Grautity Accounting in the Books of Gratuity Trust & Company

This blog is intended to highlight the accounting treatment in the books of Employer Company and Gratuity Trust. I have divided this series in two parts. The first part is intended to help the reader to understand the accounting treatment in the books of Employer Company.

Case Study

The Employer Company has decided to create a Gratuity Trust in order to manage the Gratuity liability for their employees. The main motto of the Gratuity Trust is to manage the Funds contributed by Employer Company & to pay the Gratuity Amount to the employee at the time of retirement or separation. The payment will be made out of the funds managed by Gratuity Trust. The Employer Company will periodically contribute to the Funds of Gratuity Trust, which in turn will invest in the securities as approved at the time of creation of trust.

Above arrangement is treated as “Defined Benefit Plan” under AS-15_Accouting for Retirement Benefits issued by Institute of Chartered Accountants of India.

As per AS-15, the Employer Company is required to value the Gratuity Liability from the qualified actuary.

Looking to the above discussion & for the better understanding of the reader, we can take the following example:

In a Financial Year, Employer Company has contributed Rs 100 millions to Gratuity Trust. At the end of Financial Year, the further liability calculated by qualified Actuary is Rs 25 million. The extract from Actuary Report is as follows:

Balance Sheet Recognition           (Rs in millions)
Present Value Of Obligation	125
Fair Value Of Plan Assets	-100
Liability (assets)	0
Unrecognised Past Service Cost	0
Liability (asset) recognized in the Balance Sheet	25

Accounting Entries

The accounting entries in the books of Employer-Company will be as follows:

Date	Particular	Dr/Cr	Nature of Ledger	Amount
Payment Date	Provision for Gratuity A/c	Dr	Liability	100
	Bank A/c	Cr	Asset	100
	(Toward Contribution to Gratuity Trust)
31/MAR/2XXX	Gratuity Expenses	Dr	Expense	125
	Provision for Gratuity A/c	Cr	Liability	125
	(Liability & Expense Booking As per Actuarial Valuation)

So the Gratuity Expense recognized in the books of accounts is Rs 125 million vis-a-vis Gratuity Liability as Rs 25 million. It means that the Employer Company has to still contribute Rs 25 millions to Gratuity Trust to meet the Gratuity Liability.

In case of any query, the readers can post their comment and I will try to resolve the same at the earliest.

Please follow this blog to learn the accounting treatment in the books of Gratuity Trust

Nalin Bhandari Chartered Accountant Cell:+919930018666

Cost of Living in Mumbai

Mumbai is the Financial Capital of India. Most of the Corporates have their offices at Mumbai. The City is full of energy & having fast life. This article is meant for those people who are looking to come down to Mumbai for long stay/permanent stay.

Geographies of Mumbai

Mumbai is in the western part of India & is part of Maharashtra State. City is expanded from Churchgate to Virar on Western Lines and Churchgate to Thane on Central Line. Maximum offices are located between Dadar & Churchgate. Most of the people are stay in suburban areas of Mumbai. Andheri to Virar(western line) & Ghatkopar to Thane(Central Line) are generally referred to as Suburban areas.

Climate of Mumbai

Mumbai has tropical wet & dry climate. Rainy season starts from July & end till November.

Transport

Mumbai is well connected with all means of transport system. Public transport systems in Mumbai include the Mumbai Suburban Railway, BEST buses, Metre taxis & Auto rickshaws. Each Suburban Station is attached with Bus Depot & Taxi/Autorikshaws stand.

Other Facilities

Mumbai is well equipped with all type of other facilities like School,Colleges,Hospital,Malls,24 hr electricity & water supply.

