NES RATNAM COLLEGE OF ARTS,SCIENCE AND COMMERCE

INTERNAL EXAM - SEMESTER IV

Subject: Corporate financial accounting.

Name: JAYAPRIYA ARUMUGAM KAUNDER

Roll No: 20

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 1. Explain IND-AS in detail?
Meaning:
Indian Accounting Standards (Ind-AS) are the International Financial Reporting
Standards (IFRS) converged standards issued by the Central Government of India
under the supervision and control of Accounting Standards Board (ASB) of ICAI
and in consultation with National Advisory Committee on Accounting Standards
(NACAS).

Definition:
Indian Accounting Standards (Ind- ASs) are Standards prescribed under Section
211(3C) of the Companies Act, 1956.

Material Omissions or misstatements of items are material if they could,

individually or collectively, influence the economic decisions that users make on
the basis of the financial statements. Materiality depends on the size and nature of
the omission or misstatement judged in the surrounding circumstances. The size or
nature of the item, or a combination of both, could be the determining factor.

Ind AS First-time adoption of Ind AS

101

Ind AS Share Based payments

102

Ind AS Business Combination

103

Ind AS Insurance Contracts

104

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Ind AS Non-Current Assets Held for Sale and Discontinued Operations
105

Ind AS Exploration for and Evaluation of Mineral Resources

106

Ind AS Financial Instruments: Disclosures

107

Ind AS Operating Segments

108

Ind AS Financial Instruments

109

Ind AS Consolidated Financial Statements

110

Ind As Joint Arragements

111

Ind AS Disclosure of Interests in Other Entities

112

Ind AS Fair Value Measurement

113

Ind AS Regulatory Deferral Accounts

114

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Ind AS Revenue from Contracts with Customers
115

Ind AS 1 Presentation of Financial Statements

Ind AS 2 Inventories Accounting

Ind AS 7 Statement of Cash Flows

Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Ind AS 10 Events after Reporting Period

Ind AS 11 Construction Contracts

Ind AS 12 Income Taxes

Ind AS 16 Property, Plant and Equipment

Ind AS 17 Leases

Ind AS 18 Revenue

Ind AS 19 Employee Benefits

Ind AS 20 Accounting for Government Grants and Disclosure of Government

Assistance

Ind AS 21 The Effects of Changes in Foreign Exchange Rates

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Ind AS 23 Borrowing Costs

Ind AS 24 Related Party Disclosures

Ind AS 27 Separate Financial Statements

Ind AS 28 Investments in Associates and Joint Ventures

Ind AS 29 Financial Reporting in Hyperinflationary Economies

Ind AS 32 Financial Instruments: Presentation

Ind AS 33 Earnings per Share

Ind AS 34 Interim Financial Reporting

Ind AS 36 Impairment of Assets

Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets

Ind AS 38 Intangible Assets

Ind AS 40 Investment Property

Ind AS 41 Agriculture

5
 2. Explain the various methods of valuation?

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 Meaning:
Valuation is the analytical process of determining the current (or projected)
worth of an asset or a company. There are many techniques used for doing a
valuation. An analyst placing a value on a company looks at the business's
management, the composition of its capital structure, the prospect of future
earnings, and the market value of its assets, among other metrics.

Fundamental analysis is often employed in valuation, although several other

methods may be employed such as the capital asset pricing model (CAPM) or the
dividend discount model (DDM).

Definition:
1: the act or process of valuing specifically: appraisal of property

2: the estimated or determined market value of a thing

3: judgment or appreciation of worth or character

PURPOSE OF VALUATION:
Valuation is applicable to various business events, i.e. mergers and acquisitions,
sale of business, procurement of funds, taxation etc. Unless and until the key
managerial personnel are thorough with the valuation processes involved in the
mentioned business events, it will be extremely difficult for them to discharge their
professional obligations. Further, various business events demand a different
approach of valuation. This lesson have made an attempt to encompass the critical
concepts whose understanding is needed to execute the assignments relating to
mergers and acquisitions, convincing banks and financial institutions at the time of
raising finance to meet working capital and long-term capital requirements, handle
taxation related matters, to meet various statutory requirements etc.

Valuation Methods:

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There are various ways to do a valuation. The discounted cash flow analysis
mentioned above is one method, which calculates the value of a business or asset
based on its earnings potential. Other methods include looking at past and similar
transactions of company or asset purchases, or comparing a company with similar
businesses and their valuations. 

The comparable company analysis is a method that looks at similar companies, in

size and industry, and how they trade to determine a fair value for a company or
asset. The past transaction method looks at past transactions of similar companies
to determine an appropriate value. There’s also the asset-based valuation method,
which adds up all the company’s asset values, assuming they were sold at fair
market value, and to get the intrinsic value.

Sometimes doing all of these and then weighing each is appropriate to calculate
intrinsic value. Meanwhile, some methods are more appropriate for certain
industries and not others. For example, you wouldn’t use an asset-based valuation
approach to valuing a consulting company that has few assets; instead, an earnings-
based approach like the DCF would be more appropriate.

