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GST impact on flood affected suppliers and flood relief

Frequently asked questions (FAQs) 

1.     I am a trader/ manufacturer of goods registered under GST. A good majority of the stock of goods (including raw material/ work in progress/ finished products) in my business was damaged in flood, and cannot be sold in any way. I have already claimed GST input tax credit on the purchase of those lost goods. Should I reverse the credit already availed?  

Ans: Input tax credit shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Here Goods means traded goods and Capital Goods. So, if the goods are lost or destroyed irrecoverably in flood, meaning lost 100% in value, input tax credit on such goods are to be reversed entirely. Even in case of loss of capital goods, input tax credit reversal is required. If they can be sold at some value (at a reduced rate), no reversal of ITC is necessary.

However, in case of work in progress and finished goods manufactured is lost, there is no requirement of ITC reversal. 

2.     I am a service provider registered under GST. Certain inputs and capital goods are necessary for the course of providing the service. A good majority of the stock of goods in my business was damaged by the flood, and cannot be sold in any way. I have already claimed GST input tax credit on the purchase of those lost goods. Should I reverse the credit already availed? 

Ans: Similar to what has explained above, if the goods are lost or destroyed irrecoverably in flood, meaning lost 100% in value, input tax credit on such goods is to be reversed entirely. Even in case of loss of capital goods, input tax credit reversal is required. If the damaged goods can be sold at some value (at a reduced rate), no reversal of ITC is necessary.

3.     I am a building construction contractor. A building in construction (work-in-progress) stage was damaged irrecoverably in flood. Should I reverse input tax credit on the goods used to construct the building? 

Ans: It is pertinent here to note that reversal of input tax credit is required only in respect of goods; loss of immovable property does not necessitate input tax credit reversal. If goods have been already used in the building construction, it is no longer goods and becomes immovable property. In such cases, reversal of input tax credit is not required. 

4.     I managed to sell the damaged goods at a reduced price. Should I reverse input tax credit already availed on such goods?

Ans: GST is payable on transaction value, which is the price paid or payable for the said supply of goods, where the supplier and the recipient are not related, and the price is the sole consideration for the supply.

So, once the damaged goods are sold at a reduced price to an unrelated party, it is its transaction value, and GST is payable on such value. No input tax credit reversal is required.

5.     As per GST, do I need to record the loss of goods in the books and records of the business?

Ans: GST rules which deal with maintenance of books and records say that every registered person, other than a person paying tax under composition scheme, shall maintain the accounts of stock in respect of goods received and supplied by him, and such accounts shall contain particulars of the opening balance, receipt, supply, goods lost, stolen, destroyed, written off or disposed of by way of gift or free sample and the balance of stock including raw materials, finished goods, scrap and wastage thereof.

6.     What is the procedure to reverse input tax credit?

Ans: As per GST rules, goods damaged/lost has to be recorded in the Stock register and as regards recording of the same in the GST returns, only reversal of ITC is required to be made Ascertain the cost of lost/destroyed goods and its corresponding Input Tax Credit already claimed in the GSTR 3B of any previous months. Reverse such credit in the GSTR 3B return of the month in which the loss is actually suffered.

7.     What if I have no credit in my electronic credit ledger?

Ans: On reversal of ITC, if sufficient credit or no credit is available in electronic credit ledger, the same will be treated as output tax liability and has to be paid in the moth of reversal.

8.      I am eligible for the insurance claim on the damaged/ lost goods. Should I pay GST on insurance amount received, considering the same as transaction value? Also, should I reverse input tax credit?

Ans: Insurance claim is an "actionable claim" and is not supply as per Schedule III. Hence receipt of an insurance claim will not be treated as a value of supply; no GST is payable in such a case. However, if the stock of goods is lost/ destroyed 100% in value, input tax credit has to be reversed.

If the claim for insurance is submitted for a total loss, without any salvage value, then input tax credit has to be reversed. The GST department is likely to corroborate this evidence.

In case the goods are completely lost, it is advisable to include GST component also in the Insurance claim to compensate the Input tax reversal.

9.     I am a trader of goods. I wish to donate certain goods to the flood victims free of cost. What is the procedure to be followed under GST? 

Ans: If goods are donated free of cost to the flood victims, it is not a "supply" as defined under GST and so no tax is payable on the actual value of such goods. However, the input tax credit already availed on such goods need to be reversed. In such a case instead of tax invoice, a delivery note should accompany the goods along with E-waybill as applicable.