Cost of Living at Mumbai

The main chunk of expenditure goes on rent. The flats are little bit costly as compared to other parts of India. Other household expenditure are almost equal to other metro cities of India. Household expenditure is bifurcated into following heads:

Rent

 Flats are available in all sizes & ranges. The rent range is depending on the location & age of Flat. The rent per month is as follows:

Location	1 BHK	2 BHK	3 BHK
	565 Sq Ft	850 Sq Ft	1200 Sq Ft
Churchgate-Andheri/Ghatkopar	20,000-50,000	30,000-200,000	45,000-400,000
Andheri-Borivali or Ghatkopar-Thane	8,000-20,000	12,000-40,000	18,000-70,000
Beyond Borviali or Thane	5,000-8,000	8,000-12,000	12,000-15,000

Security Deposit of the Flat is generally 5-6 times of the monthly rent. Brokerage charges are equivalent to 1.5 month rent.

Electricity Charges & Water Charges

The Cost per unit of electricity is Rs 3.5/unit(upto 100 units) & there after Rs 6/unit (upto 300 units).Water charges are nominal and part of maintenance charges of Flats.

Transport

Suburban Rail Tickets (monthly pass) are available @ Rs 600 p.m for First class and Rs 200 for Second Class. Monthly Bus pass are available in the range of Rs. 200 to Rs. 1000.Minimum Bus fare for Short Distance route is Rs 4.

Minimum Fare of Auto/Taxi is Rs 11 & Rs 16 respectively for first 1.6 Km. Thereafter rate will be charged as Rs 7/Km for Auto & Rs 10/Km for Taxi. Auto & Taxi are run on the basis of Meter & fare is charge on the basis of kilometer run.

Petrol charges are in the range of Rs 65-70 per litre and diesel is available in the range of 30-35.The petrol & diesel prices are variable in nature.

Medical Facilities

All range of Medical facilities are available in Mumbai. There are sufficient amount of Hospital & Doctors Clinic both government as well as private. The Government Medical Facility are available at nominal cost. In Case of Private Clinics normally fees charged by the doctor is as follows:

First Visit:  Rs 400

Next Visit: Rs 200

Medicines are easily available and sold on MRP rates.

Telephone Expenses:

Mobile call charges per minute are Rs. 0.50 for Local Call and Rs 1.00 for STD Call. The rates are very competitive and many cheaper plans are also available.

Education

School range from all Boards (State Board, CBSE, ICSE, IB, IGSE) are fairly available in Mumbai. Admission are generally started in the month of August-October for the next session (Session Starts from 1^st April).

	Most of the Schools
	Fee Range	One Time Deposit
State Board	Minimum-10,000	Minimum-10,000
ICSE	30,000-50,000	65,000
IB/IGSE	50,000-100,000	100,000

Other Grocery Items

Generally household items are available in the following ranges. Superstore are also located in the city which offer items at discounted rate.

	Amount in Rs.
MilK	30-45/ litre
Vegetables	60/Kg
Fruits	100/Kg
Cereals	40-100/Kg
Rice	58-120/Kg
Wheat	12-30/Kg

Entertainment

All Sort of Entertainment is available in the city that includes multiplex theatres, mall , restaurants, beer bar ,water park, amusement parks etc.

Normally Couple with two kids can enjoy their weekend in the range of Rs 2,500-3,000(i.e. decent weekend)

In case of any specific query about Mumbai then reader can write to me. I will try to resolve the same.

Nalin Bhandari Chartered Accountant Cell:+919930018666

Draft Circular on Refunds in Service Tax

The Draft Circular of Refunds in Service Tax as issued by Central Board of Excise & Custom is published here for the comments of reader.On the basis of Comments, we will draft our response & sent to CBEC.Even readers can directly emailed at d.aron@nic.in to Shri Deepankar Aron, Director (Service Tax), CBEC (Phone No. 011-23092747 and Fax No. 011-23092275) by 30^th November 2011.

Draft Circular is attached herewith:

Problems faced by exporters in availing refund of excess credit

DRAFT CIRCULAR NO. _____/___2011 - SERVICE TAX

Representations have been received both from the field and the trade regarding difficulties being faced in the determination of the input services which are eligible for refund under notification 05/2006. Resultantly, the issue has spawned delays and disputes, which has necessitated the issue of this clarification.