Discounted Cash Flow Valuation

Analysts also place a value on an asset or investment using the cash inflows and
outflows generated by the asset, called a discounted cash flow (DCF) analysis.
These cash flows are discounted into a current value using a discount rate, which is
an assumption about interest rates or a minimum rate of return assumed by the
investor.

If a company is buying a piece of machinery, the firm analyzes the cash outflow
for the purchase and the additional cash inflows generated by the new asset. All the
cash flows are discounted to a present value, and the business determines the net
present value (NPV). If the NPV is a positive number, the company should make the
investment and buy the asset.

Limitations of Valuation:

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When deciding which valuation method to use to value a stock for the first time,
it's easy to become overwhelmed by the number of valuation techniques available
to investors. There are valuation methods that are fairly straightforward
while others are more involved and complicated.

Unfortunately, there's no one method that's best suited for every situation. Each
stock is different, and each industry or sector has unique characteristics that may
require multiple valuation methods. At the same time, different valuation methods
will produce different values for the same underlying asset or company which may
lead analysts to employ the technique that provides the most favorable output.

How Earnings Affect Valuation:

The earnings per share (EPS) formula is stated as earnings available to common

shareholders divided by the number of common stock shares outstanding. EPS is
an indicator of company profit because the more earnings a company can generate
per share, the more valuable each share is to investors.

Analysts also use the price-to-earnings (P/E) ratio for stock valuation, which is

calculated as market price per share divided by EPS. The P/E ratio calculates how
expensive a stock price is relative to the earnings produced per share.

For example, if the P/E ratio of a stock is 20 times earnings, an analyst compares
that P/E ratio with other companies in the same industry and with the ratio for the
broader market. In equity analysis, using ratios like the P/E to value a company is
called a multiples-based, or multiples approach, valuation. Other multiples, such
as EV/EBITDA, are compared with similar companies and historical multiples to
calculate intrinsic value.

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 3 Explain Corporate financial Reporting in detail?
Meaning:
Corporate financial reporting is an essential activity for all businesses. This form
of accounting should provide investors and creditors with useful information that
they can employ in making lending or investment decisions. Since stockholders
and lending institutions rely on income or repayment from your business to
accurately run their own companies and estimate their cash flow, it’s essential
that your company be able to present accurate, timely information that speaks to
the overall health of your company. Failure to provide accurate information can
not only lead to problems of reputation; it can cause legal difficulties.

Corporate financial statements are essential for tax preparation and audit
protection, as well. When your business files monthly or quarterly reports that
showcase the health of the company, you may use that information in preparing
other, more complex reports come tax time or keep them on hand in case your
company is ever subject to an audit.

Definition:
Financial Reporting involves the disclosure of financial information to the
various stakeholders about the financial performance and financial position of the
organization over a specified period of time. These stakeholders include –
investors, creditors, public, debt providers, governments & government agencies.
In case of listed companies the frequency of financial reporting is quarterly &
annual.
Financial Reporting is usually considered an end product of Accounting. The
typical components of financial reporting are:
1. The financial statements – Balance Sheet, Profit & loss account, Cash
flow statement & Statement of changes in stock holder’s equity
The notes to financial statements
2. Quarterly & Annual reports (in case of listed companies)
3. Prospectus (In case of companies going for IPOs)
4. Management Discussion & Analysis (In case of public companies)

The Government and the Institute of Chartered Accounts of India (ICAI) have
issued various accounting standards & guidance notes which are applied for the
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purpose of financial reporting. This ensures uniformity across various diversified
industries when they prepare & present their financial statements. Now let’s
discuss about the objectives & purposes of financial reporting.

Why Corporate Financial Reporting is Important:

Corporate financial reporting is important because it offers essential information
to management, as well as others with capital market interests in your business.
This information is necessary for making determinations about future
investments, purchases or loans. For corporate leaders, financial reports can be
compared to past data to determine how certain decisions have impacted the
bottom line and whether similar choices should be made in the future. Also, a
high-level look at the company’s overall financial health is critical in determining
whether to bring on or reduce staffing, make financial or economic investments,
pursue mergers and acquisitions or raise or lower prices. They can also help you
to determine the liquidity of your business, which can indicate whether the
company can continue as what is called a “going concern,” or an entity that will
remain in business for the foreseeable future.

For investors and creditors, corporate financial reports are useful because they
disclose the financial obligations of a business. This speaks to the potential for
future economic resources to ebb and flow and indicates whether it might be a
good time to lend money or invest in your company.

Principles for corporate financial reporting have been laid out by the Financial
Accounting Standards Board, which is the successor to the Accounting Principles
Board, in existence in the United States since 1973. All corporate financial
reporting must follow the Generally Accepted Accounting Principles so that
information presented across industries can be universally understood.

