The country-wide ambitious indirect tax regime, GST is set to roll out with effect from April 1, 2017. The government has already finalized the framework on the modalities of the GST law and its implementation. The GST council has increased its efforts to bring consensus on contentious issues regarding the dual control over the GST assessment. With this, the industry at large has jumped on to the bandwagon to ensure that the transition to the new tax structure is a success. Conventionally, countries that have implemented GST normally had three to four months to make the transition after the GST law was put into effect. However, given the current economic scenario in mind, market analysts contend that the same leverage may not be present for organizations in India.
The GST, hailed as the ambitious tax reform, is not just limited to changes in the tax structure, but also encompasses the overhaul of the entire business financial processes along with the accounting and financial reporting structure. This is likely to create a wide-ranging impact on the treatment of GST in financial statements and chart of accounts. As a result, the accounting system in companies will witness significant changes in revenue reporting, calculation of tax holiday incentives, and the way tax credit is written off. To fully comprehend the impact, companies will need to evaluate the changes GST will bring on the financial reporting and indirect tax accounting. Consequently, companies will be able to figure out the realignment in accounting and financial reporting for a correct revenue recognition.
Presently, accounting treatment of various indirect taxes are covered under the Indian Accounting Standards (IND AS) where various taxes are treated based on their nature and the point of levy. For instance, excise duty is included in revenue since it is origin-based or production-based tax. On the other hand, sales tax and VAT being levied at the time of sales is not taken into account while calculating revenue. GST is a consumption-based or destination-based tax, which implies that all tax components are levied at the point of supply. Hence, the state that will collect taxes will be decided by the place of consumption. As a result, while projecting revenue under GST structure, companies will witness volatility in the reported revenue numbers, which may not reflect their true financial status to the stakeholders. Experts suggest that companies may find non-GAAP reporting useful in these cases to correctly portray their earnings.
Another area where the GST will significantly affect the accounting structure of companies is the tax credit. Various indirect taxes such as luxury tax, octroi, entry tax, CST do not fall into the tax credit. However, after the GST comes into effect, these taxes will be eligible for tax credit. However, as per the standard accounting principles, refundable taxes are not taken as an expense—the cost incurred in the acquisition of asset but are considered as an asset in the accounting framework. This leads to major reconfiguring in inventory valuation and asset capitalization rules to ensure that the tax credits are correctly entered in the accounting system.
There are a few issues that require careful planning by companies to make the GST transition successful. A potential issue that may affect the accounting and financial system of companies is whether the transition causes any significant write off of tax credits availed in particular states and not likely to be set off. While GST helps in increasing the output tax base of the nation, it also provides a wider input credit mechanism and leads to better cross-utilization of credits. For instance, the GST regime will make many e-commerce companies eligible for input credit on goods they purchase. Another example, where companies need to rejig their accounting structure is the case of traders selling on eCommerce sites. Various eCommerce portals can claim input tax credit on the services they received against the output on the sale of various goods.
A key challenge that companies may counter is related to the carry forward of tax credits. Experts contend that since these tax credits will be carried forward state wise, it could lead to significant rework in managing the current balances. Furthermore, IT department of companies need to give due consideration to tax compliance issues for transactions originating before the GST transition and reversing the entries post transition for parameters such as sales returns and receipt of purchases after transition.
An effective ERP solution helps the companies update the chart of accounts more convenient. Chart of accounts (COA) is a unique record for each type of asset, liability, equity, revenue, and expense that provides a complete listing of every account in an accounting system. COA depends on various parameters such as the type of business, credit rules, and the place of supply. Various tax-related general ledger (GL) codes related to different transactions are used in the COA for financial reporting, including several accounting entries that are generated in the ERP system. Leading ERP providers offer solutions that take care of many financial reporting errors and minimize any impact on the accounting system after transiting to the GST.
The above points are some of the major concerns for companies to design an all-inclusive and sustainable IND AS reporting. This is necessary for organizations as careful evaluation is needed for avoiding disruptions and to make the transition to GST fast and secure.