Depreciation Rate Chart

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Cash flow statement and its usefulness

MANU		CONVERSATION BETWEEN MANU AND VINU ABOUT CASH FLOW STATMENT AND ITS USEFULNESS	VINU
Manu	Hi Vinu! How are you?
Vinu	Fine Manu!
Manu	How is your Financial Analysis Job going on?
Vinu	Manu, now I am in the process of analysing Financial Statements of a particular customer. His Financials vis-a-viz reality is taking me for a ride!
Manu	Why? What’s the problem?
Vinu	He is showing good progress in his business with Growth in Sales and Profits. But that’s on papers. In reality, - He doesn’t have sufficient funds to meet his expenses. - He couldn’t service Bank Loans on time. - Many of his cheques issued to suppliers get bounced. - He pays salary to his employees with great delay. How all these can happen if he is making so much profit? I have a doubt whether he is giving bogus financial report?
Manu	Vinu! I don’t know what the exact background of your customer is. But one thing I can tell you! It is not necessary that he should have cash to meet his expenses / requirements, since because he is making profit.
Vinu	That sounds strange!!!!
Manu	But that’s the reality! Profit is not cash!
Vinu	Come on yaar! What are you talking?
Manu	True Vinu! Profits are not cash and register it in your mind strongly!
Vinu	Ok! I understand that if you say something, it would be with logic. But tell me that logic!
Manu	Ok. Answer this simple question: Let’s say you have the following Profit and Loss Statement:                                                    Rs. In Crs Sales 100.00 Less: Raw Material Consumed (60.00) Labour Cost (10.00) Power and Fuel (5.00) Depreciation (5.00) What should be profit?
Vinu	Sales is 100.00 Crs expenses are 80.00 Crs So profits should be 20.00 Crs.
Manu	Fine! With this limited information, tell me what could be the cash balance?
Vinu	Sales             100.00 Crs Expenses      80.00 Crs So Cash Balance should also be 20.00 Crs
Manu	This is your mistake! Don’t you remember Financials are prepared following accrual concept wherein - Expenses will be accounted when accrued, whether it is paid or not; - Income will be recognised whether it is received or not.
Vinu	Yes. Agreed. But here we don’t have any such item or you have not told me anything about that!
Manu	True! But you also didn’t notice the effect of depreciation. Whether depreciation has cash outflow?
Vinu	No! It is only book entry to account for fixed assets by charging against profits over the period of its life.
Manu	So what could be the profit before depreciation?
Vinu	It may be Profit 20.00 Add: Depreciation 5.00 Profit before Depreciation 25.00
Manu	Ya! That’s correct and that profit can be called as Cash Profit!
Vinu	Oh! Is this the cash balance?
Manu	Don’t jump for conclusion. Again I am repeating! Profit is not cash!
Vinu	Ok! Ok!
Manu	Do you think all the sales can be made for cash?
Vinu	No! In order to be competitive and attract new customers, credit should be given!
Manu	Correct! Let’s say, 75% of sales are on credit!
Vinu	Then in that case, 100 Crs x 75% = 75 Crs should be credit sales.
Manu	So, what is your Cash Sales?
Vinu	Total Sales 100.00 Less: Credit Sales 75.00 Cash Sales 25.00
Manu	When you give credit, you can also get credit! Is it not?
Vinu	Sure!
Manu	But it happens in market that you give more credit to attract customers but you receive only less credit from your suppliers! Because, suppliers would be generally big players and they go by fixed norms! Your other expenses would be basically power, labour, and other operating expenses where you cannot have much credit.
Vinu	True!
Manu	So let us assume, 50% of your expenses are on credit.
Vinu	My total expenses are Rs.80 Crs. So 50% of it is................
Manu	Stop! Don’t consider all expenses. It includes depreciation also which is a non cash item.
Vinu	Correct! Total expenses are Rs.75 Cr (excluding depreciation of 5 Crs). 50% of 75 Crs is Rs.37.50 Crs
Manu	So, what is your Cash Payments?
Vinu	Total Expenses 75.00 Less: Credit available for expenses (50%) 37.50 Cash Expenses 37.50
Manu	Now you have both your Cash Expenses and Cash Sales. Can you prepare a Comparison table?
Vinu	Ya! I can do that. Particulars As per P&L Account Actual Cash Flow Sales 100.00 +25.00 Less: Raw Material Consumed (60.00) -37.50 Labour Cost (10.00) Power and Fuel (5.00) Depreciation (5.00) No Cash Flow
Manu	Look at the table! You made sales of Rs.100 Crs where as you received only Rs.25 Crs. You have incurred expenses of 75 Crs (excluding depreciation) where as you paid only 37.50 Crs. So what is your cash balance?
Vinu	Cash balance? a) Cash Sales                          25.00 b) Less: Cash Expenses (37.50) c) Shortage (a-b) -12.50 I don’t have cash balance!!!!!!
Manu	But you had profit of Rs.20 Crs!
Vinu	Ha ha! I am caught! Now I understand profit has no relevance to cash balance or cash generation!!!
Manu	No! Modify that statement! Profit has relevance but it alone does not decide cash balance or say cash generation!
Vinu	Ok! In this case, how come cash balance can be negative? It is Negative 12.50 Cr.
Manu	Don’t say Negative 12.50 Cr. Cash can never be negative figure. What happened to you is you realised Rs.25 Crs from cash sales and PAID cash expenses of Rs.37.50 Crs. You cannot pay 37.50 Crs without cash with you. Yes or No?
Vinu	Yes! I cannot pay 37.50 Crs without cash with me. But how I got 37.50?
Manu	You generated 25 Crs. You had shortage of Rs.12.50 Cr You should have managed that shortage with some other sources!
Vinu	Some other sources?? How come?
Manu	Common yaar! Do you think, cash is generated or brought into the business only through sales? There are various other ways for mobilising cash for the business.
Vinu	Correct! Cash can be brought into the business through a. Raising Capital; b. Raising Long Term Loans; c. Raising Short Term Loans; d. Selling Assets; e. Selling Investments.
Manu	Good! What was your Shortage from Operations?
Vinu	It was Rs.12.50 Cr
Manu	Now let us assume, you have funded this shortage by bringing in capital of Rs.25 Crs
Vinu	Rs.25 Crs???
Manu	Yes! Now arrive at your cash position
Vinu	It is a) Cash Sales 25.00 b) Less: Cash Expenses 37.50 c) Shortage (a-b) -12.50 d) Add: Fresh Capital 25.00 e) Surplus 12.50 I have surplus of Rs.12.50.
Manu	Correct! Now also assume you purchase Plant and Machinery for Rs.20 Crs and work out your cash position.
Vinu	It should be a) Cash Sales 25.00 b) Less: Cash Expenses 37.50 c) Shortage (a-b) -12.50 d) Add: Fresh Capital 25.00 e) Surplus 12.50 f) Less: Purchase of P&M 20.00 g) Shortage -7.50 Again I am landing in shortage.
Manu	Don’t worry! Raise loan for Rs.7.50 Crs and work out your cash position.
Vinu	a) Cash Sales 25.00 b) Less: Cash Expenses 37.50 c) Shortage (a-b) -12.50 d) Add: Fresh Capital 25.00 e) Surplus 12.50 f) Less: Purchase of P&M 20.00 g) Shortage -7.50 h) Bank Loan 7.50 i) Cash Balance -
Manu	Did you noticed, your balance is Nil now.
Vinu	Yes! Now i understand. I had shortage of 12.50 Cr from Operations. But that was supported out of fresh capital of 25 Crs. With the balance money available (25-12.50=12.50), I went for purchasing Plant and Machinery 20 Crs. Again I faced shortage of Rs.7.50 Crs. So, I had to finance the shortage through Bank Loan of Rs.7.50 Crs
Manu	Correct! The cash you generated from running or operating your business is called as Cash Generated from Operating Activity. In your case, it is deficit of Rs.12.50 Cr.
Vinu	True!
Manu	To Support cash deficit in operations and also to support purchase of plant and machinery, you raised finance from two sources Capital – 25 Crs Loan – 7.50 Crs They are Cash Generated from Financing Activity
