During finalisation of accounts, the following points are to be considered while finalisation of such assets.
1. Blocked/ Ineligible credits
Motor vehicles
Input tax credit shall not be available in respect of motor vehicles for transportation of persons having approved seating capacity of not more than 13 persons (including the driver) including leasing, renting or hiring thereof, except when they are used for making the following taxable supplies-
(i) Further supply of such vehicles; or
(ii) Transportation of passengers; or
(iii) Imparting training on driving such motor vehicles.
It may also be noted that input tax credit shall not be allowed in respect of services of general insurance, servicing, repairs and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to above, except when such services are used for specified purposes stated above.
Input Tax Credit shall be allowed for motor vehicles used for transportation of goods.
Construction of immovable property
Input tax credit shall not be available in respect to goods or services or both received by a taxable person for construction of an immovable property i.e. building, other than plant and machinery.
We should verify the correctness of the amount capitalized in the books of accounts to ensure that the GST on ineligible items are not taken as input tax credit.
2. Assets in the custody of third parties
Capital assets like moulds, dies, jigs, fixtures and tools can be held by third parties (job workers) for an indefinite period of time as may be decided by the principal. This will not have any impact under GST law. However, we should ensure that the principal maintains all relevant data in terms of location of the third party, nature of asset held etc.
Capital assets other than moulds, dies etc. with a job worker are to be returned within a period of 3 years or as extended from time to time by the appropriate authority. This must be reviewed on a regular basis to avoid any legal consequences.
We should verify whether the capital assets sent to job workers, if any, have been returned within the specified timeline. If the same is not returned the we have to ensure that the same has been declared as deemed supply and relevant tax discharged on the said assets.
3. RCM on import of services
There are several services such as erection and commissioning, technical consulting services, architect’s services, etc. which are capitalized as part of cost of asset as per AS-10/ IND AS-16. These services will be treated as import of services when they are rendered by persons outside India and the recipient is liable to discharge GST on reverse charge basis.
We should verify whether there are import of services in case of assets purchased. For the import of services, we should verify whether liability has been discharged as per the relevant provisions. We must ensure that the tax paid under RCM is not claimed as ITC, if the same has been paid for construction of building.
4. Disposal of assets on which input tax credit taken
As per section 18(6) of CGST Act, in case of disposal of capital goods or plant and machinery, on which input tax credit has been availed, the registered person shall pay an amount equal to the input tax credit availed on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher.
5. Right of Use of Assets under IND AS
In the case of companies where IND AS is followed, right to use of assets would be created in the books of accounts. There will not be any impact in relation to GST as the ITC can be taken only on the basis of actual invoices without considering any factors like time value, discounting etc.
6. Inventories
Inventories consist of raw materials, work-in-progress, finished goods and stock-in-trade.
In terms of the finalisation of accounts with reference to GST, following points are to be considered:
(a) In general, all inventories purchased will have a GST component which can be taken as input tax credit.
(b) Caution needs to be taken in case of goods-in-transit, goods sent to job workers and goods sent to agents.
7. Goods in Transit
In case of goods-in-transit, the input tax credit shall be available on the invoices from the suppliers only when the goods are received by the entity. This will cause a timing difference in terms of input tax credit available vis-avis availed.
We should verify the goods-in-transit to ensure that the input tax credit is availed in the books only when the goods are received by the business entity, as this is one of the primary conditions to be satisfied for availing credit under section 16.
8.Goods at third party site – Job worker
A job worker is a person who carries out a process or a treatment on goods belonging to another registered person. A job worker need not be a registered person. A registered person (principal) sends goods to a job worker/ sub-contractor for say, finishing or polishing related activities.
In this case the entity should maintain a record of inventories sent and should have proper documentation in terms of delivery challan. Similarly, there can be cases where the raw materials are directly sent to job workers premises from the vendors’ location, without passing through the principal.
In this situation the principal can claim ITC only when the goods are physically received by the job worker. There can also be cases where the goods move to multiple job workers e.g. textile industry for various stages of production.
It must be noted that the goods sent to the job worker, must be returned to the principal within a period of twelve months which may be extended to 24 months with the prior approval of the appropriate authority.
9. Goods at third party site – Sale on Approval Basis
In the case of goods sent on sale or approval basis, the supply shall be deemed, either at the time of supply or six months from the date of removal, whichever is earlier. In case goods are sent on “Sale on approval basis”, we should verify the compliance in terms of GST provisions. If the goods are not returned within 6 months, it should be treated as deemed supply and creation of liability and payment of tax would be warranted on the said goods.
