With an impetus on infrastructure and PPP model gaining increasing importance, many entities are entering built-operate-transfer concession arrangement with various government authorities. Usually, under such agreements, the operator (private entity) builds the infrastructure such as a road or a bridge and collects toll from users for a specified period. IFRS provides guidance on accounting for such arrangements.
Under IFRS, during the construction of infrastructure, the operator recognises construction revenue in its profit or loss statement and a corresponding intangible asset – being the right to collect toll from users. After the construction is completed, the operator collects toll from users and records it as separate revenue in its profit or loss statement.
Thus, the IFRS accounting treatment results in two types of revenue being recognised: revenue from construction services and toll revenue. On such PPP model, the GST (if made applicable) is likely to be paid only on collection of toll revenue and it is unlikely that there would be two taxable events, one at the construction stage and second at the time of collection of toll. On the other hand, input tax credit of the GST borne on the construction may be available against the liability on the collection of toll.
Provision of excise duty on closing stock of manufactured goods: For the purpose of inventory valuation as at the reporting date, the company would be required to make a provision for excise duty – being a tax on manufacture of goods – on closing stock of manufactured goods lying unsold. However, under the GST framework, the GST may not be considered for inventory valuation.
While these are steps in the right direction in an era of globalisation, unless some more clarity emerges in near future, the industry shall face challenges around maintaining an efficient and planned tax structure.
These financial and taxation aspects relating to the IFRS and GST convergence need to be planned, managed, tested and executed in advance of the implementation date. In view of this, industry needs to start its transition process early, preferably now. The early-mover advantage not only provides adequate time to carry out required changes, but protects critical decisions being taken within the constraints of time and resources.
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