Vinu	Correct!
Manu	You have invested Rs.20 Crs in purchase of P&M. So you have not generated any cash from Investment Activity but rather consumed cash.
Vinu	Correct!
Manu	Can you capture all these cash flows as per activities
Vinu	Cash Flow from Operating Activity -12.50 Cash Flow from Investing Activity -20.00 Cash Flow from Financing Activity 32.50
Manu	Good! This is you abridged Cash Flow Statement. It tells that, you have mobilised 32.50 Crs and have used 20 Crs for Investing Activity and 12.50 Crs for Operating Activity. Now you will appreciate why the companies can suffer despite making profits.
Vinu	Yes! In this case, though I have made profit but have not generated cash. I was functioning only with the support of capital funds provided by financing activity. Apart from that I also used all the balance capital funds for acquiring Plant and Machinery along with Bank Loan.
Manu	Correct! Now you are getting the pulse of it. This is the purpose of preparing Cash Flow Statement. It would give much information which P&L and Balance Sheet will not give on the face of reading. That’s why Cash Flow Statement and its Analysis are given high importance by Investors and all stake holders.
Vinu	So, how ideal Cash Flow should be?
Manu	In the initial period, cash can be provided by Financing Activity to Operating Activity and Investment Activity. But gradually, the cash flow from Operating Activity should become positive and it should provide for repaying financing cash flows and also support Investment activities.
Vinu	Ya! Cash flow from operating activity should be positive and it indicates the very purpose of running any business. If this cash flow is positive, we will have source for funding investment and financing activities.
Manu	Correct!
Vinu	But Manu, the cash flow statements which I have seen are lengthy in nature. It would not be like the one which we have discussed.
Manu	We have discussed the cash flow which can be prepared under direct method. But what we see in Industry would be cash flow prepared in Indirect Method.
Vinu	What was that?
Manu	Those cash flow statements are prepared from the information available in Profit and Loss Statement and Balance Sheet in Indirect Way. Profit and Loss Statement will be perused to find out the cash profits. Profits reported in P&L Statement are computed using accrual and matching concept. So, that profit is after providing for various non cash items.
Vinu	Non Cash items like?
Manu	Non Cash Items like a. Credit Sales b. Credit Purchases c. Outstanding Expenses d. Accrued Incomes
Vinu	Correct!
Manu	These items will also have presence in Balance Sheet in the form of current assets and current liabilities in various names. So movement of those items will also be provided in Cash Flow Statement to know the exact cash generated from operating activity.
Vinu	Ya! In our example Sales were Rs.100 Crs. whereas Debtors created out of Sales is 75 Crs. Our profit is 20 Crs, No No...Cash profit is 25 Crs but it is calculated based on Total Sales (cash & credit) and so it will not reflect cash generation. So we have to deduct non- cash sales from Cash Profits which is in the form ofDebtors - 75 Crs. Is that right?
Manu	You are right! By deducting increase in current asset (in our case, debtors) from cash profits, we are communicating to the readers, that though our company has earned cash profit of Rs.25 Crs from Sales of Rs.100 Crs, please bear in mind we have not realised 75 Crs worth of Debtors. So we are deducting it!!!
Vinu	Very true!
Manu	In the same way, if we carry creditors, or say, creditor’s increases, then to that extent there is no cash outflow. So, that will be added with cash profits to communicate to the readers, cash position is more than the cash profits!
Vinu	Correct! In our case, cash profit is Rs.25 Crs. We also have unpaid expenses (creditors) of Rs.37.50 Crs. So this should be added to cash profits!
Manu	You are right! Can you tabulate cash generated from your operating activity based on our discussion?
Vinu	Ya! Profit 20.00 Add: Depreciation 5.00 Less: Increase in Current Assets (Debtors) (75.00) Add: Increase in Current Liabilities (Creditors) 37.50 Net Cash from Operating Activities (12.50) Is it correct?
Manu	Very Much! Also remember you will see some more additions and subtractions in real cash flow statements.
Vinu	Like?
Manu	Additions for - Interest Expenses; - Loss on Sale of Asset; Deductions for - Interest Income; - Dividend Income; - Profit on Sale of Asset;
Vinu	When these items obviously decide the profits, whey these should be added back or deducted?
Manu	I agree that they decided profits! But they are not out of operational activities of the business. In cash flow from operating activity, focus is on finding cash generated from operating activity. So any activity, which is not part of operating activity, but already included in profits will be removed by either adding back or deducting!
Vinu	Ok! Let me understand that! Interest is paid on Financing Source – So it is a Financing Activity. But it is already considered as expense for arriving at profit. So, we remove this interest by adding back! Is that right?
Manu	Correct! Loss / Profit on Sale of Asset are result of Investing Activity! So we remove them from profits either by adding / deducting under Cash Flow from Operating Activities.
Vinu	True! Dividend / Interest income are also part of Investing Activity! So we should remove them from profits by deducting under Cash Flow from Operating Activities.
Manu	So remember, when you do this adjustment (adding / deducting) under Operating Activity, you are doing it, because you want to show them under respective activity!
Vinu	Ya! Interest added back in Operating Activity should be shown as deduction in Financing Activity. Dividend / Interest Income deducted in Operating Activity should be shown as addition in Investing Activity.
Manu	Very Good! So now you know how to prepare Cash Flow Statement too!
Vinu	How about the other activities Manu?
Manu	Other activities don’t involve much complication! You have to ensure only cash flows are captured and non-cash items are ignored. Sometimes assets can be purchased by issue of shares instead of cash. Then in those cases, purchase of asset will not figure under Investment activity.
Vinu	Understood! What would be the effect, if a company issues bonus shares?
Manu	In that case also, there is no cash flow. Because of Bonus Issue, there may be increase in Share Capital but there will not be any cash inflow. So that will not find place in Cash Flow Statement!
Vinu	Understood! So the focus is on cash inflows and outflows and all non-cash items are knocked off!
Manu	Exactly! Cash flow statement is a great tool for Investors, Bankers and other stake holders! It would communicate, whether you generate funds from business or you are dependent on Investment and Financing Activities for running your operations!
Vinu	True! If business is run with support of cash inflows from Investment activities it indicates company is selling its assets to fund its operations! So it would raise serious question on Going Concern right?
Manu	Yes! Similarly, if cash flows from Financing Activities continuously increases to support operating activity, it is also not a healthy sign because company is dependent on other funds to support its operations and it would become dangerous if the company is too dependent on borrowed funds.
Vinu	Ya! I think single reading of Cash Flow Statement would give complete cash flow movement of business.
Manu	Absolutely and it is very important for any stake holder to read cash flow statement before investing or lending, because CASH IS KING.

