GST and its impact on financial reporting
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Saying that financial reporting is the beating heart of a business is a gross understatement, if there ever was one. The records, which offer an in-depth look at the company’s cash flow, earnings and equity, help investors, traders, government agencies and other financial bodies you may need to approach make informed decisions relating to your business.
Though this is a standard procedure, the end of this financial year poses a set of unique challenges and questions, as accountants and business owners everywhere come to terms with the impact the Goods & Services Tax (GST) will have on their financial reporting. And while a lot has been said and written about how GST has affected businesses, there’s still some ambiguity about its impact on financial reporting. 

Initially, one of the biggest points of confusion that arose was whether the GST collected on every sale or transaction would be considered a part of the company’s gross revenue for accounting purposes. The Indian Accounting Standard defines revenue as the gross inflow of economic benefits acquired by a business entity on its own account. This means that the GST, which is collected on behalf of a third party (the government), should not be presented as part of the company’s earnings. 

Another change in the reporting structure springs from the fact that excise duty was once included in the revenue of a company. This might lead to fluctuations in the numbers, which could have a negative impact on the behaviour of stakeholders and potential investors. To combat this, experts recommend preparing an additional balance sheet for them, which lists down the entity’s earnings before interest, taxes, depreciation and amortization, allowing them to objectively evaluate the company’s performance. 

Tax credit is another area that will see a significant change this year. Prior to the GST rollout, every transaction was subjected to a number of taxes, each of which came with its own rules and complications, when claiming credits. In this domain, the GST has a leg-up on the previous system, since an entity can now easily claim their GST input credit, provided that their suppliers are GST-compliant as well.

Take the example of a furniture manufacturer, who pays a GST of INR 1000 on raw materials for a table, the total tax payable on which is INR 1500. If his raw materials were sourced from GST-compliant vendors, and if he has all the relevant documents – including supplier invoices and bills of supply – the furniture manufacturer can now claim an input tax credit of INR 1000, requiring him to deposit only INR 500.

Another important thing to keep in mind is that since the GST is imposed by the government, and is payable as part of a statute, any input credit must be presented under the category ‘Other Current/Non-Current Assets’ in the final balance sheet. Similarly, since the GST is not a cost incurred to complete production or acquire finished goods, it cannot be included in the cost of inventories. 

It is also crucial to revisit your enterprise resource planning solution and ensure that all the necessary records are maintained and updated on a regular basis. Relevant records of all the company’s assets and liabilities, the register of goods produced, sales, stocks, input tax credit availed, output tax liability and output tax paid will help you stay on top of things. Additionally, always maintain a record of all the input and output Central Goods & Services Tax (CGST), State Goods & Services Tax (SGST) and, where relevant, Integrated Goods & Services Tax (IGST).

With all these, and many more, changes in store, it’s easy to see that the GST is more than just a revision in the tax structure. It is an introduction that is bound to impact your financial reporting procedure. But if you’re vigilant about any changes to your company’s revenue structure and you maintain accurate records, there’s no reason why the transition shouldn’t be a smooth one for you and your business!