2. The issue of eligibility of input services to refund under notification no. 05/2006 has been addressed in Circular No. 120/01/2010-ST dated 19^th January, 2010 in paragraph 3.1. The criterion laid down in this paragraph for determining the eligibility states that "in case the absence of such input/input service adversely impacts the quality and efficiency of the provision of service exported, it should be considered as eligible input or input service". This criterion has not been very useful as it is found to be too conceptual and not easily translatable into objective tests that could help in deciding actual cases. Thus a need has been felt for further elaboration by the Board on this issue.

3. The objective that is sought to be achieved by the refund of cenvat credit under notification 05/2006 is to zero-rate the exports. Zero-rating means that the goods and services that are exported from the country should not be burdened with any excise or service taxation. For a 100% exporter who has no domestic business this can be realized only when the ambit of services that are covered by notification 05/2006 is congruent with the ambit of services that are covered by the definition of "input service" that is given in Cenvat Credit Rules, 2004. Thus every input service has to be eligible for refund under notification 05/2006 for a 100% exporter who has no domestic business.

4. The above clearly implies that the scope of Rule 2(l) is congruent with the scope of Rule 5 and the scope of both is congruent with the scope of Notification No. 05/2006 i.e. any service that satisfies the definition of input service as given in Rule 2(l) would also fall within the mischief of Rule 5 and also of Notification No. 05/2006. This is necessary for a perfect pass through from Rule 2 (l) to Rule 5 to Notification No. 05/2010. Only such a construction can zero-rate the exports.

5. For a business entity that has both export business and domestic business the only additional requirement is to check whether the input service has contributed exclusively to domestic business. If the input service has made no contribution to exports and has been exclusively utilized for domestic operations the service has clearly not contributed to exports and so would not be eligible to refund. For example an advertising campaign for a product that is sold exclusively in the domestic market would not contribute to exports and so would not be eligible for the benefit of notification 05/2006. Every input service that is not identifiable as contributing exclusively to domestic business can be said to have a link with exports though its contribution to export may vary. In order to extract the extent of contribution that the input service has made to exports, notification 05/2006 provides for multiplying the credit that has been taken on an input service with the correction factor (export turnover/ total turnover). It is this extracted amount which indicates the contribution that the input service has made to exports. The extracted amount is also the maximum possible amount that is eligible as refund as per the current statute. In this backdrop, it would not be necessary to link every input service invoice with an output invoice, so long as the input service has a link with the export as discussed above.

6. Field formations and trade have represented about the problems being faced in identifying and linking the input services that have gone into providing the output services. Accordingly, the method to be followed for determining eligibility to refund can be summed up in the following principles:

(1)  Check that the service on which refund is claimed satisfies the definition of input service that is given in Rule 2 (l) of the CENVAT Credit Rules, 2004.

(2)  Next, service is eligible to refund unless facts of the case indicate that the benefit of the service has gone exclusively into domestic business with no spill over what-so-ever into export business.

(3) The second principle mentioned at sub-para (2) above is to be given a strict construction. Disqualification on this account would be an exception rather than a rule and should be done only when there is unmistakable indication that the benefit of the service has not gone into export business what-so-ever.

(4) The level at which a determination shall be made of whether the input service has gone exclusively into domestic business or not shall be at the level of the „input service invoice‟. The officer scrutinizing the claim will not disaggregate the invoice and extract elements from it and state that these elements have exclusively contributed to domestic business. If at the level of aggregation that is reflected in an invoice, a portion of the input service that is embodied in the invoice has contributed to exports, then the entire input service invoice shall be eligible for refund.

