As a small or medium business owner, the Goods and Services Tax (GST) is something that you cannot ignore. GST is a comprehensive tax levied on the supply of goods and services in India. It has replaced multiple indirect taxes like VAT, excise duty, and service tax. One of the responsibilities of a registered dealer under GST is to maintain proper books of accounts and get them audited by a Chartered Accountant or a Cost Accountant. The audit report is then submitted to the GST department along with the annual return.
A key aspect of the GST audit report is the expense breakup. In this article, we will understand the various components of the expense breakup and how they are calculated.
The expense breakup in the GST audit report includes the following components:
1. Direct expenses
2. Indirect expenses
3. Expenses not eligible for input tax credit
4. Expenses eligible for input tax credit
Direct expenses are those expenses that are incurred directly on the production or sale of goods or services. These expenses are deductible under GST. Examples of direct expenses include raw materials, labor, and packaging material.
Indirect expenses are those expenses that are not directly related to the production or sale of goods or services but are still necessary for the business. These expenses are also deductible under GST. Examples of indirect expenses include rent, electricity, and office expenses.
Expenses that are not eligible for input tax credit include the following:
1. Expenses on personal use
2. Expenses on exempted goods or services
3. Tax paid under reverse charge mechanism
4. Penalty or late fee
Expenses that are eligible for input tax credit include the following:
1. Input goods or services used for business purposes
2. Capital goods
3. Services received from a non-resident taxable person
4. Tax paid under reverse charge mechanism
To calculate the expense breakup, you need to follow the below steps:
1. Identify the direct and indirect expenses incurred during the financial year.
2. Identify the expenses eligible for input tax credit and the expenses not eligible for input tax credit.
3. Calculate the total input tax credit available for the financial year.
4. Allocate the input tax credit proportionately to the eligible expenses based on their value.
5. Calculate the net amount payable or refundable to the government based on the input tax credit and the tax paid during the financial year.
The expense breakup in the GST audit report is a crucial aspect of the audit process. It helps the business owner to claim the input tax credit and reduce their tax liability. It is important to maintain proper books of accounts and get them audited by a Chartered Accountant or a Cost Accountant to avoid any issues with the GST department.
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