Expert Advisory Committee
ICAI-Expert Advisory Committee
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1.17     Query

 

Accounting treatment for MODVAT

 

1. The product profile of a large public sector company comprises mainly excisable products. The excise duty/CVD paid on all the inputs is taken for valuation of inventory. The proforma credit as per the MODVAT Scheme is availed by the company in respect of all eligible items of inputs, by collecting the Excise Duty Gate Pass/Bills of Entry and maintaining RG 23A Register.

 

2. The credit accumulated in RG-23A Register is utilised for payment of excise duty on the finished products. Thus, the excise duty paid on finished products is net of MODVAT credit utilised, which is also disclosed in the accounts. For the valuation of Stores Receipt Vouchers, excise duty/CVD paid is also taken into account. In the process, the cost of inventory is inclusive of MODVAT credit availed, even though it would have been utilised for payment of excise duty on finished products.

 

3. The querist is of the view that in-so-far as the consumption of the inputs and the MODVAT credit utilization occurs in the same accounting year, there is no effect on the profit and loss account. However, if the inputs in respect of which MODVAT credit has been availed and utilised for payment of excise duty on finished products and are to be carried over as closing stock either as raw materials and stores or as work-in-progress, it results in over-valuation of inventory. It is expected that in the case under consideration, the financial impact will be quite material. In view of this, it was considered that the excise duty/CVD paid on inputs in respect of excisable finished products may be kept outside the valuation of inventory. However, for the following reasons, as per the querist, it was deferred:

 

(a) The ‘Cost of Purchase’ as per Accounting Standard – 2, issued by the Institute of Chartered Accountants of India, consists of the purchase price including duties and taxes, freight inwards and other expenditure directly attributable to acquisition, less trade discounts, rebates, duty drawbacks and subsidies in the year in which they are accounted, whether immediate or deferred, in respect of such purchase. As such, excise duty/CVD paid on MODVAT eligible inputs also should form part of cost of purchase.

 

(b) The MODVAT claim although realised by way of reduction in excise duty payable on the finished products is only provisional and is subject to end use of the inputs in or in relation to the manufacture of the finished excisable products.

 

4. In the above context, the querist has sought the opinion of the Expert Advisory Committee on the following:

 

(i) Whether the present accounting treatment followed by the company in respect of accounting for MODVAT is correct and, if not,

 

(ii) Whether MODVAT eligible excise duty/CVD paid can be excluded from the valuation of inventory.

 

(iii) Whether the excise duty/CVD paid on MODVAT eligible inputs can be accounted separately which will be set-off against the credits realised while making payment of excise duty on finished products.

 

(iv) Whether the uncovered MODVAT can be disclosed as a deposit in the balance sheet or it can be charged-off to the profit and loss account in the years in which it is incurred and credit can be taken in the year in which claims are realised by way of adjustment to the duty paid on finished goods.

 

(v) Whether Expert Advisory Committee would consider it fit to issue guidelines on this aspect to ensure uniformity in accounting.

 

                                                                      Opinion                                               July 5, 1988

 

1. From the facts of the query, the Committee notes that the company in question is showing excise duty on final products, net of MODVAT credit, and inventories of MODVAT eligible inputs are being valued at gross amount, i.e., inclusive of input duty even in those cases where the credit has been utilised for payment of excise duty on final products.

 

2. The Committee notes that the Research Committee of the Institute of Chartered Accountants of India has issued a Guidance Note on Accounting Treatment for MODVAT (published in March 1988 issue of “The Chartered Accountant”). Paras 4.1 and 4.2 of the Guidance Note, which recommend two alternative methods of accounting treatment for MODVAT, are reproduced 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 product. 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 the MODVAT credit is utilised 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 inputs 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 value of inventory of the input.

 

4.2 It may be appropriate to quote the definitions of ‘historical cost’ and ‘cost of purchase’ from Accounting Standard-2 (AS-2) on ‘Valuation of Inventories’, issued by the Institute of Chartered Accountants of India:

 

“Historical Cost represents an appropriate combination of the

 

            (a) Cost of purchase;

 

            (b) Cost of conversion; and

 

(c) Other costs incurred in the normal course of business in bringing the inventories up to their present location and condition.”

 

“Cost of Purchase consists of purchase price including duties and taxes, freight inwards and other expenditures directly attributable to acquisition, less trade discounts, rebates, duty drawbacks and subsidies, in the year in which they are accounted, whether immediate or deferred, in respect of such purchase”.

 

Particular attention is invited to the term ‘cost of purchase’, according to which, ‘rebates’ and ‘duty drawbacks’ are to be deducted from purchase price in determining the actual cost of purchase under the historical costing system. Therefore, MODVAT credit, when availed of can be described as similar to duty drawback which will reduce the cost of purchase.”

 

3. On the basis of the above, the opinion of the Expert Advisory Committee on the issues raised by the querist in para 4 of the query, is as below:

 

(i) The present accounting treatment followed by the company in respect of accounting for MODVAT is not correct.

 

(ii) MODVAT eligible excise duty/CVD paid can be excluded from the valuation of inventory of the relevant inputs [Para 4.1 (a) of the Guidance Note].

 

(iii) Excise duty/CVD paid on MODVAT eligible inputs can be accounted separately by debiting MODVAT Credit Receivable Account which would be set-off while making payment of excise duty on final products [para 4.1 (a) of the Guidance Note]

 

(iv) Where treatment as per (ii) and (iii) above is made, the uncovered MODVAT credit, i.e., balance in MODVAT Credit Receivable Account should be shown under the head ‘advances’ in the balance sheet [para 4.1 (a) of the Guidance Note] and is carried forward for utilization in the next accounting period in case it is likely to be used in the normal course of business within a reasonable time. In case it is not likely to be so utilized “notwithstanding the right to carry forward such excess credit in the Excise Rules, the non-usable 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.” [para 4.5 of the said Guidance Note]. According to para 4.6 of the Guidance Note, “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 a 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.”

 

(v) As already stated, the Research Committee of the Institute has issued a Guidance Note on the subject.

 

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