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Should Turnover include indirect taxes such as GST / VAT / Excise Duty?
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The Term ‘Turnover’ has not been defined under the Income Tax Act, 1961. According to section 2(91) of Companies Act 2013 as amended by the Companies (Amendment) Act, 2017
“Turnover” means the gross amount of revenue recognised in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year
The GST law also do not define the term turnover. However, the Central Sales Tax Act, 1956 defined the term turnover as
“Turnover” used in relation to any dealer liable to tax under this Act means the aggregate of the sale prices received and receivable by him in respect of sales of any goods in the course of inter-State trade or commerce made during any prescribed period and determined in accordance with the provisions of the Act and rules made there under
In “Guidance Note on Terms Used in Financial Statements” published by the ICAI, the expression “Sales Turnover” has been defined as under:-
“The aggregate amount for which sales are effected or services rendered by an enterprise. The term `gross turnover’ and `net turnover’ (or `gross sales’ and `net sales’) are sometimes used to distinguish the sales aggregate before and after deduction of returns and trade discounts”.
Should Turnover include indirect taxes such as GST / VAT / Excise Duty?
- PARA 9.1.3 – Indirect taxes such as Sales tax, Service tax, Purchase tax etc. are generally collected from the customer on behalf of the government in majority of the cases. However, this may not hold true in all cases and it is possible that a company may be acting as principal rather than as an agent in collecting these taxes. Whether revenue should be presented gross or net of taxes should depend on whether the company is acting as a principal and hence responsible for paying tax on its own account or, whether it is acting as an agent i.e. simply collecting and paying tax on behalf of government authorities. In the former case, revenue should also be grossed up for the tax billed to the customer and the tax payable should be shown as an expense. However, in cases, where a company collects tax only as an intermediary, revenue should be presented net of taxes
- PARA 9.1.4 – However, as per the Guidance Note on Value Added Tax, “Value Added Tax (VAT) is collected from the customers on behalf of the VAT authorities and, therefore, its collection from the customers is not an economic benefit for the enterprise and it does not result in any increase in the equity of the enterprise”. Accordingly, VAT should not be recorded as revenue of the enterprise. At the same time, the payment of VAT should not be treated as an expense in the Financial Statements of the company.
- PARA 9.1.5 – Further, as per the definition of Revenue in the Guidance Note on Terms Used in Financial Statement, “It excludes amounts collected on behalf of third parties such as certain taxes”. The Guidance Note on VAT further states, “Where the enterprise has not charged VAT separately but has made a composite charge, it should segregate the portion of sales which is attributable to tax and should credit the same to ‘VAT Payable Account’ at periodic intervals”.
- If sales tax and excise duty are included in the sale price, no adjustment in respect thereof should be made for considering the quantum of turnover.
- If, however, the Excise duty an / or sales tax recovered are credited separately to Excise duty or Sales tax Account (being separate accounts) and payments to the authority are debited in the same account, they would not be included in the turnover
Inclusions & Exclusions from Turnover
The term ‘turnover’ for the purposes s. 44AB would mean the aggregate amount for which sales are effected or services rendered by an enterprise. The following should not be deducted from sales to arrive at turnover:
Inclusions (Not to be deducted from Turnover)
1. Sale of scrap/ By product
2. Sales proceeds of shares, securities, debentures etc. held as stock in trade by the assessee.
3. Cash discount other than allowed in invoice
4. Commission on sales
5. If sales tax/ Excise duty was included in sale price while accounting (Inclusive method), then the same shall form part of Turnover.
Exclusions (To be deducted from Turnover)
1. If sales tax/ Excise duty was not included in sale price while accounting (Exclusive method), then the same shall not form part of Turnover.
2. Sale proceeds of Fixed Assets.
3. Sale proceeds of Investment property.
4. Sale proceeds of shares, securities, debentures held as an Investment.
5. Discounts allowed in the Invoice.
6. Turnover discount (even if allowed by way of separate credit note)
7. Ancillary charges such as packing, freight and forwarding etc. provided they are separately mentioned in the Invoice. Otherwise they will form part of Turnover.
8. Sales Returns
9. Price adjustments.
10. Special rebate (Excluding commission on sales)
In case of Share Brokers
Share Brokers buy and sell securities on behalf of their client. Thus Brokerage income received on purchase and sale of such securities shall form part of Turnover.
Speculative Transactions
Aggregate of both positive and negative differences arising from the difference between purchase and sale transactions should be considered as Turnover.
Derivatives/ Futures & Options
- Total of favourable and unfavourable differences.
- Premium received on sale of options.
- Differences in case of reverse trades.
Delivery based transactions
Where the transaction for the purchase or sale of any commodity including stocks and shares is delivery based whether intended or by default, the total value of the sales is to be considered as turnover.
In agency business
