aligned but still there are notable differences. The said differences if not understood and addressed properly will lead to uninvited litigations. IND AS has been brought in India in a phased manner since 01 April 2015 and it is applicable to specific categories of companies as per the roadmap laid down by the Ministry of Corporate Affairs. The old Accounting standards (AS) continue to apply to other categories of companies and other non-corporate entities. It’s a myth that IND AS adjustments don’t get recognised under GST Law. However, it’s not true which you may be better understood by the end of this note.
Recognition of revenue under IND AS and GST
2. IND AS 115 Revenue from Contract with Customers (earlier under AS 9) prescribes “accrual principle” as the basic criteria for recording revenue under books of accounts. The same is common across industries supplying any kind goods or services. Accordingly, with the help of such prescribed guidelines, income for any financial year as per books of accounts is On the other hand, there is no concept of recognition of income under the provisions of GST. Unlike Income Tax, GST is not payable on income earned but on provision of supply which is a wider term than income. The basic criteria for recording/recognising a transaction under either of the concepts is explained as under:
|Under IND AS 115, revenue is recognised when the entity satisfies a performance obligation (i.e. promise to transfer to the customer goods or services that are distinct or a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer). An asset (i.e. good or service) is transferredwhen (or as) the customer obtains control of that asset.
At contract inception, an entity determines whether each identifiable performance obligation in the contract, is satisfied at a point of time or over time.
For each performance obligation satisfied over time, as in the case of services, an entity shall recognise revenue by measuring the progress towards complete satisfaction of that performance obligation.
|The time of provision of supply1 shall be the earliest of the following dates:
i. Date of issue of invoice2 or receipt of payment whichever is earlier.
ii. Date of completion of provision of services [in case no invoice] or receipt of payment
iii. Date on which the recipient shows receipt of services in his books of accounts
|Under IND AS 115, revenue from sale of goods is recognised on satisfaction of performance obligation which is at a point of time when the customer obtains control of the goods. Indicators of transfer of control are (but not limited to):
i. Entity has a present right to payment for that asset.
ii. Customer has legal title to that asset (goods).
iii. Entity has transferred physical possession of that asset.
iv. Customer has the significant risks and rewards of ownership of the asset. v. Customer has accepted the asset.
|The time of provision of supply3 shall be the earliest of the following dates:
i. Date of issue of invoice4 or last date of issuing invoice whichever is earlier.
ii. Date of receipt of payment
3. From the above, it can be understood that though both the concepts are completely different but they supplement each other. It can be said that though a transaction may be “supply” in GST but it will definitely find its place somewhere in the books of accounts and vice versa. Thus, it would have been desirable that such thin line would be backed with some statutory guidelines which will curtail possible future litigation and moreover would provide correct path.
4.1 Illustration 1: Year End Sales Transactions
Mr. A sells goods to Mr. P where the transportation shall be the responsibility of Mr. A till the factory premises of Mr. P. The ownership of the goods is transferred when the goods are delivered by Mr. A. The goods have been dispatched on 30 March 20XX from the factory of Mr. A while the goods were received on 05 April 20XX. As per Section 31 of the GST Act, the invoice would be required to be raised on or before removal of goods i.e. 30 March 20XX. The liability under GST shall accrue in the month of March 20XX since the goods have been removed. However, the revenue would be recorded in April 20XX in books of accounts of Mr. A since as per IND AS 115, revenue is recorded only when the entity satisfies a performance obligation i.e. transfer of promised goods to the customer demonstrating that the customer obtains control of those goods. Hence the customer obtaining control of the promised goods under the contract is key to revenue recognition. Till the goods are transferred to the customer, in a manner depicting transfer of control over the goods, such goods shall be part of stock of the company. There will be timing difference in recording of liability under the GST and recording of revenue under IND AS. These transactions shall stand as unreconciled and has to be appropriately disclosed under FORM GSTR-9C.
