Introduction
Prior to the GST regime, numerous taxes like VAT and excise duty were prevalent. These taxes were devised for specific purposes. However, the implementation of GST was done to replace these multiple indirect taxes.
Today, the Indian GST system covers a diverse nature of transactions, even unsold stock of pre-packaged commodities. This might make you wonder about the relation between pre-packaged commodities and GST. Consider reading the article below to learn in detail about the accounting practices and GST impact on unsold stock of pre-packaged goods.
Explaining Pre-Packaged Commodities
According to Section 2(l) of The Legal Metrology Act, 2009, a “pre-packaged commodity” is defined as a commodity that is placed in a package, whether sealed or not, without the purchaser being present. The key characteristic of such commodities is that they have a pre-determined quantity within the package.
What Qualifies as a Pre-Packaged Commodity?
The determination of whether a particular commodity qualifies as a pre-packaged commodity has been the subject of discussion in various High Courts and the Supreme Court. Notably, the High Courts of Madras, Andhra Pradesh, Bombay, and Kerala have weighed in on the matter, often considering different types of products such as vacuum cleaners, wristwatches, refrigerators, sunglasses, radios, tape recorders, and VCRs.
Different High Courts have held differing opinions on what constitutes a pre-packaged commodity. The Madras, Andhra Pradesh, and Bombay High Courts have maintained that commodities packaged solely for the purpose of transportation and for the convenience of consumers are not classified as pre-packaged commodities.
Conversely, the Supreme Court and the Kerala High Court have taken a contrary stance. The Madras High Court, in the case of Phillips India Ltd. v. Union of India, opined that products like televisions, video and audio players, or speakers should not be classified as pre-packaged commodities. The court argued that these products are packaged primarily for protection during storage and handling and the convenience of consumers during safe transportation.
GST and Its Effect on Unsold Stock of Pre-Packaged Commodities
The impact of the Goods and Services Tax on unsold stock of pre-packaged commodities is addressed through a notification that allows manufacturers, packers, or importers to declare a revised retail sale price (MRP) on existing stock. This provision is implemented in accordance with Rule 33(1) of the Legal Metrology Rules, 2011. Here are key aspects and conditions associated with this measure:
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Permitted Declaration of Revised MRP
Manufacturers, packers, or importers are allowed to declare a revised MRP on unsold stock manufactured, packed, or imported prior to the revision of GST. This declaration can be made after including the applicable or increased amount of tax.
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Timeline for Declaration
The permission for declaring the revised MRP is applicable until 31st January 2023 or until the stock is exhausted, whichever occurs earlier.
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Methods of Declaration
The changed retail sale price (MRP) can be declared through stamping, putting a sticker, or online printing, depending on the circumstances.
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Conditions for Price Revision
The difference between the originally printed retail sale price and the revised price should not exceed the increase in tax or, in the case of the imposition of fresh tax, the amount of the new tax. In the case of a reduction in tax, the revised price should not exceed the reduced amount after the tax reduction.
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Display of Original MRP
The original MRP must continue to be displayed, and the revised price should not overwrite it.
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Advertising and Notification
Manufacturers, packers, or importers are required to publish at least two advertisements in newspapers, notifying the change in price. Additionally, notices must be circulated to the Director of Legal Metrology in the central government, dealers, and Controllers of Legal Metrology in states and Union Territories.
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Usage of Packaging Material
Any packaging material or wrapper that could not be used before the GST revision may be employed for packing material until 31st January 2023 or until the material is exhausted, whichever is earlier. Corrections in the retail sale price (MRP) due to the implementation of GST can be made through stamping, putting stickers, or online printing, as necessary.
Accounting Practices and GST Adjustments for Unsold Stock
The implementation of GST can necessitate adjustments in accounting practices, particularly when dealing with unsold stock. The approach taken will depend on aspects such as absorbing the tax difference, selling at a discounted price, or disposing of the stock. Here’s a breakdown of the accounting for unsold stock under GST for these scenarios:
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Absorbing the Tax Difference
- Debit: “GST Payable” account for the additional tax liability on unsold stock.
