Expert Advisory Committee

1.34 Query

Treatment of Sales Tax Collected on Sales—Inclusion In the

Value of Sales shown in the Profit & Loss Accounts.

Sales Tax being collected on sales, is being treated as money received on behalf of Government and whenever payment is made to Government is adjusted against the same. Neither sales tax collected nor paid appears in Profit and Loss Account, unless after assessment, the amount payable is more than the amount collected.

Our auditors feel that the sales tax is a part of turnover, and therefore, the sales shown in the Profit and Loss Account must include sales tax collected on the same and whenever, sales tax paid, has to be shown as an expenditure in the Profit and Loss Account. They have relied upon the following case laws for this purpose.

(1) Supreme Court of India,

George Oakes Pvt. Ltd., Vs.

State of Madras,

Reported in 13 STC Page No. 98.

(2) A. P. High Court in

State of Andhra Pradesh Vs.

East India Commercial Company Limited,

Reported in 8 STC Page No. 114.

(3) Madras High Court in

Sundaram Motors Vs.

Jt. Commercial Tax Officer,

reported in 16 STC Page No. 644.

Opinion November 1, 1976

The question raised, based upon certain Supreme Court judgements that turnover would include sales tax collected, as to whether the sales to be accounted for in the Profit and Loss Account, should include the sales tax collected also.

It is considered that the Supreme Court judgements would have a relevance only for the limited purpose of finding the incidence of sales tax that is payable and that beyond answering this question, the judgements have no accounting significance. The Institute has in its publication No. H 7 209 7 entitled “Statement on the Amendments to Schedule VI to the companies Act, 1956” has already expressed the following view on the above question: -

“5.5 In the case of composite charge invoices, it would not ordinarily be proper to attempt a demarcation or ancillary charges on a proportionate or estimated basis. For example, if a company makes a composite charge to its customer inclusive of freight and despatch, the charge so made should ordinarily be regarded as the invoice price of the goods sold, and should accordingly be disclosed as the value of the turnover. It would not be proper to reduce the value of the turnover by reference to the approximate value of the service relating to freight and despatch. On the other hand, if the company makes a separate charge for freight and despatch, and for other similar services it would be quite proper to ignore such charges when computing the value of the turnover to be disclosed in the Profit and Loss Account. In other words, the disclosure may well be determined by reference to the company’s invoicing and accounting policy and may thereby vary from company to company. For reasons of consistency, as far as possible, a company should adhere to the same basic policy from year to year and if there is any change in the policy, the effect of that change may need to be disclosed if it is material, so that a comparison of the turnover figures from year to year does not become misleading.

5.6 For reasons discussed in the foregoing paragraphs, sales tax may also be segregated from the value of turnover if it is conveniently possible to do so in accordance with the accounting system followed by the company ; particularly if the company’s billing procedures involve a separate charge to the customer for sales tax. This treatment, it may be noted, is also in accordance with the recommendations of the Institute of Chartered Accountants in England and Wales relating to the accounting treatment of the value-added tax which is a tax that corresponds in many instances, to the sales tax in India—vide English Institute’s Statement M5 issued in April 1974 in which it has been recommended inter alia, that “turnover shown in the Profit and Loss Account should exclude VAT taxable outputs”.

5.7 While the foregoing treatment of sales tax is recommended as the approved method of accounting in a case where a company makes a separate charge on the invoice for sales tax, the question as to the appropriate method of accounting still remains to be resolved in a case where a company makes a composite charge to the customer which is inclusive of sales tax, without separately designating the sales tax on the invoice or in the contract with the customer. In an earlier paragraph, it was suggested that approximate adjustments to the value of turnover would not be proper in respect of various services which are not separately charged to the customer. The position with regard to sales tax is, however, somewhat different, since this is a statutory liability, the incidence of which can be calculated with a high degree of precision with reference to any given value of turnover. Accordingly, it is suggested that if sales tax is not separately charged to the customer, two alternative methods of accounting are available to the company, either of which may be adopted subject to consistency of application from year to year. The alternative methods are: firstly, to disclose the entire value inclusive of sales tax as the value of the turnover, or secondly, to segregate the sales tax value by applying the appropriate sales tax rates to the gross value of the turnover so that only the net value after such adjustment is disclosed in the Profit and Loss account as the value of the turnover.”

Incidentally this raises the question as to how the accounting treatment should meet the situation where the invoice is inclusive of sales tax. Here there would appear to be two standard practices prevalent. One is (a) to ascertain the sales tax liability (in accordance with the judgments already quoted) and make it as a provision on the debit side of the Profit and Loss Account, and the other is (b) to show it as a deduction from the Sales Turnover. Even in the second alternative the gross invoicing should be shown as such and the sales tax liability deducted from the inner column and the net results extended to the outer column.

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