Implementing Goods and Services Tax (GST) is a giant leap towards creating a unified Indian market. While we expect the benefits of this single, robust and transparent regime to elevate India’s status with respect to economic growth at a global level, it would be equally vital to be mindful of the backstage transitions that our businesses would have to endure in order to surface as a tax-friendly destination.
GST is not a mere tax change; it will impact the way businesses run, especially in the areas of supply chain management, procurement policies, warehouse distribution, stock transfer, etc.
As India readies itself for one of the biggest indirect tax reforms in the form of GST, many industries have begun evaluating their accounting and IT functions with possibilities of a complete overhaul. Businesses strive to record each transaction properly in their books of account, so as to project a true and fair picture of the organisation. Every organisation endeavours to achieve a foolproof system of processes/databases that capture tax computation, leading to no defaults in discharging their tax liabilities. With India pacing on the path of overall economic reforms, the overall book-keeping and tax compliance processes are expected to change.
Our country has recently witnessed a phased roll-out of Indian Accounting Standards (Ind-AS). Under Ind-AS, several instances enumerate that the timing and amount of revenue recognition are not likely to coincide with the principles laid down under GST. For instance, as per Ind-AS 18, which deals with revenue recognition, revenue from sale of goods can be recognised in the books of accounts only once the effective control over the goods has been transferred to the buyer. However, the incidence of tax on such sale under the GST framework is likely to be on the basis of invoice. This could result in a difference in the timing of revenue recognition in the books of account and the invoice date.
Many companies invest into high value capital goods required for rendering services across the country. Under GST, the credit of taxes paid on procurement of capital goods maybe required to be distributed to each state where GST needs to be paid, based on situs of consumption of service. However, the manner of distribution and tracking the same into the accounting system may be a tough task to deal with.
Santosh Dalvi, Partner, Indirect Tax, KPMG – India
Further, accounting treatment for stock transfer would also differ under GST vis-a-vis the accounting point of view, as under the GST framework tax is expected to be payable even on stock transfers, considering it akin to sale.
Therefore, if the point of recognition of revenue as per the Ind-AS is different from that of invoicing (as per GST), companies may face the challenge of maintaining two sets of records, i.e., for accounting and for taxation.
Hence, it becomes imperative to have a seamless convergence between Ind-AS and the GST framework with the basic objective of removing variations in the treatment of several accounting and tax aspects, and to bring about standardisations in disclosures and revenue recognition.
Secondly, with CENVAT credit available at every stage of value addition, GST is anticipated to bring in the much sought after relief from the cascading effect of tax on tax which leads to spiralling costs, thereby burdening the final consumers.
While this rings in a positive bell, diving deeper down into this concept reveals the impact this can have on the numbers of any business as far as disclosing a true and fair view is concerned, e.g., CENVAT tax costs at each stage may taper final product/service costs.
Keeping margins constant, this could lead to gross sales showing a dip, which prima facie could portray a dent in revenues as far as management reporting is concerned. While corporate performance stands to be questioned and inefficiency could be declared as the culprit, it may take finer business acumen to attribute the diminishing revenue digits accurately to tax savings. It goes without saying that such misinterpretations could hurt market sentiments, leading to volatility in stock prices, which in actuality is reaping the real fruit of GST.
To address these repercussions, suitable financial statement reporting disclosure mechanisms need to be incorporated, so as to correctly portray business tangents.
At present, CENVAT credit rules disallow credit on various capex leading business houses to include the same in the asset value, enjoying the depreciation benefit over the years. Under GST, a continuous flow of credits of all the taxes paid may drop the value of capex capitalised to the extent of such credit to be taken, and accordingly, the profit reported to the shareholders may be higher as compared to the current scenario (due to reduction in depreciation cost.
Further, many companies invest into high value capital goods required for rendering services across the country (e.g., companies invest into servers which are located in one state, but use them for rendering services in multiple states). Under GST, the credit of taxes paid on procurement of such capital goods maybe required to be distributed to each state where GST needs to be paid, based on situs of consumption of service. However, the manner of distribution and tracking the same into the accounting system may be a tough task to deal with.
Valuation of the inventory lying in stock at the time of moving into the GST regime may also be a big exercise for the industry and could have a direct impact on the accounting and disclosure in financial statements.
Hence, it is expected that whenever GST becomes a reality, the transition from a multiple indirect tax regime to a unified tax structure would be smooth, without any surprise hiccups, providing ample time and opportunity to incorporate necessary changes in accounting and internal systems.
Kishore Purohit, Chartered Accountant supported the author in writing the article. The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG in India.