10.  Will it make any difference if I sell the goods to the flood victims at a reduced rate?

Ans: If goods are sold at a reduced price to the flood victims, GST is payable on transaction value, which is the price paid or payable for the said supply of goods, where the supplier and the recipient are not related, and the price is the sole consideration for the supply. In such a case a tax invoice at the transaction value should accompany the goods along with E-waybill as applicable.

Contact us if you have you any queries or comments relating to the above topic. 

Donations for Kerala flood relief

Frequently asked questions (FAQs)

1)     I am coordinating some flood relief work on my own. Friends of mine from India have agreed to give me some donations to my bank account. Can I collect the funds, keep receipts and also keep vouchers for expenses incurred. Will I comply with the rules this way?

Ans: While receiving donations in money to your bank account from any person in India for coordinating relief work, certain provisions of the Income Tax Act has to be kept in mind. Where any person receives any sum of money or any moveable property, without consideration and if the aggregate fair market value of the same exceeds Rs. 50,000/-, the same is taxable under section 56 of the Income Tax Act. But if the same is received from a relative (as separately explained below) the same is not taxable.  From the above, we can infer that donations received in money and in kind can be charged to tax under the Income Tax Act.

But if you can establish that you are coordinating the relief work as an agent of another person (i.e., the donor), then essentially it is not an income in the hands of the recipient. So, the burden of proof will be on the relief coordinator to show to the satisfaction of the assessing officer that the amount received was not in the nature of an income and that he acted as an agent on behalf of the donor. A statement is to be prepared showing all the inflows and outflows. It will be useful to have a letter from the donor requesting the coordinator to act as his agent; and that he has given the money for the purposes of flood relief activities. The next thing to prove is that the relief coordinator spent the monies received from the donor for flood relief. The relief coordinator should keep all the bills, invoices and receipts as the proof of the amounts spent. It is always good to maintain a separate bank account for this purpose. Photographs of various charitable activities done may come in handy at times.

Who is considered as a relative for the above provisions? "Relative" means-

(i)  spouse of the individual;

(ii)  brother or sister of the individual;

(iii) brother or sister of the spouse of the individual;

(iv) brother or sister of either of the parents of the individual;

(v) any lineal ascendant or descendant of the individual;

(vi) any lineal ascendant or descendant of the spouse of the individual;

(vii) spouse of the person referred to in clauses (ii) to (vi);

2)     Can I collect funds from friends outside India who will transfer to my bank account? Heard that there are FCNR and FCRA compliances?

Ans: The Foreign Contribution (Regulation) Act, 2010 provides that persons having definite cultural, economic, educational, religious and social programmes should get themselves registered with the Government of India before accepting any 'foreign contribution'. In case a person falling in the above category is not registered with the Central Government, it can accept foreign contribution only after obtaining prior permission of the Central Government. Further, under the Act, the Central Government is empowered to prohibit any person or organisation not specified in the Act from accepting any foreign contribution.

3)     I have collected money already in my bank account. What should i do now ?

Ans: It may happen that you have already received amounts in your bank account. You may transfer the funds received to a separate bank account kept for the sole purpose of spending donations received. Get a letter from the donor as explained above. If possible, make payments otherwise than by cash (ie, account payee crossed cheques or electronic payments). Collect bills, receipts for each rupee spent. If payments are made to daily labourers, prepare a receipt with name, address of the person, other details and get it signed by the labourer. Finally prepare a statement of inflows and outflows.

4)     What are the legal ways to collect money for flood relief?

Ans: The organized way of doing charity is through charitable trusts. Charitable trusts are those trusts whose object is to provide the services to all people in the society without discrimination of cast, creed and gender etc. Separate registration is required to give exemption u/s 80G to the donor.

5)     Will I get income tax exemption for the donations made for flood relief in Kerala?

Ans: Deduction can be claimed by any tax payer -individuals, company, firm or any other person in respect of certain donations under section 80G. Any donations made in cash exceeding Rs 2,000 will not be allowed as deduction. Thus the donations above Rs 2,000 should be made in any mode other than cash to qualify as deduction under section 80G.  In-kind contributions such as food material, clothes, medicines etc do not qualify for deduction under section 80G.

Stamped receipt:

·       You must obtain a stamped receipt from the trust or institution where you make a donation.

·       It acts as a valid proof of donation.