7. Keeping the above principles and statutory provisions in mind, as also after considering the feedback from the field formations on eligibility of input services, a list of input services that are eligible for grant of refund has been prepared and is in the Annexure. Apart from the conditions mentioned above, certain other conditions subject to which the refund would be applicable are also indicated therein. It may please be noted that the list is not exhaustive, but is illustrative. Further, the exact application would depend upon the facts of each case.

8. It is expected that the principle that has been outlined above would prove useful in determining eligibility to refund of the input services. At the same time, it is expected that the field formations shall strengthen the audit machinery including the pre-audit and the post audit mechanisms, so as to ensure that the process of sanctioning of refund is taking place in due accordance with the statutory provisions, so as to prevent the possibility of any misuse.

9. It is hoped that with the issuing of this circular, smooth and expeditious disposal of exporters claims for refund shall follow. In case of any doubt, an immediate reference may be made to the Board.

Annexure

List of Services on which refund is allowed (fully or partially)

S. No.	Category of Service	Exclusions or Limitations, if any	Remarks
1	Advertising agency's services 65(105)(e)		A company hires advertising agency for programming, broadcasting and releasing activities related to advertisements. This promotes the brand of the company which enhances its sales and hence is directly related to provision of output service.
2	Air travel agents services 65(105)(i)	Should not be allowed in case it is for personal use of employees	The services are procured by a company in relation to travel of employees for conducting business meeting and attending seminars towards professional objectives. Hence it is an eligible input service for exporting the taxable output service. These services are required for travel and tour of their employees in relation to the company's business which are essential for maintain orders and efficient work of the business i.e. export of services.
3	Asset management service 65(105)(zzzzc)	Should not be allowed in case for personal use of employees.	May be allowed when used for Banking and other financial services.
4	Banking and other financial services 65(105)(zm) & (zzk)	Should not be allowed in case for personal use of employees.	These input services are required for issuance of bank guarantee for overseas project/other business activities.
5.	Business auxiliary services 65(105)(zzb)		These input services are required for procurement of orders and some similar activities.
6.	Business exhibition services 65(105)(zzb)		These services would be required for furtherance of business activities.
7.	Business support Services 65(105)(zzzq)		Accounting payroll, transaction processing, routine administration, customer relationship management, telemarketing and IT support services are taken by the company to maintain the day to day operations of the company and are very much the input services on which refund would be eligible.
8.	Cargo handling service 65(105)(zr)		Should be allowed as it is used for business purposes.
9.	Chartered accountant's services 65(105)(s)	Should not be allowed in case for personal use of employees.	These services are required not only for maintaining the accounts and auditing the records but also for complying with the statutory requirements. Hence, these input services are essential for the business of export of services. Further, these services help to strengthen the internal controls for smooth functioning of the business.
10	Cleaning activity service 65(105)(zzzd)	Should not be allowed in case for personal use of employees.	Cleaning activities of the office premises are necessary to enable the employees of the company to perform efficiently.
11	Clearing and forwarding agent's services 65(105)(j)		Should be allowed as it is used for business purposes.
12	Commercial training or coaching service 65(105)(zzc)	Should not be allowed in case for personal use of employees.	These services are procured by a company so that employees can get regular updates of various changes in laws and technology during seminars, coaching or trainings.
13	Company Secretary Service 65(105)(u)		These services are required for complying with the requirements of Companies Act, 1956 as the assesses are normally registered under the said Act.
14	Consulting engineer's services 65(105)(g)		Various engineers are consulted for providing advice in respect of the output service and the same is used in relation to export.
15	Convention services 65(105)(zc)	Should not be allowed in case services are procured as a staff welfare measure.	As per Circular 120/01/2010-ST dated 19 January 2010, it should not be allowed for entertainment or staff welfare, however for official purposes, these are very much valid input services.