How to Use Corporate Financial Reporting:

Corporate financial reporting can be used for decision-making purposes by
internal and external parties. Particularly for larger companies, in which many
major players don’t consistently have access to important financial data, these
reports are essential in providing the basis for decisions related to staffing,
scaling and setting price levels.

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Say, for instance, an automobile dealership is trying to decide whether or not to
bring on 10 new employees. The past year has been very busy, with high sales
figures. Extra staff on the lot would go a long way to providing superior service
for customers. However, the dealership only sells cars from one automaker. The
brand hasn’t released a new model in some time, and the vehicles that are being
delivered seem to have more and more manufacturer defects. In this scenario, it
would be hugely helpful for the car dealership to know whether the automaker is
struggling financially at the top and if this has been the cause of less money spent
on research and development or quality control.

If the local dealership had the opportunity to review corporate financial reports
from the automaker, it could showcase the brand’s income and expenses, as well
as its overall assets, liabilities and equity. All of this information might prove
useful in determining whether the dealership should scale up with new
employees, or whether they should expect a slow down in the future due to the
brand’s failure to invest in itself.

Corporate financial reporting can also be helpful for creditors and investors who
are on the outside of the business itself. Let’s say the same auto dealership was
looking for a loan to expand to a second location. A local bank would need to
review the dealership’s corporate financial reports before it could determine if the
company is a safe one to lend money to. In addition, the bank would likely wish
to review the financial reports of the auto manufacturer, since they present a
better depiction of the dealership’s growth potential if they continue to sell just
one brand of car.

As a consumer, corporate financial reports are useful when it comes to

determining whether you should make personal investments. Say, for instance,
you are considering purchasing stock in a telecommunications company. You are
unsure which particular telecommunications business would yield the highest
dividends based purely on their trading price and stock value history. Corporate
financial reports play a critical role for you as the investor, because they enable
you to see how the company is performing overall. By reviewing financial reports
for multiple telecommunications companies, you should be able to determine
which is the best place to invest.

Also, once you hold stocks in a given company, it’s essential to continue to pay
attention to its financial reports. Over time, you may see growth trends that
encourage you to invest additional funds in their stock. Similarly, however, you

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might be concerned by something that you see and elect to reallocate your
investable income elsewhere.

How to Improve Corporate Financial Reporting:

Corporate financial reporting is only as good as the information it is based on.
Careful, meticulous statements must be kept for every transaction that is carried
out by a company. The day-to-day information must be tracked and fed into
monthly and quarterly reports. In turn, these must be accurate, so that semi-
annual or annual financial reports are also correct.

There is no substitute for careful bookkeeping. Not only is providing creditors

and investors accurate information essential from a moral standpoint, the failure
to do so can cause significant legal difficulties. Also, internal decision-makers
must have access to up-to-date, completely accurate financial information so that
they can make informed choices to propel the company forward.

As a decision-maker within a company, it’s important to review corporate

financial statements carefully. If anything seems amiss or out-of-place, report it
to the appropriate parties immediately. No matter how careful the accounting
department might be, mistakes do creep in from time to time. Staying vigilant and
informing the powers that be of any errors could go a long way in putting the
company on the proper trajectory. In addition, doing so could lead to a fix of the
corporate reports before they enter the hands of investors or creditors. Once an
error reaches that point in the process, it will likely be far more problematic.

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4.Explain consolidated financial statements in detail?

Meaning:

Consolidated financial statements are financial statements of an entity with

multiple divisions or subsidiaries. Companies can often use the word consolidated
loosely in financial statement reporting to refer to the aggregated reporting of their
entire business collectively. However, the Financial Accounting Standards Board
defines consolidated financial statement reporting as reporting of an entity
structured with a parent company and subsidiaries.

Private companies have very few requirements for financial statement reporting
but public companies must report financials in line with the Financial Accounting
Standards Board’s Generally Accepted Accounting Principles (GAAP). If a
company reports internationally it must also work within the guidelines laid out by
the International Accounting Standards Board’s International Financial Reporting
Standards (IFRS). Both GAAP and IFRS have some specific guidelines for
companies who choose to report consolidated financial statements with
subsidiaries. 

Definition:
 A set of consolidated financial statements consists of reports that show the
operations, cash flows, and financial position of a parent company and all
subsidiaries. In other words, it’s a report that combines all the activities of a parent
company and its subsidiaries on one report.

Understanding Consolidated Financial Statements

In general, the consolidation of financial statements requires a company to
integrate and combine all of its financial accounting functions together in order to
create consolidated financial statements that shows results in standard balance
sheet, income statement, and cash flow statement reporting. The decision to file
consolidated financial statements with subsidiaries is usually made on a year to
year basis and often chosen because of tax or other advantages that arise. The
criteria for filing a consolidated financial statement with subsidiaries is primarily
based on the amount of ownership the parent company has in the subsidiary.
Generally, 50% or more ownership in another company usually defines it as a
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 subsidiary and gives the parent company the opportunity to include the subsidiary
in a consolidated financial statement. In some cases less than 50% ownership may
be allowed if the parent company shows that the subsidiary’s management is
heavily aligned with the decision making processes of the parent company.