- Credit: “Inventory” accounts for the original cost of the unsold stock.
This entry reflects the adjustment for the increased tax liability on unsold stock, ensuring accurate representation in financial records.
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Selling at a Discounted Price
- Debit: “Cash” or “Accounts Receivable” account for the discounted sales value.
- Debit: “GST Payable” account for the GST payable on the discounted sales value.
- Credit: “Inventory” accounts for the original cost of the unsold stock.
This entry accounts for the sale of unsold stock at a discounted price, reflecting the reduced revenue and the associated adjustments in GST payable.
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Destroying the Stock
- Debit: “Inventory” accounts for the original cost of the destroyed stock.
- Credit: “Input Tax Credit” account for the GST paid on the destroyed stock.
In the case of stock destruction, this entry captures the cost of the destroyed stock and adjusts the Input Tax Credit to account for the GST previously paid on the stock.
Strategies for Managing Unsold Stock in the GST Regime
Effectively managing unsold inventory in GST era requires strategic approaches to minimise financial impact and optimise inventory control. Here are strategies to address unsold stock challenges in the GST regime:
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Implementing Effective Inventory Control Systems
Maintain accurate stock records and utilise forecasting methods to optimise purchase quantities. This helps prevent overstocking and ensures efficient management of inventory levels.
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Offering Clearance Sales and Discounts
Organise regular clearance sales or temporary discounts on unsold stock to encourage customer purchases. This generates revenue and helps clear inventory space.
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Bundling Slow-Moving Products with Popular Ones
Create appealing product bundles that combine slow-moving items with popular ones. This strategy promotes sales of less popular items while simultaneously boosting the movement of high-demand products.
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Exploring Alternative Sales Channels
Consider diversifying sales channels by exploring online marketplaces, export opportunities, or participation in local bazaars. This allows businesses to tap into new customer segments and facilitate the sale of unsold stock through different avenues.
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Donating or Recycling Unsold Items
For items nearing expiry or having negligible market value, consider ethical alternatives such as donating them to charities or recycling them responsibly. This contributes to social responsibility.
Legal and Compliance Aspects Regarding Unsold Stock
Adhering to legal and compliance aspects is crucial in managing unsold stock, particularly in the context of Goods and Services Tax (GST). Businesses must address the following GST regulations for unsold goods to ensure regulatory compliance and minimise legal risks associated with unsold inventory:
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Proper Documentation
Maintain comprehensive records of purchase invoices, stock ledgers, sales invoices, and GST returns. These documents serve as essential support for any adjustments made on unsold stock for tax purposes.
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MRP Discrepancies
If selling unsold stock with the old Maximum Retail Price (MRP) after the GST rate change deadline, it’s essential to clearly display both the old and new MRP. Additionally, include a disclaimer explaining the tax difference between the two prices. This practice ensures transparency and compliance with legal requirements.
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Disposal or Destruction
When disposing of or destroying unsold stock, businesses must obtain proper approvals and meticulously document the entire process. This documentation is vital for claiming input tax credit related to the GST paid on the unsold stock.
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Record-Keeping
In situations where discounts or clearance sales are offered on unsold stock, maintaining detailed records of transaction details and associated tax implications is imperative. Proper record-keeping ensures transparency and compliance with GST regulations, safeguarding businesses from legal challenges.
Impact on Business Growth and Sustainability of Unsold Stock of Pre-Packaged Commodities
The presence of unsold stock under the Goods and Services Tax (GST) regime can have profound implications on the growth and sustainability of a business. The consequences extend beyond immediate financial considerations, affecting various aspects of operational efficiency and brand reputation:
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Financial Drain
Unsold stock ties up capital, limiting the availability of funds for other productive areas. This financial drain hampers cash flow, hindering the business’s ability to invest in growth initiatives.