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Service tax adjustment and refund

Every  one of us is already trying our level best to understand the Service Tax provisions, but it is really difficult to cover up all that is written in the Finance Act.

Let’s get started:

Question 1: What all are the cases where adjustment of service tax is possible? What are the possible solutions in hand? What is the time limit to adjust such service tax?

Answer 1: In the following cases the adjustment of service tax is possible:

1. Rule 6(1A) of Service tax rules-Related to advance payment of service Tax

2. Rule 6(3) of Service tax rules-Related to service tax  adjustment where  service not provided but invoice issued or any payment received or invoice is negotiated because of deficient provision of service

3. Rule 6(4A)  read with Rule 6(4B) of Service tax rule-Related to excessive payment of service tax on account  of reasons other than  involving interpretation of law, taxability ,valuation or applicability of any exemption notification.

Let’s discuss each of the above one by one:

Advance payment of service Tax:

What happens: the service providers on his own will pay an amount as advanceservice tax.

Adjustment is possible subject to following conditions:

a. The adjustment can be made in subsequent periods

b. Intimation of such advance payment is made to jurisdictional Superintendent of Central excise within 15 days from date of such payment.Online intimation is possible through Aces website.

c. Indicate the advance payment made and its adjustment in ST-3 return.

   

Services not so provided but invoice issued earlier:

What happens: Service provider has issued an invoice or received payment but could not provide the service wholly or partly or the invoice amount is negotiated due to deficient provision of service or any terms contained in contract. Now as a result excess credit is available with the service provider.

Adjustment possible subject to following conditions:

a. The adjustment can be made in subsequent periods.

b. The service provider should refund the payment or part thereof to the person from whom it is received.

c. The service provider shall issue a credit note for the value of service not so provided but for which invoice already issued.

Excess service tax paid

What happens: Assessee has paid service tax in excess of his service tax liability for a month or quarter.

Adjustment possible subject to following conditions:

a. The adjustment can be made against the liability for the succeeding month or quarter.

b. The service tax so paid in excess is not an account of reasons involving interpretation of law, taxability, valuation or applicability of any exemption notification.

Question 2: Is there any monetary limit on the amount to be adjusted??

