[FAQs] Method of Accounting, GST & Ind AS under Tax Audit | A.Y. 2023-24
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- Last Updated on 16 September, 2023
FAQ 1. Where an assessee has multiple GSTINs, which one should be furnished in Form 3CD?
In case the assessee has multiple GSTIN numbers (registered in different states), all the GSTIN numbers allotted to him shall be mentioned in Clause 4 of Form 3CD.
Para 20.4 of 2022 GN provides that if multiple registration numbers are available for any indirect tax, all such registration numbers should be examined by the tax auditor. Now, the question is, what the tax auditor has to do after examining them all?
2023 GN amends Para by adding the words “and duly reported” at the end of the sentence. Thus, if multiple registration numbers are available for any indirect tax, all such registration numbers should be examined by the tax auditor and duly reported.
2023 GN omits the sentence
“Therefore, the question of whether the assessee is liable to pay any of the aforesaid indirect taxes should be considered needs to be answered.” from Para 20.4.
Thus, the tax auditor is not required to determine the complex question of whether the assessee is liable to pay any of the indirect taxes mentioned in clause 4.
Clause (4) should be interpreted in light of the fact that it forms part of Part A of Form No. 3CD, which generally requires the auditor to give the factual details of the assessee. Accordingly, the tax auditor is primarily required to furnish the details of registration numbers as provided to him by the assessee. He is not required to determine whether the client is liable to pay tax under any of the indirect tax laws.
FAQ 2. Should GST registration no. of the assessee be furnished in Form 3CD if the assessee is liable to pay tax under reverse charge?
The ICAI, vide Implementation Guide dated 22nd August 2018, has clarified that even if liability to pay GST is only under the reverse charge mechanism, the fact of being liable to GST needs to be answered in the affirmative, with the clarification that such liability is only under the reverse charge mechanism.
FAQ 3. An assessee has changed the method of accounting from mercantile to cash basis. What disclosure is required in Form 3CD?
Clause 13 of Form 3CD requires every assessee to report the method of accounting employed in the previous year. Further, if there was a change in the method of accounting employed in the immediately preceding previous year, then the same is to be reported. The assessee is also required to disclose the effect of a change in the method of accounting on the profit and loss. If it is not possible to quantify the effect of a change in the method of accounting, appropriate disclosure should be made under this clause.
A change in accounting policy will not amount to a change in the method of accounting, and hence, any change in the accounting policies need not be mentioned under clause 13(b).
FAQ 4. How to report if the assessee uses different methods of accounting for different sources of income?
There is no bar on the assessee to opt for different methods of accounting for different sources of income. The Allahabad High Court, in the case of J.K. Bankers v. CIT [1974] 94 ITR 107 (Allahabad), held that an assessee could choose to follow one method of accounting for some sources of income and another method of accounting for other sources of income. The Bombay High Court, in the case of CIT vs Smt. Vimla D. Sonwane [1994] 212 ITR 489 (Bombay), held that the assessee is indeed free to follow different methods of accounting for income from different sources in an appropriate case. The Department cannot compel the assessee to adopt the mercantile system of accounting.
Para 25.1 of the ICAI’s Guidance Note on tax audit also provides that the assessee may adopt the cash system of accounting for one business and the mercantile system of accounting for another business. Once the method of accounting is decided, the assessee must follow it consistently.
Form 3CD does not allow tax auditors to disclose distinct accounting methods for various sources of income. Therefore, it is advisable to declare the accounting method used for the primary income source in Form 3CD. Regarding any alternative accounting method selected for other business activities, this should be documented in the accompanying notes.
FAQ 5. Could the adoption of Ind AS for the first time be considered a ‘Change in Method of Accounting’ for disclosure in Form 3CD?
Method of Accounting refers to the basic rules and guidelines under which businesses keep their financial records and prepare their financial statements. Two main accounting methods are used for record-keeping – the Cash Basis and the Accrual Basis. In contrast, the Accounting Standards or Ind AS pre-requisite the accrual basis of accounting. Accounting standards are authoritative for financial reporting and are the primary source of generally accepted accounting principles (GAAP).