16	Copyright services 65(105)(zzzzt)	Should not be allowed in case for personal use of employees	Should be allowed as these are used for professional activities.
17	Cost accountant's services 65(105)(t)	Should not be allowed in case for personal use of employees	Should be allowed as these are used for professional activities.
18	Courier service 65(105)(f)	Should not be allowed in case for personal use of employees.	These services are consumed by a Company for delivery of business documents. The delivery of these documents is essential to process transactions related to exports. Hence, a valid service.
19	Credit rating agencies 65(105)(x)		These services are used for professional purposes.
20	Custom house agent's services 65(105)(h)		These services are used for professional purposes in relation to exports.
21	Design services 65(105)(zzzzd)		These services are required for making designing of consumer products, industrial products, packages, logos, graphics, website and corporate identity designing and production of three dimensional models. Without these services output services cannot be provided.
22	Development and supply of content service 65(105)(zzzzb)		These services are required towards marketing efforts of the company concerned and as such have a clear nexus with the output activities.
23	Dry cleaning services 65(105)(zt)	Should not be allowed in case for personal use of employees.	Should be used only for office cleaning/ maintenance.
24	Erection, commissioning or installation service 65(105)(zzd)	Should not be allowed in case for personal use of employees	These services rendered in connection with office premises or office equipment would have a direct nexus with the output activities.
25	Event management service 65(105)(zu)	Should not be allowed in case services are procured as a staff welfare measure.	As per Circular 120/01/2010-ST dated 19 January 2010, it should not be for entertainment or staff welfare. However, in so far as it is for promotion of the business, it should be a valid input.
26	Fashion designing service 65(105)(zv)	Should not be allowed in case for personal use of employees.	Should be used only for office purposes.
27	Forward contract services 65(105)(zzy)
28	General Insurance Service 65(105) (d)	Should not be allowed in case for personal use of employees; it is also not allowed in so far as it relates to a motor vehicle except when used for provision of a taxable service for which credit on motor vehicle is available as capital goods;	Should be used only for office purposes. This could include fixed assets insurance or group insurance for official activities.
29	Goods Transport operators 65(105)(zzp)	Should not be allowed in case for personal use of employees.	Should be used only for office purposes.
30	Information technology software service 65(105)(zzzze)		These services are availed for procuring the software for running the operation of company. As export of services is dependent on the better operation of company. Hence the software is an input for providing output service. In addition to this software is required for the data management
31	Intellectual property services 65(105)(zzr)		Should be used only for office purposes.
32	Interior decorator's services 65(105)(q)	Should be allowed if used for renovation or maintenance of office premises only.
33	Internet telecommunication Services 65(105)(zzzu)		A company uses the telecommunication /internet telecommunication services which are essential input services for providing output services. These input services are consumed essentially for providing the output services related to the export business and for discharging day to day duties by the administrative staff. Without the telephone and internet facility the services could not have been rendered.
34	Legal consultancy service 65(105)(zzzzm)	Should not be allowed in case for personal use of employees.	Should be used only for office purposes.
35	Management or Business consultant's services 65(105)		Consultancy Services are procured for providing advice, consultancy and technical assistance in relation to the business and therefore should be allowed.
36	Management, maintenance or repair service 65(105)(zzg)		A company procures services maintenance and repair of office premise, office equipments etc. The management, maintenance & repair service of office building is essential for conducting the business including exports.
37	Mandap keeper's services 65(105)(m)	Should not be allowed in case services are procured as a staff welfare measure.	As per Circular 120/01/2010-ST dated 19 January 2010, it should not be for entertainment or staff welfare. However, for activities relating to business, it should be allowed.
38	Manpower recruitment or supply agency's services 65(105)(k)		Procurement of manpower is a basic requirement of the industry and for which it has to engage recruitment agencies. The procurement of these services is essential in view of the high labor turnover and in order to identify the right person for the right job at the right time. An organization can't operate without appropriate people.
