The Hindu Business Line : A timely note by ICAI

THE Institute of Chartered Accountants of India (ICAI) has, in double-quick time, brought out a "Guidance Note on Accounting for State Level Value Added Tax".

The timing for the release of this could not have been better since the Empowered Committee is working overtime to ensure that the starting glitches in the VAT regime are nipped in the bud.

One could expect that it would take a couple of months for the wave of protests, bandhs and objections to the VAT regime to die down. At the end of this period, there would be a few concessions given by the Empowered Committee and the trading community would give in, resigned to accept the new regime and out of sheer fatigue to keep up the tussle.

Since there was a Guidance Note on Accounting for Cenvat credit already in place — and VAT being a very rudimentary form of State Cenvat — the task of the ICAI was probably that much easier. Here is a gist of the entire Guidance Note:

Input tax paid on purchase of inputs/capital goods which is available as VAT credit should not be included in the cost of purchase.

VAT credit which will be available in future on the goods lying in stock at the inception of the VAT scheme should be credited to the Opening Stock A/c at the inception of the scheme itself.

VAT payable on sales is an indirect tax which is ultimately borne by the final consumer. The dealers collect VAT from their customers on behalf of the VAT authorities.

VAT collected from the customers should not be recognised as an income of the enterprise, that is, it should not be included in the sales.

The payment of VAT should not be treated as an expense in the financial statements of the enterprise.

No surprises here. In the Guidance Note on Accounting for Cenvat, the ICAI recommended that the raw material or input purchase account be reviewed annually and adjusted in case the balances reflect credit that are unlikely to be used in the near term.

A revised AS 2 of the ICAI rules that inventory cost should comprise all costs of purchase, conversion and other costs incurred in bringing the inventories to their present location and condition.

Subsequently, recoverable duties should be excluded from the value of inventory. A similar guidance exists for VAT too.

However, one hopes that the Income-Tax Department does not see a pot of gold in the difference between the closing inventory and opening inventory. This is because the Guidance Note encourages companies to credit the opening stock "at the inception of the scheme" itself.

Inception of VAT is now acknowledged as April 1. While excise duty is included in the sales numbers of companies, the Guidance Note on VAT exhorts companies to exclude VAT from their turnover. Similarly, VAT paid is to be expensed. VAT on capital goods would also have to given the same accounting treatment, save for the fact that the credit would have to be spaced out over the period of eligibility of the credit.

Section 145A of the Income-Tax Act does not appear to take a liking for AS2 since it talks about valuing stocks by including the amount of any tax, duty, cess or fee actually paid and incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. While we are not new to a straight conflict between tax accounting and normal accounting and the consequent effects of AS 22 on deferred taxes, the difference in the Cenvat regime is being resolved by excluding Cenvat while valuing inventory of inputs and following Section 145A in letter and spirit for tax purposes. This tactic has received the blessings of the highest court of the land and, hence, one can expect a similar treatment for VAT accounting, too, without having to reach the hallowed doors of the apex court.

(The author is a Hyderabad-based chartered accountant.)

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