GST transition is not only about a tax change but a complete business, finance, accounting and reporting overhaul.
GST is a destination-based tax, which is levied at the point of supply. It 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.
Following are some key areas where companies will need to focus from financial accounting and reporting perspective on transition to GST.
A) 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.
B) Tax holiday incentives
Many companies enjoyed significant amount of tax holiday incentives and accounted for same as government grant. 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.
C) Financial Reporting
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.
D) 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.
E) Conclusion
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.
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