4.2 Illustration 2: Financial Guarantee by Holding / Subsidiary Company
M/s. ABC Ltd is a Holding Company who has given a financial guarantee to banks on behalf of its 100% subsidiary company M/s. XYZ Ltd who has been granted a bank loan. As per the guidelines issued under IND AS 109 – Financial Instruments: Recognition and Measurement, the instant transaction qualifies as financial liability for M/s. ABC Ltd and depending upon the manner of execution of the transaction an ultimate effect would be given on the income side recognising the same as income. Accordingly, M/s. ABC Ltd should recognise consideration at fair value in lieu of the financial guarantee so provided on behalf of M/s. XYZ Ltd. The said transaction is recorded in the books of accounts due to mandatory requirement of IND AS. Therefore, an important aspect will arise that whether GST is liable on book adjustments? Under service tax regime, Hon’ble Chennai CESTAT5 had pronounced that such transaction would not be taxable since there is no consideration. The question regarding its “classification” as “service” is pending before the Supreme Court6. However, there is no ruling under GST which clarifies the said issue.
4.3 Illustration 3: Sale of goods under the Scheme
M/s. PQR Ltd is in business of sale of detergent at Rs. 100/kg. As a part of marketing strategy, M/s. PQR Ltd gives 1 bucket free with every 1 kg pack of detergent whose cost is Rs. 10/- per unit. Unlike the old accounting Standard 9 where any expense related to sales was to be disclosed under direct expenses, as per IND AS 115, such transactions shall be recorded at net. i.e. Rs. 90/- only (i.e. the cost of the bucket is reduced from the sale price of the detergent). However, under the GST, the liability has to be recorded at Rs. 100/- only. While preparing the reconciliation statement of Gross turnover against the revenue as per books, these transactions shall always stand as reconciliation. In cases where the goods are sold without any consideration (i.e. Free of Cost), they will directly be recorded as expense under the scheme and would get netted from the gross turnover. Accordingly, the turnover of sales as per balance sheet would be understated compared to the turnover disclosed under GST since it is paid on gross turnover. Accordingly, appropriate disclosure should be made in FORM GSTR-9C to address such situation so that it does not converts into any sort of litigation.
4.4 Illustration 4: Recording of Lease transactions in the Books of Lessor
M/s. DEF Ltd has given its commercial premises on lease for a term of 3 years starting from 01.04.2020 to M/s. LMN Ltd in following manner:
|Sr.no||Period||Monthly Lease (Rs.)|
M/s. DEF Ltd, the lessor, is required to record the transaction on straight line method in accordance with IND AS 116 – Leases. Hence, in the given case, the lessor shall record the transaction in the books of accounts by calculating average lease premium earned during the tenure of contract i.e. [(1+1.25+1.5)/3 = Rs 1.25 Lakhs]. However, under GST, M/s. DEF Ltd shall pay GST in each year at the lease premium fixed as per the contract. There will be timing difference in recording of liability under the GST and recording of revenue under IND AS. These transactions shall stand as unreconciled and has to be appropriately disclosed under FORM GSTR-9C.
5. Above mentioned are few illustrations which has been demonstrated to explain the gravity of the issue. Accordingly, it can be substantiated that since both the concepts are different, achieving parity between them would be difficult. Unlike Income Tax, where Income Computation Disclosure Standards [ICDS] were issued with the aim of bringing uniformity in accounting policies governing computation of income in accordance with tax related provisions, and also reducing the irregularities amongst them, there is no such guidelines prescribed under GST and hence reconciliation statement7presented under GST Act, 2017 would be with such open ended questions which if not addressed properly would lead to severe litigations.
6. In case of any clarification/queries, please feel free to contact the undersign:
|CA. Kevin Shah
M: +91-96642 94346
|Adv. Deep Shah
M: +91-99204 10008
|CA. Rovin Kothari
M: +91-98203 37515
1 Section 13 of the CGST Act, 2017
2 In accordance with Section 31 of the CGST Act, 2017
3. Section 12 of the CGST Act, 2017
4. In accordance with Section 31 of the CGST Act, 2017
6 Civil Appeal No 10878-10879 of 2018 filed by Onam Enterprises India Private Limited
7 FORM GSTR-9C
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