If a company has ownership in subsidiaries but does not choose to include a

subsidiary in complex consolidated financial statement reporting then it will
usually account for the subsidiary ownership using the cost method or the equity
method.

Private companies will usually make the decision to create consolidated financial
statements including subsidiaries on an annual basis. This annual decision is
usually influenced by the tax advantages a company may obtain from filing a
consolidated versus unconsolidated income statement for a tax year. Public
companies usually choose to create consolidated or unconsolidated financial
statements for a longer period of time. If a public company wants to change from
consolidated to unconsolidated it may need to file a change request. Changing from
consolidated to unconsolidated may also raise concerns with investors or
complications with auditors so filing consolidated subsidiary financial statements
is usually a long-term financial accounting decision. There are however some
situations where a corporate structure change may call for a changing of
consolidated financials such as a spinoff or acquisition.

Purpose of Consolidated Financial Statements:

 To grow a company, it usually requires to buy out the competition to gain

the customers. Expanding business by adding new products, services, and
technology can also help to grow a company.
 Sometimes, purchasing smaller companies can also help expand the
company.
 The subsidiary companies usually continue to operate as separate
companies, but now they are under the parent company.
 According to the accounting rules, every subsidiary company is required to
have its accounting records.
 These separate reports are then combined or integrated with the parent
company’s accounting records to give the consolidated finances.

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 Objectives of Consolidated Financial Statements:

 It would be challenging for investors or financial analysts to gather the

accounting reports from the parent company as well as the subsidiary companies to
get the idea about the financial health of the entire company.
 So, the companies are required to present the financial reports or financial
data for all the subsidiaries as consolidated.
 The parent company can present the reports of their finance, but that must be
supported by the consolidated statement of all the branches or subsidiaries.

Pros and Cons:

 The consolidated reports are easier to understand and analyze the company’s
financial condition, which can help the investors, creditors, vendors, or anyone
looking for information about the company.
 These reports can also be manipulated in a way that can hide the financial
position of a company as they do not give an accurate idea of the financial health
of the company as the individual reports do not show up anywhere but in the notes
section of the consolidated finance.
 The fact that the reports from the subsidiaries only show up in the notes
section makes it possible to hide the problems.
 The Accounting Standards Board regularly visits this subject to correct
definitions and requirements, which might create a problem for companies trying
to hide their losses and liabilities.
 The International Accounting Standards Board is also working to create
some rules and definitions to make the evaluation easier and reliable while
examining the financial reports of foreign companies and companies with offshore
subsidiaries.

The Importance:

 Without the consolidated financial reports, the evaluation of a company’s

financial health would be long and complicated.

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 The investors or creditors might miss a valuable asset or liability when going
through finances and reports.
 These financial reports make everything more systematic as well as easy to
understand from the investor’s perspective.
 The investors, regulators, and customers find consolidated financial
statements helpful to look after the entire entity as it makes the parent company
and its subsidiaries as one single unit or entity.

General principles of consolidated financial statements

The general principles involved in consolidated financial statements are:

1. A consolidated financial statement should essentially provide true and fair

picture of financial condition and operating result of the business faction.
2. A consolidated financial statement needs to be prepared on the basis of legal-
entity based financial statements of the parent company and its subsidiaries which
belong to the business faction, and prepared in accordance with the GAAP.
3. A consolidated financial statement needs provide a clear vision about the
financial info requisite for interested parties not to mislead their judgments about
the business groups’ condition.
4. The procedures and policies used for preparing consolidated financial statements
need to be applied ad infinitum and should not be changed without any reason.

Checklist for preparation of consolidated financial statements

1. Estimate group holdings and establish each entity’s status in the question.
2. Ascertain the fair value of acquired assets and calculate net assets of the
subsidiary.
3. Estimate goodwill arising on acquisition.
4. Adjust for any intra-group activities.
5. Estimate the balance carried forward on consolidated retained earnings.
6. Estimate the balance carried forward on consolidated reserves.

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5. Explain IFRS in detail?

Meaning:

International Financial Reporting Standards (IFRSs) are set by the International

Accounting Standards Board (IASB), which was established in 2001 to replace the
International Accounting Standards Committee (IASC). IASB members are
accounting organisation that are members of the International Federation of
Accountants (IFAC).

Definition:

International Financial Reporting Standards (IFRS) set common rules so that

financial statements can be consistent, transparent and comparable around the
world. IFRS are issued by the International Accounting Standards Board (IASB).
They specify how companies must maintain and report their accounts, defining
types of transactions and other events with financial impact. IFRS were established
to create a common accounting language, so that businesses and their financial
statements can be consistent and reliable from company to company and country to
country.

