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In Part 1, the author of the article has dealt with aspects of revenue recognition. In this article, the author has dealt withConvergence-Divergence? The Evolving Relationship Between Direct and Indirect Taxes in India"vis-a-vis Inventories. Financial statements are considered a reflection and b
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Neither the Income Tax Act nor the GST Act explicitly define 'inventories' or 'stock-in-hand'. These terms are generally understood in common parlance when analysing their impact on business income and tax liabilities.
Under direct taxes, inventory valuation must adhere to Section 145A of the Income Tax Act and ICDS II. This involves valuing inventory at the lower of actual cost or net realisable value, and including taxes, duties, and cess paid to bring goods to their location and condition.
Under GST, 'outward supply' and 'inward supply' are defined, and tax invoices are required for goods. Every registered person must maintain records of stock, input tax credit, and output tax payable. The valuation of inventories for GST purposes is governed by Section 15 and related rules, particularly for supplies made under Section 7 of the CGST Act.
Based on the principles of the Indian Contract Act and the Sale of Goods Act, a supply made without legal ownership is considered a defective transfer. Therefore, it is unlikely that ITC can be claimed under GST provisions without valid ownership of the goods.
The Companies Act, 2013 mandates quantitative disclosures on the purchase and sale of goods, including domestic and imported splits. Auditors must report on inventory verification and valuation. Under the Income Tax Act, Form 3CD requires disclosure of quantitative details of traded and manufactured goods.
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