Answer: No as per notification No.3/2012 dated 17.03.2012, adjustment of excessive service tax is possible without any monetary limit .Further no intimation to be filed with superintendent in case of adjustment of excess service tax.

Refund Of Service tax

Before we discuss refund under service tax first we should know that as per Section 83 of the Finance Act provisions of various sections of Central Excise Act 1944 are applicable in relation to service tax as they are apply in realtion to duty of excise.Among them  two important section  relevant to service tax refund are Section 11B,11BB

Section 11B

Any person claiming refund of any 19[duty of excise and interest, if any, paid on such duty] may make an application for refund of such 19[duty and interest, if any, paid on such duty] to the 2[Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise] before the expiry of 3[one year] 4[from the relevant date 5[6[in such form and manner] as may be prescribed and the application shall be accompanied by such documentary or other evidence (including the documents referred to in section 12A) as the applicant may furnish to establish that the amount of 19[duty of excise and interest, if any, paid on such duty]  in relation to which such refund is claimed was collected from, or paid by, him and the incidence of such 19[duty and interest, if any, paid on such duty] had not been passed on by him to any other person:

What we understood From Section 11B

1. Applicable for refund of service tax and interest thereon

2. The Refund application is to filed with the AC/DC of Central Excise

3. Refund to be made within 1 year from the relevant date

4. Refund application to be accompanied by  documents referred to in section 12A

5. Incidence of Service Tax had not been passed to any other person

Question 3: What all are the cases where REFUND of service tax is possible? What are the possible solutions in hand? What is the time limit to file claim for the refund?

Answers: In the following cases refund of service tax is possible:

1. As per Rule 6(4) of Service Tax Rules- On finalisation of  provisional assessment

2. As per Section 74(6) of Finance Act- On rectification of mistake

3. Excess payment of service tax for reasons like wrong interpretation of law, taxability, valuation or applicability of any exemption notification.

4. As per Rule 5 of Cenvat Credit Rules- On input and input services used in manufacture of final products that are exported or providing output services that are exported

5. As per Rule 5B of Cenvat credit Rules-On inputs and input services used by service provider providing   specified services notified under section 68(2) i.e. services charged reverse charge mechanism.

6. Refund of cenvat credit on input services used by unit Located in SEZ or by Developer of SEZ-Notification No.12/2013 read with Section 93(1)

Let us discuss each one by one:

Friends!! If I keep the language as formal you would find in Law/ text books then purpose of my article gets defeated. Rather I would use such language that is easy to apprehend.

So, let us get started:”

Refund of Service Tax paid on Provisional Assessment as per Rule6(4) of The Service Tax Rules

The following questions need to be answered?

Q1.Why there is a need to pay service tax on provisional basis?

Answer 1: When an Assessee is not able to correctly estimate his service tax liability, he shall pay the service tax on a provisional basis after making a request  in writing to the AC of Central Excise or DC of Central excise who shall order the same .The Central Excise Rules(No.2),2001 Rule 7 shall apply except for the bond requirement part.Fill ST-3A on Aces website to fill provisional payment details.

Q2:When is the provisional assessment finalized?

Answer 2: The Provisional assessment has to be finalized by the AC/DC of Central Excise within a period of 6 months from the date  when he order the payment of service tax on provisional basis. The period of 6 months may be extended on discretion on the Commissioner of Excise.

Q3:When and how to apply for service tax refund?

Answer3: If in the final assessment order a refund becomes due to the assessee, then as per Section 11B of the Central Excise Act an application for refund has to be made within 1 year from the date of final assessment thereof as per Explanation B(eb) to Section 11B.Online Refund application can be filled for the same.

Service tax becoming refundable on rectification of mistake under Section 74 (6) of Finance Act

The following questions need to be answered:

Q1. When is a rectification order passed under Section 74(6)?

Answer1: The Central Excise officer on his own motion or on request of assessee or if any mistake is brought to his notice by the Commissioner of Central Excise pass a rectification order within a period of 2 years from the date of original order. If on rectification it is observed by the Central excise Officer that the liability of the assessee is reduced or his refund is increased, the CE officer shall pass a rectification order to make any refund which may be due to such assessee.

Q2. When and how to apply for refund?

Answer2: The refund application is to be filed within a period of 1 year from the date of such rectification order to the AC/DC of Central Excise. {Section 11B read with Explanation B(ec)}

Refund of Excess service tax paid for reasons like wrong interpretation of law, taxability, valuation or applicability of any exemption notification.

The following questions need to be answered:

Q1: What do you mean by service tax paid for reasons like wrong interpretation of law, taxability, valuation or applicability of any exemption notification?

Answer1: There are various cases, some of them are listed below:

a. In case of  KVR construction Vs CCE ,Bangalore, KVR Construction (petitioner) paid service tax on construction of  building or civil structure meant for the use of  organisations or instituitions being established  solely for educational , religious, charitable, health purpose. Whereas there was no service tax liability on the same as such construction was not taxable vide circular no.80/10/2004 dated 17.09.2004. So this is a case of payment of service tax due to misunderstanding of law.

b. In case of  Natraj  And Venkat associates Vs ACST, Natraj  and Venkat associates (petitioner) paid  service tax on export of services  again it was a case of mistake of law.

Q2: Is refund of the same possible. Is there any time limit on the same?