Objectives:

The main objectives of the IASB are:

to formulate and publish accounting standards to be observed in the presentation

of financial statements
to work generally for the improvement and harmonisation of regulations,
accounting standards and procedures relating to the presentation of financial
statements.
IFRSs are at present being used:
as a basis for national regulations on accountancy,
as an international benchmark for countries which are developing their own
national regulation,
as a uniform benchmark for multinational and international enterprises,
by companies listed on world stock exchanges.
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 IFRSs include:
an introduction and preface,
a framework,
IFRSs and International Accounting Standards (IASs),
interpretations by the International Financial Reporting Interpretations
Committee, previously called the Standing Interpretations Committee (SIC).

International Accounting Standards was the name used for all the standards until
the end of 2002, and International Financial Reporting Standards has been used
since 2003.
Both standards are applicable until the time that the IASs have been replaced by
the IFRSs.

Understanding International Financial Reporting Standards (IFRS):

IFRS are designed to bring consistency to accounting language, practices and

statements, and to help businesses and investors make educated financial analyses
and decisions. The IFRS Foundation sets the standards to “bring transparency,
accountability and efficiency to financial markets around the world… fostering
trust, growth and long-term financial stability in the global economy.” Companies
benefit from the IFRS because investors are more likely to put money into a
company if the company's business practices are transparent.

The U.S. Securities and Exchange Commission (SEC) has said it won't switch to

International Financial Reporting Standards, but will continue reviewing a
proposal to allow IFRS information to supplement U.S. financial filings. GAAP
has been called "the gold standard" of accounting. However, some argue that
global adoption of IFRS would save money on duplicative accounting work, and
the costs of analyzing and comparing companies internationally.

IFRS are sometimes confused with International Accounting Standards (IAS),

which are the older standards that IFRS replaced. IAS was issued from 1973 to
2000, and the International Accounting Standards Board (IASB) replaced the
International Accounting Standards Committee (IASC) in 2001.

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Standard IFRS Requirements:

IFRS covers a wide range of accounting activities. There are certain aspects of
business practice for which IFRS set mandatory rules.

 Statement of Financial Position: This is also known as a balance sheet. IFRS

influences the ways in which the components of a balance sheet are reported.
 Statement of Comprehensive Income: This can take the form of one
statement, or it can be separated into a profit and loss statement and a
statement of other income, including property and equipment.
 Statement of Changes in Equity: Also known as a statement of retained
earnings, this documents the company's change in earnings or profit for the
given financial period.
 Statement of Cash Flow: This report summarizes the company's financial
transactions in the given period, separating cash flow into Operations,
Investing, and Financing.

In addition to these basic reports, a company must also give a summary of its
accounting policies. The full report is often seen side by side with the previous
report, to show the changes in profit and loss. A parent company must create
separate account reports for each of its subsidiary companies.

IFRS vs. American Standards:

Differences exist between IFRS and other countries' Generally Accepted

Accounting Principles (GAAP) that affect the way a financial ratio is calculated.
For example, IFRS is not as strict on defining revenue and allow companies to
report revenue sooner, so consequently, a balance sheet under this system might
show a higher stream of revenue than GAAP's. IFRS also has different
requirements for expenses; for example, if a company is spending money on
development or an investment for the future, it doesn't necessarily have to be
reported as an expense (it can be capitalized).

Another difference between IFRS and GAAP is the specification of the way

inventory is accounted for. There are two ways to keep track of this, first in first
out (FIFO) and last in first out (LIFO). FIFO means that the most recent inventory
is left unsold until older inventory is sold; LIFO means that the most recent

20
inventory is the first to be sold. IFRS prohibits LIFO, while American standards
and others allow participants to freely use either.

History of IFRS:

IFRS originated in the European Union, with the intention of making business
affairs and accounts accessible across the continent. The idea quickly spread
globally, as a common language allowed greater communication worldwide.
Although the U.S. and some other countries don't use IFRS, most do, and they are
spread all over the world, making IFRS the most common global set of standards.

The IFRS website has more information on the rules and history of the IFRS.

The goal of IFRS is to make international comparisons as easy as possible. That

goal hasn't fully been achieved because, in addition to the U.S. using GAAP, some
countries use other standards. And U.S. GAAP is different from Canadian GAAP.
Synchronizing accounting standards across the globe is an ongoing process in the
international accounting community.

Benefits of IFRS:

The advantages of achieving convergence with IFRS are numerous. 

1. It benefits the economy by increasing the growth of its international business. 

2. By encouraging the international investors to invest, it leads to more foreign

capital flows to the country.

3. Financial statements prepared using a common set of accounting standards help

investors better understand investment opportunities as opposed to financial
statements prepared using a different set of national accounting standards. 

4. The industry is able to raise capital from foreign markets at lower cost if it can
create confidence in the minds of foreign investors that their financial statements
comply with globally accepted accounting standards. 

5. It offers accounting professionals more opportunities in any part of the world if
same accounting practices prevail throughout the world.

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NES RATNAM COLLEGE OF ARTS, SCIENCE AND COMMERCE

INTERNAL EXAM - SEMESTER IV

Subject: Advanced Financial Management.