39	Market research agency's services 65(105)(y)		Required for business related activities.
40	On-line information and database access or retrieval services 65(105)(zh)		A company does market analysis, studies economic factors and other market parameters for the purpose of providing output service. For this purpose online database and other research database are used.
41	Packaging services 65(105)(zzzf)		Should be allowed.
42	Pandal or shamiana contractor's service 65(105)(zzw)	Should not be allowed in case services are procured as a staff welfare measure.	As per Circular 120/01/2010-ST dated 19 January 2010, it should not be for entertainment or staff welfare. However, for activities relating to business, it should be allowed.
43	Photography services 65(105)(zb)	Should not be allowed in case services are procured as a staff welfare measure.	As per Circular 120/01/2010-ST dated 19 January 2010, it should not be for entertainment or staff welfare. However, for activities relating to business, it should be allowed.
44	Promotion or Marketing of Brand service 65(105)(zzzzq)		Should be allowed.
45	Public relation management service 65(105)(zzzs)		To maintain public relations, professionals are hired in maintaining relations with govt. authorities and organizations. Should be allowed
46	Rail travel agent's services 65(105)(zz)	Should not be allowed in case for personal use of employees.	Should be allowed for business use.
47	Real estate agent's services 65(105)(v)	Should not be allowed in case for personal use of employees.	Should be allowed for business use.
48.	Rent a cab service 65(105)(o)	It is not allowed in so far as it relates to a motor vehicle except when used for provision of a taxable service for which credit on motor vehicle is available as capital goods.
49	Renting of immovable property services 65(105)(zzzz)		The premises from where the party renders output services or premises where books of accounts of company are maintained has been taken on rent and accordingly renting of immovable property is essential for operation for the output service.
50	Sale of space or time for advertisement services 65(105)(zzzm)		Should be allowed for business use.
51	Scientific or technical consultancy services 65(105)(za)		Should be allowed for business use.
52	Security agency's services 65(105)(w)	Should not be allowed when used for residential premises i.e. in case for personal use of employees.	The procurement of these services is essential for security of office buildings and equipment. Further, business operations involve handling of confidential data.
53	Service of permitting commercial use or exploration of any event organised by a person or organization 65(105)(zzzzr)		Should be allowed for business use.
54	Service relates to short term accommodation 65(105)(zzzzw)	Should not be allowed in case for personal use of employees	Should be allowed for business use.
55	Sponsorship services 65(105)(zzzn)	Should not be allowed in case services are procured as a staff welfare measure.	As per Circular 120/01/2010-ST dated 19 January 2010, it should not be for entertainment or staff welfare. Should however be allowed for business use.
56	Steamer agent's services 65(105)(I)		Should be allowed.
57	Stock broker services 65(105)(a)	Should not be allowed in case for personal use of employees	Should be allowed for business use.
58	Storage and warehousing service 65(105)(zza)		Should be allowed.
59	Survey and map-making service 65(105)(zzzc)		Should be allowed for business use.
60	Technical inspection and certification service 65(105)(zzi)		This input service is related to export of service which is mainly used for inspecting the items which are exported to other country at the ports and other places. Should be allowed for business use.
61	Technical testing and analysis service 65(105)(zzh)		Should be allowed for business use.
62	Telecommunication service 65(105)(zzzx)	Should not be allowed in case for personal use of employees.	Should be allowed for business use
63	Transport of coastal goods; and goods transported through inland water service 65(105)(zzzzl)	Should not be allowed in case for personal use of employees	Should be allowed for business use
64	Transport of goods by air service 65(105)(zzn)	Should not be allowed in case for personal use of employees	Should be allowed for business use
65	Transport of goods by rail service 65(105)(zzzp)	Should not be allowed in case for personal use of employees	Should be allowed for business use
66	Transport of goods by road service 65(105)(zzp)	Should not be allowed in case for personal use of employees
67	Transport of passengers by air service 65(105)(zzzo)	Should not be allowed in case for personal use of employees.	Should be allowed for business use
68	Travel agent's service 65(105)(zzx)	Should not be allowed in case for personal use of employees.	Should be allowed for business use

Nalin Bhandari Chartered Accountant Cell:+919930018666