Answer 2: Congratulations!!! Refund of the same is possible. Also there have been various case laws which suggest that refund in such cases is not time –bound as what is paid erroneously was  not required to be paid at all by the law and doesn’t become of the nature of service tax.In support of my answer I would like to give the reference of following case laws:

1. Jyotsana D.Patel Vs Commissioner  of Central excise, Nagpur 2014

2. KVR Construction Vs CCE-2010

3. Natraj and Venkat  Associates  Vs Asstt . Commissioner of Service Tax ,Chennai

4. SGS India (P.) Ltd. v. CST [2011] 31 STT 2006

5. Ranadip Shipping & Transport Co. (P.) Ltd. v. CC 1989 (42) ELT 398

6. Prime Products Private Limited Vs CCE Nashik(2012)

Therefore in case service tax is paid under any misunderstanding of law or any exemption notification, refund of same is allowable and Section 11B of Central Excise Act is not applicable as for period of time limitation.

Refund of Cenvat Credit on input and input services used in manufacture of final products that are exported or providing output services that are exported-Rule 5 of Cenvat Credit Rules

The following questions need to be answered:

Q1. Is refund of cenvat credit of input and input services used is available only for taxable output services that are exported?

Answer1: The Rule 5 of CCR does not provide a condition or pre-requisite that assessee should export taxable services. So refund shall be available for any service exported whether taxable or not.

Case law for reference:

1. Karnataka High Court -mPortaal India Wireless Solutions Private Ltd Vs CST,Bangalore(2012)

2. Bombay High Court-Repro India Ltd Vs Union Of India(2009)

Q2: How to apply for refund and is there a time limit for the same?

Answer2:  The Refund of Cenvat Credit Under Rule 5 of Cenvat Credit rules was earlier  governed by notification no.5/2006 which is now superseded by Notification No.27/2012 dated 18.06.2012.

As per the notification the refund claim is to be filed in form A along with documents required therein. Further the notification says that the claim has to be filed within the time limit specified under Section11B for the purpose of refund.

Q3: What is the relevant date as per section 11B in case of export of services?

Answer 3: The relevant date in this case is drawn from the conclusion derived in the case law of

Madras High Court-CCE Vs GTN Engineering Ltd {2012(28) S.T R. 426 Mad}

So the relevant date is the date on which consideration has been received  where refund is claimed by service provider. The refund claim has to be filed within 1 year from the date of receipt of consideration.

Moreover in Form A copies of Bank Realization Certificates for the export of services is required, this means the refund claim has to be filed only after the export proceeds are received.

Refund of Cenvat credit  on inputs and input services used by service provider providing  specified services notified under section 68(2) i.e. services charged  under reverse charge mechanism -As per Rule 5B of Cenvat Credit Rules

The following questions need to be answered:

Q1: To whom the refund is available under Rule5B of Cenvat Credit Rules?

Answer 1: Service Providers who are providing services notified under section 68(2) i.e. services on which service tax is payable under reverse charge and are unable to utilize the cenvat credit on Inputs and input services .

Such service providers can claim the refund of the same under Rule 5B of CCR w.e.f  01.07.2012 wide notification no.28/2012 dated 20.06.2012.

Q2: Are there some specified services on which refund available under Rule 5B?

Answer 2:Notification No. 12/2014 dated 03.03.2014 specified  the following output services namely:

i. Renting  of motor vehicle designed to carry passengers on non-abated value to, any person who is not engaged in the similar business

ii. Supply of manpower for any purpose or security services; or

iii. Service portion in execution of a works contract

Please note that above are partial reverse charge services.

Q3: Is there some formula for calculation of Unutilized cenvat part?

Answer3:Yes the formula says unutilized cenvat credit on inputs and input services =A-B

Where A=Cenvat credit taken on inputs and input services during the half year (*)partial reverse charge service turnover/total turnover of goods and services during the half year

B=Service tax paid by the service provider for such partial reverse charge services during the half year.

Q4: When the refund claim has to be filed and in what form?

Answer: Notification No.12/2014 reads that the one  refund is to filed  for each halfyear.The refund application in Form A along with specified documents,shall be filed within  one year from the due date of filing of service tax return for the half year.

Please note that the time limits specified in Section 11B does not apply in cases covered by rule 5B of CCR.

Refund is only admissible for CENVAT credit taken on inputs or input services received after the 1st day of July,2012.

Refund of cenvat credit on input services used by unit Located in SEZ or by Developer of SEZ-Notification No.12/2013 read with Section 93(1)

The following questions need to be answered:

Q1:To whom is this Notification applicable and why?

Answer1: The notification is applicable to unit located in Special Economic Zone(unit located in SEZ) or Developer of SEZ .Such units and Developers are allowed refund of service tax paid on   input  services received that are used exclusively for  the authorized operation of the SEZ unit.

Q2:How  to file the refund claim?

Answer2:The  refund claim has to be filed within 1 year from the end of the month in which actual payment of service tax was made by such Developer or SEZ unit to the registered service provider or such extended period as the AC/DC of Central excise shall permit.

Q3:In which form the refund application is to be filed?

Answer3:The refund application is to be filed in Form A-4 with the AC/DC of Central Excise.The SEZ unit or Developer shall submit only one claim of refund under the notification for each quarter.

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INPUT TAX CREDIT UNDER TAMIL NADU VALUE ADDED TAX ACT, 2006

INPUT

Input means any goods including capital goods purchased by a dealer in the course of his business.

INPUT TAX

Input tax means the tax paid or payable under this Act by a registered dealer to another registered dealer on the purchase of goods including capital goods in the course of his business.

OUTPUT TAX

Output tax is tax collected on sale of goods from the buyer. This tax is calculated by applying the rate of tax on taxable turnover of these goods.

INPUT TAX CREDIT

The input tax credit that can be deducted from the output tax payable for any month or year shall be calculated by the formula (A+B)- (C+D) where-

• A = Input tax credit carried forward from the previous month or year;
• B= Input tax credit accrued during the month or year;
• C = Input tax credit reversed during the month or year;
• D = Input tax credit refunded during the month or year.