Name: JAYAPRIYAARUMUGAM KAUNDER

Roll No: 20

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1. Explain classification of capital budgeting techniques.

Meaning of Capital Budgeting

Capital budgeting is the process a business undertakes to evaluate
potential major projects or investments. Construction of a new plant or a
big investment in an outside venture are examples of projects that would
require capital budgeting before they are approved or rejected.
As part of capital budgeting, a company might assess a prospective
project's lifetime cash inflows and outflows to determine whether the
potential returns that would be generated meet a sufficient target
benchmark. The process is also known as investment appraisal.

Definition: Capital budgeting is a method of analyzing and comparing

substantial future investments and expenditures to determine which ones
are most worthwhile. In other words, it’s a process that company
management uses to identify what capital projects will create the biggest
return compared with the funds invested in the project. Each project is
ranked by its potential future return, so the company management can
choose which one to invest in first.

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Capital Budgeting Techniques

Capital Budgeting Techniques

Some of the major techniques used in capital budgeting are as follows:
1. Payback period
2. Accounting Rate of Return method
3. Net present value method
4. Internal Rate of Return Method
5. Profitability index.

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 1. Payback period:
The payback (or pay-out) period is one of the most popular and widely
recognized traditional methods of evaluating investment proposals, it is
defined as the number of years required to recover the original cash
outlay invested in a project, if the project generates constant annual cash
inflows, the payback period can be computed dividing cash outlay by the
annual cash inflow.
Payback period =
Cash outlay (investment) / Annual cash inflow = C / A

2. Accounting Rate of Return method:

The Accounting rate of return (ARR) method uses accounting
information, as revealed by financial statements, to measure the profit
abilities of the investment proposals. The accounting rate of return is
found out by dividing the average income after taxes by the average
investment.
ARR= Average income/Average Investment

3. Net present value method

The net present value (NPV) method is a process of calculating the
present value of cash flows (inflows and outflows) of an investment
proposal, using the cost of capital as the appropriate discounting rate,
and finding out the net profit value, by subtracting the present value of
cash outflows from the present value of cash inflows.

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4. Internal Rate of Return (IRR)
For NPV computation a discount rate is used. IRR is the rate at which
the NPV becomes zero.  The project with higher IRR is usually selected.
Like the NPV method, it considers the time value of money.
It considers cash flows over the entire life of the project. It satisfies the
users in terms of the rate of return on capital. Unlike the NPV method,
the calculation of the cost of capital is not a precondition. It is
compatible with the firm’s maximising owners’ welfare.

5. Profitability Index
Profitability Index is the ratio of the present value of future cash flows of
the project to the initial investment required for the project.  
Each technique comes with inherent advantages and disadvantages. An
organization needs to use the best-suited technique to assist it in
budgeting.  It can also select different techniques and compare the
results to derive at the best profitable projects.

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2. Explain various types of working capital in detail.

Meaning of working capital

Working capital, also known as net working capital (NWC), is the
difference between a company’s current assets, such as cash, accounts
receivable (customers’ unpaid bills) and inventories of raw materials and
finished goods, and its current liabilities, such as accounts payable. Net
operating working capital is a measure of a company's liquidity and
refers to the difference between operating current assets and operating
current liabilities. In many cases these calculations are the same and are
derived from company cash plus accounts receivable plus inventories,
less accounts payable and less accrued expenses.
The following working capital example provides an outline of the most
common sources of working capital.

 Spontaneous: It refers to the Funds which are easily available in

market .Sundry Creditors, Bills Payable, Trade credit, Notes
Payable
 Short Term WC :Bills Discounting, Cash Credit ,Bank OD,
Commercial Paper, Inter Corporate Loans and Advances

Types of working capital

27
Broadly, there are two views of working capital, the balance sheet view
and operating cycle view. Let’s take a look at what the two include.

I. Balance sheet view of working capital

 Gross working capital

 Net working capital

II. Operating cycle view of working capital

 Permanent or fixed working capital

 Temporary or variable working capital

I. Balance sheet view of working capital

With Under the balance sheet view, there are two types of working
capital.

 Gross working capital

Simply put, gross working capital is defined as the amount of

money you have invested in the company’s current assets. These
are assets with high liquidity and so, you can convert them into
cash in a short span of time, usually a year. Examples of such
current assets include debtors, prepaid expenses and stock.

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  Net working capital
Net working capital is the difference between current assets and
current liabilities of your company as per its balance sheet. This
can be further divided into positive net working capital and
negative net working capital. The former is when your company’s
current assets exceed its current liabilities. On the other hand,
negative net working capital is when the liabilities outdo the assets.

Between the two, net working capital is more widely used. This is

because it indicates your company’s ability to meet its current liabilities,
shows whether your business is financially sound, and is a measure of
the margin available to short-term creditors.

II. Operating cycle view of working capital

Here, working capital is classified as per the time it takes to convert
stock into cash for your company.

