Valuation of inventories under GST

Introduction

The Goods and Services Tax (GST) introduced on 1st July, 2017. There are various impacts of GST on business activities, like change in invoicing process, change in accounting process, etc. It has impact on valuation of inventories also due to reverse charge mechanism on goods under GST. This document prescribes the accounting treatment of GST on inventories.

As per Ind AS 2 and AS 2, inventories are assets held for sale in the ordinary course of business (trader), in the process of production for such sale or in the form of materials or supplies to be consumed in the production process (manufacturer) or in the rendering of services (service provider).

Therefore, inventories can be classified into:

(i)		Stock-in-trade;
(ii)		Raw materials;
(iii)		Finished goods; and
(iv)		Spare parts

Valuation of Inventories under GST

According to accounting principles envisaged under Ind AS 2 and AS 2, taxes paid on goods or raw materials should be included in the cost of inventories only when those taxes are not recoverable. So, the amount of GST should be included in the cost of inventories only when it is neither available for input credit nor refundable.

Journal Entries
JE 1.	Purchase A/c (Price + GST)			Dr. XXXX
			To Creditors A/c		XXXX
JE 2.	(i)	Raw materials A/c (Price + GST)		Dr. XXXX
			To Creditors A/c		XXXX
	(ii)	Finished Product A/c		Dr. XXXX
			To Raw materials A/c (Price + GST)		XXXX
		(This entry happens in the background of ERP software)
JE 3.	On the date of TOS
	Deferred cost of inventory A/c (Asset)			Dr. XXXX
			To SGST/CGST/IGST Liability		XXXX
	On the date of invoice
	Purchases/Raw materials A/c			Dr. XXXX
			To Creditors A/c		XXXX
			To Deferred cost of inventory A/c (reversal of above)		XXXX
	On GST payment date
	SGST/CGST/IGST Liability			Dr. XXXX
			To Bank A/c		XXXX
	On completion of final product (applicable only in case of manufacturer)
	Finished Product A/c			Dr. XXXX
			To Raw material A/c (incl. GST)		XXXX
	(This entry happens in the background of ERP software)
JE 4.	On the invoice date
	Purchases/Raw materials A/c			Dr. XXXX
			To Creditors A/c		XXXX
	On date of TOS
	Purchases/Raw materials A/c			Dr. XXXX
			To SGST/CGST/IGST Liability		XXXX
	On completion of final product (applicable only in case of manufacturer)
	Material Consumed A/c			Dr. XXXX
			To Raw material A/c (incl. GST)		XXXX
	(This entry happens in the background of ERP software)

Notes

Note 1. The following supplies of goods covered under RCM:

(i)		Supply of cashew nuts (not shelled or peeled) by agriculturist to any registered person;
(ii)		Supply of bidi wrapper leaves (tendu leaves) by agriculturist to any registered person;
(iii)		Supply of tobacco leaves by agriculturist to any registered person;
(iv)		Supply of lottery by State Govt., Union Territory or any local authority to lottery distributor or selling agent; and
(v)		Supply of silk yarn by any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn to any registered person.

Note 2. In RCM case, receiver of goods (buyer) first of all is required to determine time of supply (TOS). TOS in case of supplies of goods under RCM is earlier of the following:

(i)		Date of receipts of goods;
(ii)		Date of payment to supplier; and
(iii)		The date immediately following 30 days from the date of invoice issued by supplier.