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Storage Costs
Maintaining unsold stock in warehouses incurs ongoing storage costs. These costs, including rent, utilities, and security, contribute to overhead expenses and can erode profitability over time.
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Loss of Revenue
Unsold stock directly translates to lost sales and revenue. The inability to move inventory efficiently diminishes the business’s income potential.
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Inventory Obsolescence
Over time, unsold stock may become outdated or perishable, leading to potential write-offs or the need for discounted sales at lower profit margins. This affects financial performance and raises concerns about product relevance in the market.
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Brand Image
Excessive unsold stock can create a perception of slow-moving products or outdated offerings. This can harm the brand image and erode consumer confidence.
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Sustainability Concerns
Disposal of unsold stock, especially items with short shelf lives or hazardous materials, raises environmental and ethical concerns. Businesses may face scrutiny for their sustainability practices.
Conclusion
The impact of the GST on unsold stock of pre-packaged commodities is a multifaceted challenge. The GST system has financial ramifications and possible revenue losses owing to capital tie-ups in idle inventories.
The danger of inventory obsolescence and the accompanying impact on brand image highlight the need for careful inventory management. Furthermore, the environmental and ethical considerations surrounding the disposal of unsold goods highlight the significance of preventive steps.
Also Read: GST: Everything You Need To Know
Also Listen: CaptainBiz | Smart stock management is the backbone of a successful business!
Frequently Asked Questions
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Is there GST on unsold goods?
When goods purchased remain unsold, they are often scrapped, and output GST is paid on the scrap’s sale as it constitutes an outward supply. However, by Section 17(h), input tax credit is not available for goods that are lost, destroyed, written off, stolen, or disposed of through gifts or free samples.
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Can GST be levied on a pre-packed and Labelled food item even if it is non-branded?
Until July 18th, 2022, rice, whether branded or unbranded, enjoyed exemption from Goods and Services Tax (GST) as specified goods were not subjected to GST. However, post this date, the exemption on branded commodities has been lifted. Consequently, GST is now applicable to pre-packaged and labelled rice commodities.
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What is the stock of unsold goods?
Inventory encompasses unsold finished or unfinished goods, as well as unused raw materials and intermediate goods, carried by a firm from one year to the next, playing a pivotal role in operational efficiency.
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How much GST is on pre-packed food?
Goods and Services Tax (GST) rates are as follows: 0% GST on fresh fruits, vegetables, unprocessed cereals, meat, fish, and poultry; 2.5% GST on packaged food items such as tea, coffee, edible oil, sugar, and spices.
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How is unsold stock treated?
Unsold stock is typically valued at cost, and in the case of consignment stock, this includes the cost of the consigned goods and proportionate non-recurring expenses. All non-recurring expenses, whether borne by the consignor or consignee, are considered in determining the cost.
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Is unsold stock an asset or liability?
The cost of unsold inventory at the end of the year is recognised as an asset on the balance sheet. This reflects the value of goods that the business has on hand and is yet to sell.
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What is the disadvantage of carrying stocks of unsold inventory?
Excessive inventory can lead to storage challenges as the surplus stock occupies valuable space. It is crucial to be mindful of the storage footprint and promptly address the issue to optimise space utilisation.
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How much GST is on pre-packaged milk?
As of July 18, 2022, amendments have been implemented, impacting the taxation of pre-packaged and labelled milk products, such as lassi, paneer, curd, and buttermilk, which will now be subject to a 5% Goods and Services Tax (GST).
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What is an example of a pre-packaged commodity?
For instance, food products like rice, rava, and flour sold at METRO or DMart involve packaging tailored to the consumer’s specified quantity. Declarations mandated by the Legal Metrology Act (LMA) are addressed in Section 18, which outlines requirements for declarations on pre-packaged commodities.
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Does unsold stock count as profit?
Unsold inventory impacts profits and can lower taxable income. However, it also signifies tied-up capital without returns on the investment, highlighting the financial challenge of holding stock that isn’t generating revenue.