 Permanent or fixed working capital

Fixed working capital varies from firm to firm. Essentially, it is set

based on the lowest amount of net working capital as per one financial
year. It is this level that is considered to be the permanent or fixed
working capital and signifies the minimum investment that you must
make towards your company’s working capital. If you notice a shortfall
in this, you can finance it using funds from a working capital loan.

29
  Temporary or variable working capital
The difference between the net working capital and permanent working
capital of your company is its temporary or variable working capital.
This is needed to meet the extra cash requirements due to annual
fluctuations in production and sales, caused by seasonality. For example,
if you’re an umbrella manufacturer, you will manufacture stock before
the season commences, in anticipation of demand. Hence you will
require extra funds to meet this temporary working capital need.

Besides these, some other kinds of working capital are reserve or

cushion working capital and special working capital. Reserve working
capital, as the name suggests, acts as a cash reserve to tackle
uncontrollable risks and uncertainties. Special working capital is set
aside to specifically finance certain activities such as running an
advertisement campaign, carrying out marketing research or diversifying
into a new market.

No matter what method of working capital calculation you adopt for

your business, it is vital to monitor it so that if there are any gaps or
signs of distress, you can meet the deficiency at the earliest, before it
impacts your business’ productivity.

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3. Explain inventory management in detail.

Meaning of inventory management

Inventory management refers to the process of ordering, storing, and
using a company's inventory. These include the management of raw
materials, components, and finished products, as well as warehousing
and processing such items.

For companies with complex supply chains and manufacturing

processes, balancing the risks of inventory gluts and shortages is
especially difficult. To achieve these balances, firms have developed two
major methods for inventory management: just-in-time and materials
requirement planning: just-in-time (JIT) and materials requirement
planning (MRP).

Purpose/Objectives of Inventory Management:

The main objectives of inventory management are operational and
financial. The operational objectives mean that materials and spares
should be available in sufficient quantity so that work is not disrupted
for want of inventory. The financial objectives means that investments in
inventories should not remain idle and minimum working capital should
be locked in it.

31
The following are the objectives of inventory management:

1) To ensure the continuous supply of materials, spares and finished

goods so that production should not suffer at any time and
customers demand should also be met.

2) To keep material cost under control so that they contribute in

reducing cost of production and overall costs.

3) To minimize losses through deterioration, pilferage, wastages and

damages.

4) To eliminate duplication in ordering or replenishing stocks. This is

possible with help of centralizing purchases.

5) To design proper organization for inventory management.

Benefits of Inventory Management.

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 1. Centralized inventory management consolidates inventory
information by tracking lot numbers, on-hand levels and
expiration dates, making the re- ordering process more efficient.

2. Enables simultaneous tracking and documenting supplies during

studies to reduce redundant data entry and increase workflow
efficiency.

3. When multiple officials are involved in a case, the statistical report

accurately correlates the supplies used with the correct user,
eliminating mis-charges and appropriately tracking resources.

4. Provides stand-alone inventory management system for the

institution with the capacity to integrate with a hospital’s existing
inventory system, significantly reducing go-live times and
improving departmental efficiency.

5. Optional interface to institution’s/company’s material

management system significantly reduces on-going inventory
maintenance, and ensures accurate pricing Data for case cost
reports and auto-decrements supply levels.

6. Comprehensive inventory reports help automate key

administrative responsibilities, such as tracking inventory item
usage by vendor and physician, maintaining in-stock value of

33
 consignment verses non-consignment items, and providing
notification of items with upcoming expirations. Inventory Control
Techniques

4. Explain receivable management in detail.

Meaning of receivable management

There are very few businesses, which have the luxury of receiving
money before selling, i.e. Selling for advance payments. Most of the
Companies sell their offerings on a credit. Which means that they will
collect the money after selling. Although it looks very simple on the face
of it, Managing receivables from Debtors can be a very complex task
depending on the nature of our business. As our business grows and as
our offering gets complex the process of collecting the payments needs
to be designed accordingly.
So the entire process of defining the Credit Policy, Setting Payment
Terms, Payment Follow ups and finally timely collection of the due
payments can be defined as Receivables Management.

Objectives of Receivable Management

In order to keep business running, we need cash. The whole purpose or
objective of Receivables Management is to keep inflow of cash healthy.
In other words, these are the objectives of Payment Collection.

 Collect receivables from our sundry debtors.

34
  Maintain a healthy cash flow for the company, so that it can pay
our creditors.

 Have proper Policy for Credit management.

 A working process and mechanism for managing payment follow

ups and timely collection.

Importance of receivable management

1. Cash flow is always considered as bloodline of any business

organisation. Badly managed Receivables can break the company.

2. Most of the companies that go bankrupt have Cash flow problems.

Companies with lack of profit can survive, but lack of cash flow is
fatal.