Input tax credit may be availed on goods and capital goods.

INPUT TAX CREDIT ON GOODS

To avail input tax credit the following are the conditions:

• The dealer shall establish that the tax due on such purchases has been paid by him in the manner prescribed;
• Both purchasing and selling dealers must be registered dealers;
• The purchaser of goods shall be in the course of business;
• The goods purchased shall be taxable goods;
• The purchases shall be supported with bills/invoices;
• If the original invoice/bill is lost, certified copy or copy of invoice shall be produced;
• The purchase of goods shall be for the purpose of-
  • Re-sale within Tamil Nadu;
  • Use as input in manufacturing or processing of goods in Tamil Nadu;
  • Use as containers, labels and other materials for packing of goods in Tamil Nadu; or
  • Use as capital goods in the manufacture of taxable goods;
  • Sale in the course of inter-state trade or commerce under the Central Sales Tax Act;
  • Agency transaction by the Principal within Tamil Nadu in the manner as may be prescribed.

NON ELIGIBLITY OF INPUT TAX CREDIT

The Input Tax Credit is not allowed in the following transactions-

• When goods are sold interstate and are not supported by ‘C’ declaration form;
• When goods are dispatched outside the State otherwise than by way of sale and are not supported by Form ‘F’ declarations;
• When the manufactured goods are exempt from tax or when the goods became exempt from tax;
• In respect of purchase of tax paid or payable in other States or Union Territories or interstate purchases;
• In respect of purchases if capital goods, which are used exclusively in the manufacture of exempted goods;
• Goods purchased and accounted in the business but utilized for providing facility to the proprietor or partner or director or employees and in any residential accommodation;
• Automobiles including commercial vehicles, two wheelers and three wheelers and spare parts for repair and maintenance purchased unless the registered dealer is carrying on business of dealing in such automobiles or spare parts;
• Air conditioning units purchased unless the registered dealer carries on business of dealing in such units;
• In respect of goods that are given away by way of free sample or gift or consumed for personal use;
• If goods are not sold because of theft, loss or destruction including natural calamity;
• If inputs are destroyed in the fire accident or lost even before use in the manufacture of final products;
• If inputs are damaged in transit or destroyed at some stage of manufacture;
• In case goods are purchased from dealers who pay tax at compounded rate;
• To dealers who are paying tax at compounded rate;
• To dealers who have opted for payment of tax at compounded rates on works contracts;
• To dealers on sale of unbranded foods, sale of ready to eat unbranded foods including sweets, savories’, un-branded non alcoholic drinks and beverages served in or catered indoors or outdoors by hotels, restaurants, sweet stalls, clubs, caterers and any other eating houses who have opted for payment of tax at compounded rate;
• To a manufacturer of sugar on tax paid on the last purchase of sugarcane;
• In respect of goods mentioned in the second schedule to the Act. 

INPUT TAX CREDIT ON CAPITAL GOODS

Capital goods means-

• A plant, machinery, equipment, apparatus, tools, appliances, or electrical installation for providing, making, extracting or processing of any goods or for extracting or for bringing about any change in the substance for the manufacture of final product;
• Pollution control, quality control, laboratory and cold storage equipments;
• Components, spare parts and accessories of the goods specified above;
• Moulds, dies, jigs and fixtures;
• Refractors and refractory materials;
• Storage tanks; an
• Tubes, pipes and fitting thereof

Used in the State for the purpose of manufacture, processing, packing or storing of goods in the course of business excluding civil structures and such goods as may be notified by the Government.

INPUT TAX CREDIT TO A REGISTERED DEALER

Input tax credit is available to a registered dealer in the following circumstances and on the specified amounts given below:

• In respect of tax paid or payable in respect of taxable goods when goods are-
  • Sold locally within the State and such sale is taxable under the provisions of the Act;
  • Sold inter state under the CST Act, 1956 and such inter State sake us supported by ‘C’ declaration form;
  • The sales are zero rated sales under Section18 of the Act.
• In respect of tax paid or payable in respect of taxable goods purchased and used in manufacturing or processing of taxable goods and when such manufactured taxable goods are-
  • Sold locally within the State and such sale is taxable under the provisions of the Act;
  • Sold interstate under the CST Act, 1956 and such inter State sake us supported by ‘C’ declaration form;
  • The sales are zero rated sales under Section18 of the Act.
• In respect of taxable goods paid or payable in respect of taxable goods that are purchased and used as containers, labels and other materials for packing of taxable goods in the State and such packed goods are-
  • Sold locally within the State and such sale is taxable under the provisions of the Act;
  • Sold interstate under the CST Act, 1956 and such inter State sake us supported by ‘C’ declaration form;
  • The sales are zero rated sales under Section18 of the Act.
• In respect of tax paid or payable on taxable goods purchased and used as capital goods in the manufacturing or processing of taxable goods in the State and such manufactured goods are-
  • Sold locally within the State and such sale is taxable under the provisions of the Act;
  • Sold interstate under the CST Act, 1956 and such inter State sake us supported by ‘C’ declaration form;
  • The sales are zero rated sales under Section18 of the Act.

However credit on capital goods shall be availed up to 50% in the same financial year and the balance credit shall be availed before the expiry of third financial year, provided the capital goods are in the possession of dealer. After the end of the third financial year the credit shall lapse.

TRANSACTIONS BETWEEN PRINCIPAL AND AGENT

Agent is not entitled to input tax credit.   It is the principal who is entitled to take the input tax credit and it is the liability of the principal to discharge the burden of payment of tax on sales effected either directly or through the agent.

The credit in excess of 3% is available where goods are purchased locally and transferred to a place outside the State otherwise than by way of sale, provided such transfer is supported by Form F declaration.