·       Such receipt should have the name, address and PAN of the trust or institution mentioned on it.

·       Receipt should also include the name of the donor and details of amount donated mentioned on it.

·       Registration number of the trust under section 80G and validity of registration (registration period) must be mentioned on the receipt.

We can consider 3 types of donations:

i)               Donations paid to Kerala Chief Ministers Relief Fund:

Donations paid to Chief Ministers Relief Fund will be fully allowed as a deduction from the Gross Total Income of the assessee under section 80G. There is no qualifying limit condition for this deduction.

ii)              Donations made to approved charitable institutions for flood relief:

Donations made to any institution which satisfies conditions mentioned in Section 80G(5) or to Government or any local authority to be utilised for flood relief is allowed as deduction. In this case 50% of the donation paid is allowed as deduction subject to a maximum of 10% of adjusted gross total income.

Adjusted total income: Adjusted gross total income is the gross total income (sum of income under all heads) less the following:

·       Amount deductible under Sections 80CCC to 80U (but not Section 80G)

·       Exempt income

·       Long-term capital gains

·       Income referred to in Sections 115A, 115AB, 115AC, 115AD and 115D, relating to non-residents and foreign companies            

iii)            Donations made on your own to deserving people

Donations made on your own or through any institution which does not satisfy conditions under section 80G(5) will not be allowed as deduction under the Income Tax Act.        

Contact us if you have you any queries or comments relating to the above topic. 

GST updates

Key Takeaways - 28th GST Council Meeting dated 21st July 2018 Read more

An eye-opener for automobile dealers


1. Need for Health check-up in automobile dealerships

The following typical factors and complexities make Automobile Dealership a challenging and highly complex business activity:

  1. Huge investment by way of equity and borrowed funds
  2. Excessive manpower requirement
  3. Stiff competition not only from own brands  but also from other brands
  4. Inefficiency in Working capital management
  5. Susceptibility to fraud, malpractices and falsification of accounts & documents
  6. Lack of leadership quality among departmental heads
  7. Inadequacy of quality training
  8. Abrupt change in key persons without proper replacement

2. Situations which necessitates health checkups and professional management:

  1. Lack of adequate Internal Control and proper process flow
  2. Excessive stock holding
  3. Diversion of working capital to long term investments
  4. Inefficiency of Top Management
  5. Weak HR department
  6. Lack of proper MIS & Budgetary Control
  7. Excessive salary to unproductive staff
  8. Rampant malpractices, falsification of accounts by sales team in connivance with departmental heads
  9. Non-submission of timely returns for claiming incentives, exchange bonus etc
  10. Excessive finance cost
  11. Inability to generate monthly reports

Many of the factors mentioned above resulted in closure of several viable and highly potential automobile dealers especially in Kerala

A proper Health check-up, professionalism, Internal Control & MIS can make Automobile Dealership a challenging and rewarding experience.

3. The crisis faced by Automobile dealers

a. Increased pressure from OEM to off-take the load from their heads

b.Unhealthy business practice among business competitors

c. Compulsion to provide excessive freebies to secure sales

d. Achieving the sales target of non-performing products

e. Piling up of slow moving parts, accessories & products due to compulsive dumping by OEM

f. Increased pressure to achieve sales targets to maintain premium dealership

g. Increased Labour Turnover compared to other business segments

4. Need for proper process flow and Internal Control

Unless proper and adequate internal control system is in place internal frauds can often occur in automobile dealerships and the financial impact of such frauds could be disastrous.

5. Multiplicity of Profit Centers

A dealership business consists of multiple unconnected business activities within one roof such as:

  • Sale of New cars
  • Sale of used cars
  • Services
  • Parts &  Accessories
  • Driving School

Each of this business is being run as independent profit centre and this makes things extremely complicated to monitor and control as each line of business has its fraud risk factors.

6. Statutory Compliances

Harassment from both Direct & Indirect Tax departments and raising of unreasonable demands make the lives of dealers miserable. The only solution therefore is to have foolproof accounts with convincing documentary evidence. Equally important is the need for complying with Labour Laws.

To know more about our business health check up services for automobile dealerships, please contact 9447123625 or jose@jaksllp.com.

Does your hospital urgently need a health check?

Business Health check-up for hospitals? 

