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Closing Stock Valuation

Arihant (Business) (207 Points)

26 April 2010

If closing stock is valued exclusiveof VAT, will it result in non compliance of 145A which says it should be inclusive of all taxes..?

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20 Replies

Ratan Deep Saxena (Asstt Manager (Accounts & Finance)) (2998 Points)
Replied 26 April 2010

Closing Stock should be valued inclusive of all taxes.

regards,

ratan

CA Sanjay Jha (ACCOUNTS MANAGER) (914 Points)
Replied 26 April 2010

If u have credit taken VAT paid then exclude taxes for valuation of Goods.

but If Credit not taken then all taxes are part of cost of good so include it.

Himansu Sekhar Pati (CA Final) (208 Points)
Replied 26 April 2010

Sanjay sir is right

i.e If you are following exclusive method for accounting VAT.(as guidance note issued by ICAI)

Closing stock should be valued exclusive of vat

Arihant (Business) (207 Points)
Replied 26 April 2010

Originally posted by : CA Sanjay
	If u have credit taken VAT paid then exclude taxes for valuation of Goods. but If Credit not taken then all taxes are part of cost of good so include it.

Dear Sir,

If we have taken the credit and excluded VAT from closing stock valuation then provisions of 145A will still be violated because section does not state that there is no need to include a tax if its creit is taken.

Is my doubt correct ?

CA Sanjay Jha (ACCOUNTS MANAGER) (914 Points)
Replied 26 April 2010

Somtimes all these thing are not written in section.

that time apply AS 2, it clears that if credit taken of taxes then taxes are not form part of cost of goods.

Secondaly u have to not taken double benifited because it directly violationof law.

If u have taken credit then how can u have to add valuation of goods.

I have no doubt about it.

So be Happy

CA Shiv (Business Controller) (2987 Points)
Replied 26 April 2010

Hello, Agreee with sanjay sir regarding the valuation inclusive if not taken vat credit.

145A is very clear about the inclusive and exclusive methods of accounting. There is no violation. You just have to make a inventory sheet showing price and vat for the sake of TAX audit...

CA Devanshi Gandhi (Ajani) (FCA DISA Mcom CIFRS & LLB) (9058 Points)
Replied 26 April 2010

agree with CA Shivang

Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 26 April 2010

But Section 145A states as under:

⁵²[Method of accounting in certain cases.

145A. Notwithstanding anything to the contrary contained in section 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be—

(a) in accordance with the method of accounting regularly employed by the assessee; and

(b) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.

Explanation.— For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment.]

So doesn't that mean that inclusive method should be followed rather than following any of the methods for the purpose of valuing closing stock?

CA Shiv (Business Controller) (2987 Points)
Replied 26 April 2010

Hello Aditya,

It is normally meant that all the tax and exp which are expense out are to be included.( notwithstanding any right arising as a consequence to such payment). Here for the VAT the asseessee has a right to take credit..

So normally its inclusive of other exp excluding the TAxes for which the credit is taken or will be taken.

vikash rathi (Chartered Accountant) (787 Points)
Replied 26 April 2010

fully agree with sanjay sir.....as once credit is taken then it is not our expenses..then no need to be added...

Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 26 April 2010

Then why does the explanation say any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment which seems to be referring to the right to take credit on the purchase of goods.

(Guest)

AS 2 issued by ICAI requires cost of inventory to include cost of materials, cost of conversion and any cost incurred for bringing the inventory to its present location and condition. Further cost of materials shall include cost of purchase, freight and taxes which are not refundable. Hence for presenting financial statements under Indian GAAP inventory shall not include VAT paid thereon if it can be taken as Input Credit for subsequent utilization towards payment of VAT charged on sales. This is known as exclusive method.

However under Section 145A of Income Tax Act, the statute has asked to follow inclusive method while computing the value of inventory, purchases & sales. In other words, purchases, sales and inventory shall include all taxes paid there on.

But in both the cases the effect on net profit or loss in the Profit & Loss Account shall be same since under inclusive method, both closing inventory (a Cr Side Item) and purchases (a Dr Side item) shall include VAT paid there upon thereby nullying the effect of VAT in closing inventory.

1 Like

CA. ANiRuDDhA RAthi (CA) (554 Points)
Replied 27 April 2010

simply add VAT only if u have not taken its set off yet ...

sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 27 April 2010

Originally posted by : Dibyendu Nandi
	AS 2 issued by ICAI requires cost of inventory to include cost of materials, cost of conversion and any cost incurred for bringing the inventory to its present location and condition. Further cost of materials shall include cost of purchase, freight and taxes which are not refundable. Hence for presenting financial statements under Indian GAAP inventory shall not include VAT paid thereon if it can be taken as Input Credit for subsequent utilization towards payment of VAT charged on sales. This is known as exclusive method. However under Section 145A of Income Tax Act, the statute has asked to follow inclusive method while computing the value of inventory, purchases & sales. In other words, purchases, sales and inventory shall include all taxes paid there on. But in both the cases the effect on net profit or loss in the Profit & Loss Account shall be same since under inclusive method, both closing inventory (a Cr Side Item) and purchases (a Dr Side item) shall include VAT paid there upon thereby nullying the effect of VAT in closing inventory.