Method of Accounting should not be confused with GAAP. The method of accounting can be either a cash basis or an accrual basis. The GAAP provides the principles and procedures for calculating and recognising a financial transaction within the framework of the accrual basis of accounting. When an entity switches from Accounting Standards to Ind AS, it does not change its method of accounting. Thus, the transition to Ind AS should not be treated as a change in the method of accounting.
FAQ 6. In the case of Ind AS financial statements, if liability increases due to a change in actuarial assumptions taken to calculate the provision of gratuity, which is debited to OCI, can the entity claim the deduction for such additional liability?
Clause 37.2 of 2022 GN required the tax auditor to verify whether a provision for gratuity has been made as provided in the trust deed. 2023 GN amends Para 37.2 to require the tax auditor to verify whether the provision has been made as provided in the trust deed, rules and regulations governing such trust deed and PCIT/CIT Approval Order stipulations.
If any liability increases due to a change in the actuarial assumptions, the resultant expense is recognised in OCI by virtue of Ind AS 19 – Employee Benefits. However, the provision made for gratuity is disallowed under section 40A(7) unless it is paid. Clause 21(e) puts a liability on the auditor to report all these types of provisions.
Thus, if the provision for gratuity increases due to changes in the assumptions, such as discount rate, mortality rate, etc., the additional expenses recognised in OCI should not be allowed as a deduction while computing the taxable business income. If an increase in provision for gratuity is attributable to such change in actuarial assumption, it shall be disclosed as disallowable under Clause 21(e).
FAQ 7. Should the deduction of interest charged to Statement of Profit & Loss due to the “effective interest rate method” of Ind AS be allowed under the Income-tax Act?
In view of Ind AS, the processing fees paid to the banks or financial institutions in respect of borrowings have to be amortised over the tenure of the loan. In other words, the amount of borrowing cost recognised during the year shall be the sum of actual interest paid or payable to the bank and the amortised amount of processing fees.
The deduction for such borrowing cost under the Income-tax Act shall be subject to Section 43B. The deduction for interest and processing fees shall be allowed on a payment basis. Thus, if the processing fee has been paid to the bank, the deduction for the entire fee shall be allowed in the year of payment itself. Irrespective of the amount of borrowing cost recognised in the books of account, the Income-tax Act shall allow a deduction for the entire amount of interest or process fees paid to the bank during the year. The disclosure shall be made in Clause 26.
FAQ 8. Whether details regarding GST have to be reported in Clause 27(a) as a clause in Form 3CD requires details of CENVAT but in schema requires for CENVAT/ITC?
Clause 27(a) applies to all assesses registered under GST/Central Excise. Though no reference of Input Tax Credit (ITC) is notified in Form 3CD, the same is maintained in the e-filing utility format. Hence, all assessees registered under GST/Central Excise should provide the relevant details in Form 3CD.
FAQ 9. Should details to be provided in Clause 27(a) match with the books of accounts?
While providing the details under Clause 27(a) of 3CD, an assessee should ensure that details are reconciled with the books of account vis-à-vis details available on the GST portal. The assessee shall maintain a proper reconciliation with respect to the same. However, an assessee may adopt either the books of account or GST portal to provide the information under this clause, provided the same basis is adopted consistently. The tax auditor should verify the reconciliation between the balance of CENVAT/Input credit in the accounts and relevant excise and GST records. The tax auditor should report the amount of CENVAT/Input availed and utilised under this sub-clause.
FAQ 10. In the case of the first Ind AS financial statements, should the details regarding turnover, gross profit, ratios, etc., for the previous year and the preceding previous year be reported as per Ind AS financial statements?
As per Ind AS 101 – First Time Adoption of Indian Accounting Standards, in case of transition from AS to Ind AS, the opening balances and the comparative figures have to be calculated and presented as per Ind AS.