10. Adjustments to inventory on account of physical verification
Discrepancies noticed on physical verification of inventory between book stock and physical stock must be examined and suitable action taken. These differences may arise due to expired goods (beyond shelf life), theft, damage, distribution of free samples, return to vendors and non-accounting of purchases in the financial records, etc, Some of these differences must be written off or written back.
11. Trade Receivables
In case of export of services, the GST mandates various conditions like location of recipient of services outside India, place of supply outside India, the receipt of sale proceeds should be in convertible foreign exchange or Indian rupees wherever permitted by RBI etc. Further, if the exports are made under Letter of Undertaking (LUT) without payment of any duty under GST, rule 96A stipulates that convertible foreign currency or Indian rupees are to be received before the expiry of one year, or such further period as may be allowed by the Commissioner, from the date of issue of the invoice for export. In the event of non-realization of the proceeds from export of services within the stipulated time as mentioned above, GST is payable on the same.
In export of services, there can be sub-contracting of some services outside India. In cases where such sub-contracting is involved to any other person outside India, then the impact of sub-contracting will lead to import of services in India and accordingly liability is to be discharged by the Indian entity.
12. Other Current Assets
During the course of verification of the current assets balances in the balance sheet, we should necessarily map the input tax credit ledgers as per books with the GST credit ledgers. The input tax credit ledgers disclosed in the financial statements should normally tally with the GST credit ledgers as per the portal. However, invariably there will be differences and it is incumbent for us to reconcile the differences as per GST return with the books of accounts and ensure there are no material or unexplained differences. The following items would generally form part of reconciliation between books and GST returns:
Input tax credits taken in a subsequent period in the GST returns whereas the same is accounted in a different accounting period.
Input tax credits disclosed in books not available in the GST portal on account of (a) non-filing of forms in cases of merger/ acquisition of companies and (b) transitional input credit taken before registration etc.
Reversal of ITC made in the portal not reversed in the books of accounts.
Refunds rejected/ short received not adjusted in the books of accounts.
Refunds filed without transferring ITC to ‘Refund receivable account’ in the books, which are pending for approval.
ITC availed in the portal shall be subject to rules like 10% of available credit in FORM GSTR-2A, etc. However, ITC would have been accounted in full in the books of accounts
Further, we should also reconcile FORM GSTR-2A balances with the input credit taken as per returns. Material differences may affect the availability of input credit and consequently increasing the GST payable.
13. GST Cash Ledger Balances
GST cash balances as provided in the books of accounts are to be reconciled with the electronic cash balances before finalisation of accounts.
Differences arise between GST cash ledger and the books of accounts in the following cases:
TDS/ TCS credits received from customers not accounted properly in the books of accounts.
Cash paid on account of any demand of self-assessment during annual return filing, but payment not properly dealt with in the books of accounts.
Amount paid on account of any demand which has been properly dealt with in the books of accounts (debited to rates and taxes) but relevant form has not been filed in the GST portal to offset the liability.
14. Disclosure of GST liability/ GST asset in the Financial Statements
The GST input credit balances and output liability shall be allowed to be offset when the entity has legally enforceable right to set-off the recognized amounts. The excess of input credit over output payables shall be disclosed as part of other current assets and excess of output liability over input credits shall be disclosed as other current liabilities. If the right to off-set is not statutorily available, then the same shall be disclosed as gross number s i.e. output liabilities will be shown as current liabilities and input credit shall be shown as other current assets.
During verification of trade payables, balances in the balance sheet, we should necessarily verify the GST provisions for the purpose of allowability of input tax credit. We should verify the following from GST perspective for finalization of accounts.
During verification of trade payables, balances in the balance sheet, we should necessarily verify the GST provisions for the purpose of allowability of input tax credit. We should verify the following from GST perspective for the finalization of accounts.
In case of foreign creditors, particularly service vendors, we should verify the impact of import of services and where applicable should review whether RCM has been properly discharged.
For domestic creditors, review of payment is sine qua non as ITC claimed must be reversed in case payment to the creditor is not made within a period of 180 days from the date of invoice and necessary interest to be provided on such reversal. We must also ensure that ITC so reversed is reclaimed when the payment is made to the creditor.
In case of e-commerce companies, provisions relating to TCS have to closely monitored and discharging of liability should be done on a periodic basis as envisaged by the GST Act read along with relevant arules.