The Central Board of Direct Taxes under the Department of Revenue, Ministry of Finance, Government of India on 27th Sep 2023 notified the Form 6D for Inventory Valuation. The budget 2023 brought in provision with regard to the Inventory Valuation by Cost Accountants on the directions from the Income Tax Department under section 142(2A).
This is high time that assessees put their house in order to ensure that correct inventory valuation data is reported in financials and the income tax returns/forms.
Minor errors in inventory valuation can lead to significant financial consequences there by resulting in impact on the bottom line.
The industry should pay close attention to recent changes in inventory valuations to ensure accurate assessments and prevent potential complications down the road.
For the first time, the income tax department has identified the inventory valuation as the potential area wherein the chances for deferment/short payment of taxes are there. This area was much ignored area earlier and ultimately the provisions have been put in place to keep a check to ensure that correct inventory valuations are reported and due Income tax is paid.
Section 142(2A) was amended vide The Finance Act, 2023, No. 8 of 2023 dated the 31st March, 2023. Thereafter on 27th Sep 2023, the Income Tax Rules have been modified to give effect to the provisions relating to the Inventory Valuation.
The summary of the Form 6D Inventory Valuation is given below:
It is divided into two parts
A) Inventory Valuation Report
B) Annexures
Part A) contains seven different types of certifications regarding
- examination of the books of account and other documents with respect to inventory and inventory valuation
- inventory valuation
- availability of all information and explanations with regard to inventory valuation
- maintenance of proper books of account and other documents with respect to inventory
- truthfulness and correctness of inventory valuation
- truthfulness and correctness of annexures
- explanation for variations in reported inventory valuation and valuation as worked out
Part B Contains Annexures to the Inventory Valuation Report
- Item No 1 to 7 of the Annexures contain the general information about the business and methods of valuation of Inventories
Important point to note is that the HSN/SAC codes of Principal Products/Services need to be provided for products/services under Inventory Valuation
- Item no 8 is table seeing financial information for the relevant Assessment years and two years prior to that
- Item 9 contains different tables in respect of items manufactured, full quantitative details of raw materials and finished products consolidated at entity level):
(i) Details of Raw Material (RM) for the relevant period under reporting
(ii) Quantitative details in respect of items manufactured / traded by the Assessee for the relevant period under reporting
- Item no 10 seeks information about physical verification inventories has been sought
- Item No 11 requires declaration with regard to the compliance of various relevant ICDS
- Item No. 12 contains main tables seeking details of inventory valuations. The information of item level costing/purchase price/NRV in respect of Finished Goods, Stock in Trade, Raw Materials etc.
- Item No 13 contains inventory valuation of the items wherever ICDS II is not applicable, the constructions companies,
The point to be noted is that in many tables following additional information has been asked for with regard to the relevant comments, observations or qualifications of the Cost Accountant
Some questions that may help the readers to under the gamut of Inventory Valuation are given below
a) Why there was a need to bring in a mechanism for Inventory Valuation by Independent Cost Accountants?
a. A strong need was felt to ensure that the assesses pay the due taxes and that the areas where subjectivity is involved are much prone to adjustments to arrive at the desired level of Income for working out the Income Tax Liability. Presently, all incomes/ expenses are primarily open for verification through the statutory filings like GST returns etc however there was not enough mechanism for verification of inventory valuation so this provision has been brought in.
b) Can the amended section 142(2A) create a sense of product level costing among the organisations leading to efficient & effective utilization of resources?
a. Certainly yes, once the product level costing duly reconciled with financials is prepared and put up before the top management, it will add value for effective decision-making.
c) Whether Inventory Valuation under ITA can be done by any professional other than CMA?
a. The inventory valuation under Income Tax can be conduced by Cost Accountants only however the company can appoint any professional, CMA/CA to get the Inventory valuation done in accordance with relevant ICDS (Income Computation and Disclosure Standards)
d) When will the work of Inventory Valuation under ITA be assigned?
a. It will be assigned during assessment proceedings of the assessee whenever Assessing officer faces issues in the Assessing Officer having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialised nature of business activity of the assessee, and the interests of the revenue, is of the opinion that it is necessary so to do, he can direct the assessee to get the inventory valued by a Cost Accountant as nominated by PCCIT, PCIT, CCIT or CIT.
e) Who will assign the work of inventory valuation under Section 142(2A) of IT Act?
a. the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner of Income Tax
f) Can Companies directly assign the work of inventory Valuation?
a. Yes, it will be prudent for the companies to get the inventory valuation done from Cost Accountants preferably as per ICDS while finalizing the financial audit.
g) Whether any opportunity of will be given to the assessee before issue of any order under section 142(2A) of the Income Tax Act.
a. the Assessing Officer shall not direct the assessee to get inventory so valued unless the assessee has been given a reasonable opportunity of being heard
h) What type of report is to be given?
a. The format of the report has been notified under Income Tax Act and can be accessed at https://icmai.in/upload/
i) Whether banks can ask for such type of reports from borrowers in future?
a. Yes, because ultimately the bankers have very big stakes in the organisations where they have lent the money.
j) Whether the Inventory Valuation as shown in financials/Income Tax returns can be verified by Income Tax Authorities?
a. Yes, it is open for verification during assessments
k) Will the Income Tax Authorities appoint the Cost Accountants for Inventory Valuation?
a. Yes, panel of cost accountants will be maintained by Chief Commissioner for appoint for the valuation of Inventory.
l) Whether the panel of cost accountants will be centralised at CBDT level?
a. No, the panel of cost accountants will be maintained at each chief Commissionerate office.
The assesses must ensure proper maintenance of inventory-related data
The views of the author are purely personal, readers are requested to refer to the published notification.
The author can also be reached at navneetic@yahoo.com
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