The Income-tax Act does not provide any mechanism for calculating gross profit, turnover, or ratios for disclosure in Form 3CD. Thus, such disclosures have to be made as per the financial statements prepared in accordance with AS or Ind AS. As the entity has to present the comparative figures in Ind AS financial statements, the same information can be used to disclose the desired information in Form 3CD.
FAQ 11. A demand was raised with respect to Customs duties on my client, and the same was adjusted against the refund due in his name. So, no amount was paid by him to the department. As an auditor, do I need to disclose the same in form 3CD?
Yes, an auditor is required to report the details of demand raised or refund issued to the assessee during the previous year, irrespective of the fact that it was adjusted against any pending demand or refund. Details are to be shown under Clause 41 of Form 3CD.
FAQ 12. What information is to be reported by the auditor under Clause 44 of Form 3CD?
Clause 44 of Form 3CD seeks details of the total expenditure incurred during the year. The break-up needs to be given for the expenditure in respect of entities registered under GST and relating to entities not registered under GST.
However, the CBDT1 has kept the reporting under clause 30C and clause 44 of the tax audit report in abeyance until 31st March 2022. Therefore, the information is to be furnished in clause 30C and clause 44 for the reports filed on or after 31st March 2022.
FAQ 13. How to report a break-up of the total expenditure under Clause 44?
Clause 44 requires the details in the following format:
(a) Total expenditure incurred during the year;
(b) Expenditure in respect of entities registered under GST:
-
-
- Relating to goods or services exempt from GST;
- Relating to entities falling under the composition scheme;
- Relating to other registered entities;
- Total payment to registered entities;
-
(c) Expenditure relating to entities not registered under GST.
The Guidance Note issued by ICAI clarifies the following aspects for reporting under this clause:
(a) Whether every head of expenditure is to be reported?
The guidance may be taken from the heading of the table, which starts with the words “Breakup of total expenditure”. Hence, the total expenditure, including purchases as per the above format, may be given. It appears that head-wise/nature-wise expenditure details are not envisaged in this clause.
(b) Reporting of claims
Depreciation under Section 32, a deduction for bad debts under Section 36(1)(vii), etc., which are not expenses, should not be reported under this clause.
(c) Transactions not considered supply
Schedule III to the CGST Act, 2017 lists out activities or transactions that are neither treated as a supply of goods nor a supply of services. Thus, expenditure incurred in respect of such activities need not be reported under this clause.
For example, Para (1) of Schedule III covers “Services by an employee to the employer in the course of or in relation to his employment”. Thus, remuneration to employees need not be reported.
(d) Allowability of expense
Any expenditure incurred, wholly and exclusively, for the business or profession of the assessee qualifies for the deduction under the Act. Registration or otherwise of the payee under the GST Act has no relevance in considering the allowability of expenditure.
(e) Reporting of capital expenditure
In the table under clause 44, the language used is “expenditure in respect of.” Since the word used is ‘expenditure’, it is necessary that the capital expenditure should also be reported in the format prescribed. Separate reporting of capital expenditure will provide ease in reconciliation.
(f) Expenses of branch
This report may be prepared for an entity as a whole or a branch thereof, as it may be audited. Accordingly, the information in these columns may have to be filled up, consolidating the expenditure incurred under various GST registrations.
- Circular No. 5/2020 [F. NO. 370142/9/2018-TPL], dated 25-3-2021
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As per the recently released Guidance Note on Tax Audit for AY 2023-24 by ICAI dated 1-Sep-2023 – with respect to Clause 27 suggests otherwise. It says “47.9 It is pertinent to note that since implementation of GST from July 1, 2017, central excise duty has been subsumed in GST and is leviable only on six products viz. petroleum crude, diesel, petrol, aviation turbine fuel, natural gas and tobacco. Hence, reporting under this clause is restricted for only those assessees who deal in these products.”. So is GST still required to be reported in Clause 27 as per the article by Taxmann on this site?