1.16     Query

Accounting treatment for MODVAT

1.‘X’ Pvt. Ltd. is entitled to MODVAT relief. It was earlier also entitled to the excise set-off under Rule 56A of the Excise Rules. Currently, the accounting treatment followed by the company with regard to MODVAT relief is as under:

(a) Purchases are booked at full value (including the element of excise relief allowed under MODVAT).

(b) At the time of sales, the entire sales amount is credited to Sales Account, inclusive of the excise amount.

(c) Whatever excise duty is payable on such goods is adjusted against the MODVAT relief allowable at the time of purchase of the raw materials. No effect is given in the books of the company for such excise duty utilisation in RG-23.

(d) The unutilised MODVAT benefit is not reflected in books at all.

(e) The notional credit that is available in respect of goods purchased from SSI Units is also not accounted for by way of any financial entry.

(f) The stock of the raw material is valued at the gross purchase price, including the excise element.

2. The auditors of the company are of the view that the above treatment results in the unutilised MODVAT credit not being reflected in the books. They are of the view that at the time of purchase of raw materials, the purchases must be debited by the amount excluding the excise element and the MODVAT credit relief or some similar account debited for the purpose of reflecting the credit available. At the time of excise adjustment in respect of sales, the auditors are of the view that, excise duty must be debited and MODVAT credit relief credited, with the result that the balance in the MODVAT Credit Relief Account (debit) will represent theunutilised MODVAT credit. The auditors are also of the view that for the notional credit in respect of purchase from SSI Units, the MODVAT credit relief must be debited and miscellaneous income credited with the amount of the credit available. The treatment at the time of clearance of the goods would be the same as explained earlier. Closing stock of raw materials must be valued at the purchase price, excluding excise, in the view of the auditors.

3. The auditors are further of the view that if the above treatment is not being followed, but the company continues to follow the existing treatment, at least a note must appear in the accounts to the effect that the MODVAT credit is accounted on cash basis. The company disagrees with the auditors’ view pointing out that there is no requirement to make such a disclosure.

4. The querist has sought the opinion of the Expert Advisory Committee as to the correct accounting treatment for MODVAT. If the system followed by the company is also permitted, whether a note is required in the accounts and whether this note would be qualificatory or explanatory.

                                                                                   Opinion                                June, 27, 1988

1. The Committee notes that the Research Committee of the Institute of Chartered Accountants of India has issued a Guidance Note on Accounting Treatment for MODVAT2, Para 4.1 of which recommends as below:

“4.1…. MODVAT is a procedure whereby manufacturer can utilise credit for input duty against duty payable on final products. Duty credit taken on input is of the nature of set-off available against the payment of excise duty on the final products. There are two alternative methods of treatment of MODVAT credit in accounts:

      (a) Duty paid on inputs may be debited to a separate account, e.g., MODVAT Credit Receivable Account. As and when the MODVAT       credit is actually utilised against payment of excise duty on final products, appropriate accounting entries will be required to adjust the       excise duty paid out of MODVAT Credit Receivable Account to the account maintained for payment/provision for excise duty on final       products. In this case, the purchase cost of the inputs would be net of input duty. Therefore, the inputs consumed and the inventory       of inputs would be valued on the basis of purchase cost net of input duty. The debit balance in MODVAT Credit Receivable Account       should be shown on the asset side under the head ‘advances’.

(b) In the second alternative, the cost of inputs may be recorded at the total amount paid to the supplier inclusive of input duty. To the extent to MODVAT credit is utilized for payment of excise duty on final products, the amount could be credited to a separate account, e.g., MODVAT Credit Availed Account. Out of the MODVAT Credit Availed Account, the amount of MODVAT credit availed in respect of consumption of inputs would be reduced from the total cost of inputs consumed. The balance amount standing to the credit of MODVAT Credit Availed Account representing MODVAT credit in respect of input not consumed but lying in stock could be shown in the balance sheet as deduction from the value of inventory. It will have to be ensured that the set-off for MODVAT credit on input not yet consumed is carried forward and there is no accounting of double income, firstly, as set-off adjusted as reduction in the cost of input and, secondly, as credit taken in the profit and loss account by inclusion of input duty as part of the inventory of the input.”

2.With regard to accounting treatment of notional credit in respect of purchases from small scale industry, the Committee notes that para 4.4 of the aforesaid Guidance Note recommends as below:

“Regarding the treatment of additional credit for excise duty given by the Government in respect of purchases from the small-scale sector, a question may arise as to whether such additional credit should also be reduced from the cost of purchase or should be treated as subsidy from the Government and disclosed as miscellaneous income in the profit and loss account. It would be in order if the additional credit for excise duty is reduced from the cost of purchase as the credit for the additional excise duty ultimately results in the reduction of cost of purchase. The total duty relief available under MODVAT scheme can be treated according to any of the two alternatives enunciated in Paragraph 4.1. Alternatively, the differential amount can also be accounted for as miscellaneous income, during the relevant accounting period, as the credit of the additional duty is of the nature of subsidy given by the Government to the manufacturer. It should be noted that the adjustment in respect of the additional credit for excise duty in either method should be limited to the amount utilised towards payment of excise duty payable on final products.

3.With regard to the valuation of inventories of raw materials, the Committee notes that paras 5.1 and 5.2 of the aforesaid Guidance Note, recommend as below:

“5.1 In case the first alternative as mentioned in para 4.1 (a) regarding accounting of MODVAT credit is adopted, the inventory of inputs should be valued at net of input duty. In other words, the input duty paid on inputs will not form part of the cost of inventories. Balance in MODVAT Credit Receivable Account should be shown in the Balance Sheet under the head ‘advances’ on the assets side.

5.2 However, if second alternative of para 4.1 (b) is adopted, the inputs have to be valued on the basis of gross value. The amount standing to the credit of MODVAT Credit Availed Account is deducted from the value of such inventories.”

4. On the basis of the above, the Committee is of the opinion that the accounting treatment for MODVAT followed by the company is not correct as it is not in accordance with the recommendations of the said Guidance Note.

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