Churning of the Indian economy’s ecosystem over the past two years has delivered two major reforms in taxation and accounting. The Goods and Services Tax (GST) and the paradigm shift in the accounting standards adopted by the Indian companies have in them an inherent drive potent enough to usher in far reaching implications on both sides of the scale. While the GST phoenix has risen up from the ashes of all major indirect taxes, the Indian corporate sector’s adherence to Indian Accounting Standards (Ind-AS) entails vision correction while evaluating the financials of these companies. Ind-AS seeks better convergence with the International Financial Reporting Standards (IFRS) so that the Financial Statements of India Inc. are comparable to their global peers on a level platform. The combined impact of these two tectonic shifts will manifest itself as the quarterly results of the companies start to trickle this September. While the Ind-AS has come into place from April 1, 2016, the GST has been made effective from July 1, 2017.
ACCOUNTING ACROBATICS IN NEW ARENA
Adoption of Ind-AS does not overrule chances of accounting acrobatics that were used to dazzle everybody peeping into the Financial Statements of the Indian companies with a bid to make sense of the columns and rows. Acrobatics and jugglery will now be played out in a new arena with a new set of rules. A key change brought in by Ind-AS that is to be monitored closely is the treatment of excise duty revenue reportage by the companies in the manufacturing sector. However, in this blog instead of accounting `innovations’, I will concentrate on pre-GST and post-GST impacts alongwith Ind-AS implications in relation to the excise duty treatment.
Let’s understand the provisions in this regard vis-a-vis Ind-AS.
As per earlier Indian accounting standards simpliciter caller AS, the companies had to report revenues net of indirect taxes (excise + VAT etc.). For example, in the pre-GST period, the invoice raised to the customer is of INR 1.20 million (including excise duty of INR 0.12 million and VAT of INR 0.08 million). Under the old accounting regime, though the company received INR 1.20 million in its accounts, the Income Statement reported net revenue of INR One million after subtracting all indirect taxes levied in the invoice.
However, Ind-AS provisions bar manifestation of indirect taxes collected on behalf of the third parties such as Value Added Tax etc. except that of excise duty in financial statement. Here we are talking about the pre-GST regime. Even though excise duty is an indirect tax and recovered from third party, as the liability of excise duty arises on manufacturing of goods rather than selling of goods, the new accounting standards required companies to report revenues as gross of excise duty, which means that now the company in example reported INR 1.12 million as gross revenue in its financial statements. Importantly, this accounting shift did not impact the profitability of companies.
A cumulative impact of excise duty adjustment (without factoring in other variables of Ind-AS) on revenue of 27 constituents of Nifty 50 (Annexure 1) for F16 shows that the revenues of these Nifty 50 companies grew by ~10.7%. Cumulative impact of increase in sales of F16 to market capitalization (as on September 01, 2017) of these companies is around 4.5%. FMCG Sector (refer Annexure 2) witnessed maximum impact of this accounting change and recorded increase in revenue by ~21.7%, followed by Metals.
On July 1, 2017, GST reached the Indian shores and subsumed most of the indirect taxes including excise duty, VAT, entry tax, entertainment tax, service tax etc.). As GST is a tax on sale of goods and service, so the companies will now have to report revenue net of GST based on principle of economic benefits. In the scenario the financials in post-GST era may mirror those of pre-Ind-AS era.
So, the spike of ~10.7% in gross revenue of the 27 constituents of Nifty 50 in F16 is likely to witness a meltdown. This rollercoaster ride leading to spike in revenues has lasted for only 15 months, and a drop of prorated 7.7% in revenue is on the horizon come March 31, 2018.
Therefore, appearances, as has been rightly said, can be deceptive. And, facts and statistics have to be consumed with more than a pinch of salt.
Annexure – 1
(Amount in INR billions)
*Revenue are adjusted where additional information was available
Source: BSE, Company’s annual report
Annexure – 2
(Amount in INR billions)
Source: BSE, Company’s annual report
Cheers!
Nitin Mangal
SEBI Registered Research Analyst (INH000004723)
Your feedback will be highly appreciated. You may reach me at nitin@nmadvisors.com
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