1.35 Query: Accounting for unutilised MODVAT credits.
1. As per the querist, the accounting treatment followed by a company engaged in manufacture of electrical and electronic equipments, with regard to excise duty, is as follows:
At the time of procurement of inputs/components for the manufacture of certain electrical and electronic items, purchase account is debited with the material cost element without considering excise duty. Excise duty recoverable in the form of MODVAT, is separately debited in a ‘MODVAT recoverable account’, which is shown in the balance sheet after deducting the value of MODVAT utilised during the year. As and when the MODVAT credits are utilised, it is credited to a separate account, i.e., ‘MODVAT utilisation account’. The balance sheet reflects the amount lying after netting of the MODVAT utilised account from the MODVAT recoverable account. At the year end, the balances lying in register RG-23A Part II and the MODVAT recoverable account are reconciled.
2. The querist has stated that the Ministry of Finance, vide its Notification No. 52/93, had reduced the excise duty rate in case of electrical transformer, electrical capacitor, steam and other vapour generating boilers, steam turbine and other vapour turbines, hydrolic turbine and tubrojet, tubro propellers and other gas turbines to 5%. (The querist has sent a copy of the said notification for perusal of the Committee). As a result, the MODVAT on various inputs required for the manufacture of above items, ranging from 5% to 30% excise duty, were credited in the register RG-23A Part II, but only 5% of the sales price could be utilised against it. Therefore, a substantial balance is lying in the register RG-23A, Part-II.
3. The querist is of the view that the objective of the said notification was to reduce the cost of equipments relating to the power generation so as to give a boost to the development of electricity and power generation industries. Therefore, although the excise duty rate has been reduced by way of the notification, the Ministry of Finance may withdraw the said notification as and when they deem fit. However, in the view of the querist, if the said notification gets withdrawn on a future date, the balance of MODVAT unutilised lying in MODVAT recoverable account, would be allowed to be adjusted for the purpose of paying excise duty prevailing on the date of such withdrawal.
4. As per the querist, Guidance Note on Accounting Treatment for MODVAT, issued by the Institute of Chartered Accountants of India, provides that in case the company debits excise duty in its purchase account and credits the purchase account on receipt of actual gate pass then on a cut-off date, say on 31st March, it can make a notional adjustment by way of crediting the purchase account to the extent actual gate passes have not been received, or are in the pipeline. In such cases no current account is maintained separately. Only the difference is transferred to MODVAT recoverable account, which is shown in the balance sheet. In the view of the querist, although in case of the company concerned the purchase account is being debited with a figure net of excise duty, the MODVAT recoverable account unutilised would steel remain in the balance sheet for a period till there is a change in the excise rate or the notification is withdrawn.
5. The querist has stated that some experts are of the view that suitable provision should be created through the profit and loss account for such unutilised MODVAT amount. However, in the view of the querist, in case the provision is created, it is likely to reduce the profit substantially and the profit and loss account and balance sheet then may not reflect the true and fair view of the state of affairs of functioning of the company. The income-tax authorities, as per the querist, also may not accept such provision for the purpose of calculating the taxable income of the company. Thus, for the products covered by the said notification the tax shall be payable even though the profit may become negative because of the creation of such provision.
6. The querist has mentioned that the Ministry of Finance, vide notification nos. 95/93 and 96/93, dated September 27, 1993, has increased the duty rate of motor and electrical generating sets from 5% to 10%. As a result the companies dealing in motor and electrical generating sets now would not have the problem of unutilised MODVAT credit. Therefore, the querist proposes that instead of providing the amount by debiting profit and loss account, the company may disclose the situation by way of a note to the accounts in the current year’s balance sheet. Then, after waiting for a reasonable time, say 2/3 years, the issue of creation of provision may be decided, depending upon the situation.
7. The querist has sought the opinion of the Expert Advisory Committee on the accounting treatment of unutilised MODVAT credits, as proposed in para 6 above.
Opinion February 28, 1994
1. The Committee notes from para 1 of the query that the company concerned is following the first method of accounting for MODVAT credit as suggested in the Guidance Note on Accounting Treatment for MODVAT, issued by the Institute of Chartered Accountants of India, and note the method described by the querist at para 4 of the query.
2. The Committee notes paras 4.5 and 4.6 of Guidance Note on Accounting Treatment for MODVAT, issued by the Institute of Chartered Accountants of India, which read as follows:
“4.5 Balance in MODVAT Credit Receivable Account should be reviewed at the end of the year and if it is found that the balance of the MODVAT credit is not likely to be used in the normal course of business within a reasonable time, then, notwithstanding the right to carry forward such excess credit in the Excise Rules, the non-useable excess credit should be adjusted in the accounts. The consequence would be that the balance of the MODVAT Credit Receivable Account in the financial accounts may be lower than the credit available as per the RG- 23A register. A reconciliation statement would have to be prepared indicating the amounts adjusted so that a track is kept for the difference between the two balances and the difference between the financial accounts and the credit as per the excise registers can be explained in subsequent years also.
4.6 The above adjustment of excess credit should preferably be made to the raw material or input purchase account. The effect would be to increase the cost of purchase and thereby to increase the cost of inputs for the purpose of accounting for consumption and valuation of closing stocks. Where it is not possible, to debit or identify this excess credit to particular lot or lots of materials purchased, such excess credit may be apportioned over the entire purchases of raw materials, components etc., entitled to MODVAT credit during the year on pro-rata basis.”
3. The Committee is of the view that in the circumstances of the query the existing legal position should be considered in deciding whether the balance lying in the MODVAT recoverable account should be adjusted as suggested in para 4.6 of the Guidance Note, reproduced above, or not. The Committee is of the opinion on the basis of the existing legal position that the balance of the MODVAT recoverable account should be adjusted as suggested in the aforesaid para 4.6. ___________________________ |