Sounds a bit weird, but most small hospitals will either close down or be acquired by big corporate hospitals if the illness symptoms are not taken seriously. Your small hospital needs an urgent business health check-up if you are facing the following symptoms : 

1) Cash handling and internal controls - Cash is received at various points in the hospital including the pharmacy and for issuing OP tickets. There is an evident lack of internal controls in depositing the cash and tallying it with daily sales register, OP ticket register etc.

2) Rising costs, loss of income and resultant issues in managing cash flows - Struggling to do more with less without compromising the quality of patient care. Employee cost has skyrocketed over the years without the ability to increase treatment costs due to competitive pressure even from government hospitals. Drug price control Rules has resulted in significant loss of revenue and Managing cash flows at month end has become a challenge. Compliance with proposed clinical establishment rules and proposed NABH regulations will further add to the cost. 

3) Regulatory compliances - Complying with the innumerous laws and regulations including pollution control, AERB, BMW, income tax, GST, renewal of various licences to use X-ray, scanning machine etc. has become a significant challenge.  Any small noncompliance will result in hefty fines and penalties apart from the loss of reputation. 

4) Inventory control - Staying in control of the inventory at the pharmacy, casualty and on the floor while at the same time ensuring availability of life-saving drugs is a big challenge. Absolute lack of proper inventory control at the pharmacy, at the lab, at the ICU, Casualty results in preventable loss. Medicines taken by the staff for own consumption, X-ray films at the Xray machine, consumables at the lab needs proper control. Verification of physical stock with inventory records is not done periodically. 

5) Lack of adequate MIS - Most hospitals lack clear MIS showing key ratios is that required to run the hospital efficiently. Inability to generate department wise P&L, metrics to capture the average length of stay, operating margin, patient to staff ratio, occupancy rate, patient satisfaction etc

To know more about our business health check up services, contact us



Business goodwill

What is Goodwill?

Business goodwill is a valuable intangible asset that represents the division of the business value which cannot be attributed to other business assets.

Business goodwill unveils the synergy among the various assets used by the business to generate income.  The whole number will be higher than the sum of the parts in a well-run business.

If we define, Goodwill is that part of business value over and above the value of identifiable business assets.

What generates business goodwill

Here are the crucial factors that contribute to the creation of business goodwill:

1.Going concern value

Going concern value means the existence of business assets ready for use in generating business income. The value is created because a business can effectively/efficiently apply its capital, labor, and coordination to produce economic       benefits for its owners.

 2. Excess business income

 Excess business income indicates the existence of earnings above a reasonable return on all the other business assets. The theory is that this excess income is due to business goodwill.

3. The expectation of future economic benefits 

Owners may believe that the business has extra value because they see it as being capable of creating new products and services, invite new customers, and acquire or merge with other businesses.

Circumstances that may need a valuation of business goodwill

In many business valuation circumstances, the estimation of the whole business is concluded. There are some circumstances, in any case, you may have to calculate the value of Business Goodwill separately. Business purchase price allocation. 

 Goodwill financial reporting. 

  a) Business merger or spin-off. 

  b) Business Reorganization. .

  c) Financial solvency verification.

  d) Damage analysis

Valuation of business goodwill

The value of business goodwill can be estimated using the methods under the Cost, market and income valuation approaches.

1) Cost approach. 
Here, the focus is to evaluate the cost required to recreate the business goodwill in today's rupee terms.  Let's say it will take three years to build another business that will match the current business income. Let's further assume that your business will generate Rs. 50,00,000 each year in income. Then the present value of this income is the measure of your business goodwill

2) The market approaches.

A common way to determine business goodwill in an actual business sale is to subtract the total value of all recognised assets from the cash-basis business purchase price. We can also use comparative transaction data (of businesses sold) in the industry to estimate goodwill as a percentage of the business sale price.

3)  Income approach

Widely used approach to estimate the value of business goodwill. Following are the two methods:

a) Total business value residual method

  • The DCF valuation method is the preferred choice to determine the overall business value. Goodwill is then estimated as the difference between the business value (DCF method) and the fair market value (FMV) of all recognised business assets.

b) Capitalized excess earnings method

  • Estimate the FMV of all known business assets.
  • Determine a reasonable rate of return on these assets.
  •  Deduct the return from the total business earnings. The difference is the excess earnings.
  •  Capitalize the excess earnings to ascertain business goodwill. The correct selection of the capitalisation rate is crucial


Income Tax Return - AY 2018-19, Due date and Late Fee

Income Tax Return - AY 2018-19, Due date and Late Fee.Read more