The credit in excess of 3% is available where goods are purchased locally and used in the manufacture of other goods and such manufactured goods are transferred to a place outside the State otherwise than by way of sale, provided such transfer is supported by Form F declaration.

The credit is available in respect of goods that were held as opening stock as on 1.1.2007 and for which claim in Form V has been filed only when the sale of goods is taxable under the Act and the goods are-

• Sold locally within the State and such sale is taxable under the provisions of the Act;
• Sold interstate under the CST Act, 1956 and such interstate sale is supported by ‘C’ declaration form.

The claim in Form V is to be submitted along with the Xerox copy of related purchase invoice or bill within fifty nine days from the date of commencement of the Act. The assessing authority is to verify the same and pass an order not later than seven months from the date of commencement of the act.

PROCEDURE TO CLAIM CREDIT

Every registered dealer who claims input tax credit shall produce the original tax invoice in support of his claim of the input tax credit containing the following details-

• A consecutive serial number;
• The date on which the invoice is issued;
• The name, address and the TIN of the seller;
• The name, address and the TIN of the buyer;
• The description of the goods;
• The quantity or volume of the goods;
• The value of the goods;
• The rate and amount of tax charged; and
• Total value of the goods.

If the dealer fails to claim input tax credit in respect of any transaction of taxable purchase in any month, he shall make the claim before the end of the financial year or before ninety days from the date of purchase, whichever is later.

The input tax credit availed by any dealer shall be only provisional and the assessing authority is empowered to revoke the same if it appears to the Assessing Authority to be incorrect, incomplete or otherwise not in order.

IF ORIGINAL INVOICE IS LOST? 

The input tax credit shall be availed on original invoices.   If the original tax invoice is lost the input tax credit shall be allowed only on the basis of duplicate or carbon copy of such tax invoice obtained from the selling dealer.

•   In such cases the dealer the claim shall be presented before the Assessing Authority within 30 days from the date on which the original tax invoice is lost;
•   It shall be accompanied by a duplicate or carbon copy of the original voucher;’
•   The assessing authority shall verify such claim and pass orders allowing input tax credit on the basis of duplicate or carbon copy of the original invoice or the rejection;
•   When the claim is rejected, the assessing authority shall record his reasons for doing so and communicate to the dealer;
•   No order prejudicial to the dealer shall be passed unless the said dealer is given opportunity of being heard.

TRANSFER OF BUSINESS

Where the business of a dealer is transferred on account of change in ownership or on account of sale, merger, amalgamations, lease or transfer to the business to a joint venture with the specific provision of transfer of liabilities of such business, then the dealer shall be entitled to transfer the input tax credit   lying unutilized in his account to such sold, merged, amalgamated, leased or transferred concern. The transfer of input tax credit shall be allowed only if the stock of inputs, as such, or in process, or the capital goods is also transferred to the new ownership on which credit has been availed of are duly accounted for, subject to the satisfaction of the assessing authority. taxmanagementindia.com

The transferee claiming input tax credit shall furnish the following details:

• Unavailed credit available in the account of the transferor as certified by a Chartered Accountant or Cost Accountant;
• Inventory of stock transferred with date;
• Details of capital goods transferred; and
• Original tax invoices evidencing the payment of tax at the time of purchase.

The assessing authority shall verify the correctness of the details furnished allow or determine the amount of input tax credit transferred to the dealer or reject the claim.

No order rejecting the claim shall be passed unless the dealer is given an opportunity of being heard.

CARRY ON/SET OFF

• In cases where the input tax paid in the month exceeds the output tax payable, the excess input credit shall be carried over to the next month;
• The input tax credit determined by the assessing authority for a year exceeds tax liability for that year, the excess may be adjusted against any outstanding tax due from the dealer;
• If any excess, after such adjustment, shall be carried forward to the next year or refunded, in the manner, as prescribed;
• If there is no arrears or after the adjustment there is still an excess of input tax credit assessing authority shall serve a notice in Form P upon such dealer;

FRADULENT CLAIM

Where a dealer without entering into a transaction of sale issues an invoice, bill or case memo to another dealer, with the intention to defraud the Government revenue, the assessing authority shall, after making such enquiry as it thinks fit and giving a reasonable opportunity of being heard, deny the benefit of input tax credit to such dealer who has claimed input tax credit based on such invoice, bill or cash memo.

REVERSAL OF CREDIT

Where the purchasing dealer has returned the goods to the seller for any reason, the input tax credit claimed already on the purchase by the dealer shall be liable to reversal of tax credit on such goods returned.   The following are the conditions to be fulfilled-

• The purchase was included in the return; and
• The goods were returned within a period of six months from the date of purchase by him.

The following are the other grounds for reversal-

•   Input tax credit was availed but subsequently the related goods have been stolen or damaged or destroyed;
•   Input tax credit was claimed but subsequently it has been detected that related purchases are from bogus traders;
•   Input tax credit was availed but related goods have been as free samples or gift to others;
•   Input tax credit was availed but subsequently the related goods are used to provide facility to the proprietor/director of the concern.

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Meaning of Debit Note & Credit Note

This Article contains Detailed Information about Debit Note & Credit Note

Debit note is a note sent by one party to another informing him that his account is debited in the sender's book.

e.g. P (Purchaser) Purchased goods from S (Seller)

Books of P	Books Of S
Purchase A/c Dr.  To S A/c (Being goods purchased)	P A/c Dr. To Sale A/c (Being goods sold)

P --------> sends a debit note to S (for receiving damaged material)

Books Of P	Books Of S
S A/c Dr. To purchase return A/c (being goods returned)	Sales return A/c Dr. To P A/c (being goods returned)

When the P returns the goods to the S.  P sends a Debit Note to the S (ie. the P debits the S in his books ie. P's Books) and the S sends a Credit Note to the P (ie. the s credits the P in his Books ie. S's Books).

