As India gets ready for transition to GST, the key question is whether India Inc. is prepared for this transition. GST transition is not only about a tax change but a complete business, finance, accounting and reporting overhaul. As management teams start assessing these changes, they will also need to factor in changes in financial reporting and indirect tax accounting.
Following are some key areas where companies will need to focus from financial accounting and reporting perspective on transition to GST.
Presentation of GST in financial statements
Currently, accounting treatment of various indirect taxes varies based on their nature and point of levy. Under IND AS, excise duty is included in revenue, since it is a production-based tax. Sales tax and VAT is not included in revenue, since it is levied at the time of sales. GST is a destination-based tax, which is levied at the point of supply. Hence, it is likely that revenue will not be presented including GST. This is likely to bring significant volatility in the reported revenue number of various companies even though from an economic perspective no significant change in operations has happened. Companies should consider a need for non-GAAP reporting to better explain their performance from a revenue perspective to all their stakeholders.
Impact of tax credit GST is likely to bring significant benefits to organizations by way of tax credit. Currently, organizations do not get tax credit for indirect taxes such as luxury tax, Octroi, Entry tax, CST. On transition to GST, majority of these levies are likely to subsume in GST and will be eligible for tax credit. It is a well-established accounting principle that refundable taxes are not considered as part of cost of acquisition of asset/expense and are accounted as an asset. Transition to GST will require companies to reconfigure their inventory valuation or asset capitalization or expense recording rules in their accounting system to ensure tax credits are accounted appropriately in the GST regime.
Reconciliations
Revenue recognition according to IND AS may not coincide with turnover number for the purpose of GST. For example, in case of multiple element contracts, total consideration will be allocated to each component based on fair value of each element. However, the same methodology may not work for GST purpose. Moreover, GST payments and return filings are expected to be state wise. Accordingly companies will need to devise a proper system in place, for timely state-wise reconciliations of periodic GST filings in various states, with the amount recorded in the books of accounts. Companies, which include excise as a part of sales for their internal reporting/MIS, may have to redesign the MIS post-GST transition and consider the consequent impact, if any, on KPIs of sales/marketing staff.
Accounting of tax holiday incentives
Many companies enjoyed significant amount of tax holiday incentives and accounted for same as government grant. For example, the Expert Advisory Committee of the ICAI, while evaluating an issue relating to sales tax exemption under In AS, required such exemptions to be recorded as revenue grants (distinct from sales). It is not clear whether these incentives will continue even in the GST regime. Companies will need to assess accounting implications of any change in these tax holiday benefits upon finalization of GST laws.
Updating of Chart of Accounts
Another key impact area will be the Chart of Accounts (COA) used for reporting. Currently, there are several indirect taxes and hence, there are usually many tax-related general ledger (GL) codes in the COA used for financial reporting. In a GST regime, the new COA will depend on the type of business, credit availment rules and place of supply etc. However, devising the new COA would require careful consideration and planning; else, this could impact financial reporting. Essentially management will need to make substantial accounting-related modifications in their IT systems at a transaction level, for all transactions affecting tax GLs, including to the auto accounting entries generated in ERPs. This will entail a detailed assessment to ensure there are no financial reporting errors and impact on internal controls post transition.
Transition
Companies will need to plan well for transition and assess carefully the transition rules. A key aspect will be whether transition results in any potential write off of tax credits accumulated in particular states and not likely to be set off. Another practical challenge relates to carry forward of tax credits. These may need to be carried forward state wise, which could involve significant effort in identifying and breaking down the current balances. Further tax accounting and compliance considerations needs to be planned in the IT systems for transactions originating before transition but reversing/concluding post transition, e.g., sales returns, receipt of purchases after transition etc.
Concluding remarks
India Inc. is already grappling with transition to IND AS and need to address various aspects of financial reporting systems and processes to move toward sustainable IND AS reporting. Transition to GST is also likely to impact many of these financial reporting systems as well. It is critical that organizations chalk out their mitigation plan to address changes arising out of both these regulations in a synergistic manner to reduce cost of transition and minimize business disruption.
By:
Rajiv Shah,