Credit note is a note sent by one party to another informing him that his account is credited in the sender's book.

When Debit Note is sent?

1. Debit note can be sent by buyer when he is overcharged.
2. It can be sent by buyer when he returns back the goods.
3. It can be sent by the seller when he has undercharged the buyer.

When Credit Note is sent?

1. Credit note can be sent by the seller when he has overcharged the buyer.
2. It can be sent by the seller when he receives back the goods.
3. It can be sent by buyer when he has been undercharged.

Another Example:-

Debit Note - When x issues debit note to y, y has to pay money to x. In the books of x, y is debited.
Example: x sells Goods worth Rs 100 to y. But later x realises that he has charged Rs 15 less by mistake. So x issues a debit note to y. y has to pay Rs 115.

Credit Note - When x issues credit note to y, y has to get money from x. In the books of x, y is credited.
Example: x sells Goods worth Rs 100 to y. But later x agrees to a discount of Rs 15 . So x issues a credit note to y. y has to pay Rs 85.

(There are two types of people in society, Takers and Givers. Takers may eat better or best, but givers always sleep well.)

(In the end people will judge you anyway. Don't live your life impressing others, live your life impressing yourself.)

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How do Internal Controls manifest in an Organization?

I like to explain Internal Controls using 5 “P”s. They are Policies, Processes, Procedures, Practices and you can guess the 5th“P”. Otherwise, you will find it in one of the following paragraphs. While all these “P”s serve various purposes, our focus is on their relevance to Internal Controls, and how an Internal Auditor could use them in the discharge of his / her duties.

Policies

Policies are an important means of communication, used by the Board of Directors, to convey to the external world and to internal stakeholders, on the Organization’s methods of conducting business. We know that Accounting Policies are included in the published accounts, to help readers understand the basis of preparing financial statements. Policies serve certain other purposes as well. Policies are the first step towards achieving Organizational Objectives.They are relatively permanent in nature, and deserve the attention of the top management. Absence of a relevant policy could be a control weakness. Policies could be grouped under “Corporate Policies” and “Functional Policies”. Examples of Functional policies are Sales Policies, ManufacturingPolicies, HR& Admin Policies, IT Policies and so on.

Let us look at the relevance of a Sales Policy. If you are engaged in Hotels business, with a chain of hotels, there is a need for a Policy on Discounts to Room Tariff. Otherwise General Manager of each hotel in the chain, could go for individual discretion, which may not be in the interest of the organization. Thus if you are the Internal Auditor of a hotel chain, you could recommend a “Discount Policy” if it is not documented and followed. Similarly, Internal Auditor needs to review whether all important business aspects are adequately addressed through policies.

Processes

Processes help in implementing Policies. Process focus is important while designing Systems, whether computerized or manual. Processes can be classified in to Core (Key) Processes that are essential for conducting business, and Processes for Support Functions. For example, if your organization is in EPC (Engineer, Procure and Construct) business, your core Process starts with receipt of Enquiry from prospective customer, Estimation and Proposal Making, Submission of the Proposal, Negotiations, Bagging the Order, Detailed Engineering, Procuring (placing Purchase Orders), receiving materials at site, Erection, Installation, Commissioning and obtaining Project Closure from the customer. In the same business, support Processes are for functions like HR, Finance, Quality and Administration.

Clarity on processes is essential for all stakeholders, particularly in a set up where different departments are involved. If we look at material procurement process, an Indent is raised by a User department on Purchase, which in turn releases a Purchase Order. Material is received in Stores, where a Goods Receipt Note (GRN) is prepared. Vendor’s Invoice is received in the Accounts Department, which picks up the Purchase Order and GRN, matches them with the Vendor invoice, creates a Payable, and releases Payment.  While this process is contiguous, different departments like the User, Purchase, Stores and Accounts are involved, and without proper clarity on the process, to all, it would not be feasible to execute transactions, and can leave potential control gaps.

Procedures

Procedures are developed from Processes, and serve as a guide or instruction to the operating personnel in discharge of their duties. Apart from training resources, they could help in practices like Job Rotation. Standard Operating Procedures (SOPs) as they are popular, are essential for all medium and large organizations. Well managed companies place lot of emphasis on documenting SOPs, ensure that all stakeholders get engaged in awareness and implementation, and even include SOP Compliance verification in the scope of Internal Audit. Statutory Compliances are invariably included in Procedure documents.

Practices

Even if the best of Policies, Processes and Procedures are in place, if they are not followed in practice, the purpose is not served, and the organization is exposed to potential control weaknesses. Apart from Operating Procedures, Information Security related procedures are generally compromised. Sharing passwords with other employees, leaving confidential material on tables unattended, and some of the employees engaged in bank payment related process sharing their access cards and passwords with others for executing bank transactions, are common security threats. Employee leaves the organization but his / her access card or signature is not withdrawn from the bank. In some cases other employees impersonate and continue executing transactions using the same access card. Internal Auditor needs to be alert in reviewing such practices.

People

Well, the last “P” is People, one way the most important of all the “P”s, since only People implement all the above. Two important elements here are awareness of the relevant Policy, Process or Procedure and willingness to implement it. If I am conducting any walkthrough, I make it a point to observe the case worker executing a task, and make enquiries to know the extent of his / her knowledge of the task the being handled and the attitude, whether proactive or is under compulsion. Negative signals here are a potential control weakness.

Concluding Remarks

In whatever role you are, whether an Accountant, a Manager or an internal Auditor, I hope that my article will prompt you to think of Internal Controls in the “P”s I have suggested.

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