3. Working Capital is one the most costliest form of capital. One of

the ways of calculating working capital requirement can be defined
as the difference between Sales and Receivables. Bad collections
can mean higher working capital requirements. Which means
higher interest costs for the company.

4. A reliable and predictable Receivables will ensure steady cash

flow management of the organisation. Amounts receivables with
no due dates are useless.

35
Benefits of Accounts Receivable Management

1. Better Cash Flow.

All our Budgets and projections depends on how much we can spend.
Predictable cash flow enables us to manage our operations and
expansion plans.

2. Lower Working Capital Requirements.

Effective receivables management ensures that our Working Capital
requirements are kept at minimum.

3. Lowered Interest costs.

Working capital is also fixed capital, which attracts interest. Lower
Debtors will reduce our Interest burden.

4. Better Bargaining with Sellers.

When we are buying any goods or services, we can bargain mainly on
quantity or Payment terms. Having a good receivable management
provides us with enough cash flow to bargain effectively with our
Suppliers.
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 5. Stop profit leakages
In case of thin margins, just imagine how much more sales we have to
do to recover and adjust just one small bad-debt. Non receipt or delayed
receipt is the biggest profit leakage any company can have.

5. Explain financial planning in detail.

Meaning of financial planning

Financial planning is the task of determining how a business will afford
to achieve its strategic goals and objectives. Usually, a company creates
a Financial Plan immediately after the vision and objectives have been
set. The financial plan describes each of the activities, resources,
equipment and materials that are needed to achieve these objectives, as
well as the timeframes involved. A financial plan creates a roadmap for
your money and helps you achieve your goals. Financial planning can be
done on your own or with a professional.
A financial plan is a comprehensive picture of your current finances,
your financial goals and any strategies you've set to achieve those goals.
Good financial planning should include details about your cash flow,
savings, debt, investments, insurance and any other elements of your
financial life.

Definition of Financial Planning

Financial Planning is the process of estimating the capital required and
determining its competition. It is the process of framing financial

37
policies in relation to procurement, investment and administration of
funds of an enterprise.

Objectives of Financial Planning

Financial Planning has got many objectives to look forward to:

a. Determining capital requirements-

 This will depend upon factors like cost of current and fixed assets,
promotional expenses and long- range planning. Capital
requirements have to be looked with both aspects: short- term and
long- term requirements.

b. Determining capital structure-

 The capital structure is the composition of capital, i.e., the relative
kind and proportion of capital required in the business. This
includes decisions of debt- equity ratio- both short-term and long-
term.

c. Framing financial policies with regards to cash control, lending,

borrowings, etc.

38
 d. A finance manager ensures that the scarce financial resources are
maximally utilized in the best possible manner at least cost in order
to get maximum returns on investment.

Importance of Financial Planning

Financial Planning is process of framing objectives, policies, procedures,

programmes and budgets regarding the financial activities of a concern.
This ensures effective and adequate financial and investment policies.
The importance can be outlined as-

1. Adequate funds have to be ensured.

2. Financial Planning helps in ensuring a reasonable balance between
outflow and inflow of funds so that stability is maintained.
3. Financial Planning ensures that the suppliers of funds are easily
investing in companies which exercise financial planning.
4. Financial Planning helps in making growth and expansion
programmes which helps in long-run survival of the company.
5. Financial Planning reduces uncertainties with regards to changing
market trends which can be faced easily through enough funds.
6. Financial Planning helps in reducing the uncertainties which can
be a hindrance to growth of the company. This helps in ensuring
stability and profitability in concern.
39
NES RATNAM COLLEGE OF ARTS, SCIENCE AND COMMERCE

INTERNAL EXAM - SEMESTER IV

Subject: Introduction To GST

Name: JAYAPRIYAARUMUGAM KAUNDER

Roll No: 20

40
 1. Explain GST & its benefits.

Introduction:
GST is considered as an indirect tax for the whole nation that would make India
one unified common market. It is a tax which is imposed on the sale,
manufacturing and the usage of the goods and services. It is a single tax that is
imposed on the supply of the goods and services, right from the manufacturer to
the customer. The credits of the input taxes that are paid at each stage will be
available in the subsequent stage of value addition which makes GST essentially a
tax only on the value addition on each stage. The final consumers will bear only
the tax charged by the last dealer in the supply chain with the set of benefits that
are at all the previous stages.
It is charged at the national and state level at similar rates for the same products
and it also replaces almost all the current indirect taxes that are imposed separately
by the Centre and the States. Goods & Services Tax is a destination based
tax which means that the tax is paid at the place of supply.

Definition:
In simple words, Goods and Service Tax (GST) is an indirect tax levied on the
supply of goods and services. This law has replaced many indirect tax laws that
previously existed in India.

Benefits of Gst
GST benefits in India will assist the Government as well as the consumers in the
long run in creating a win-win situation for both. Some of the advantages of GST
in India are enlisted as follows:

41
 1. Mitigation of Cascading effect :

Under the GST administration, the final tax would be paid by the consumer
for the goods and services purchased. However, there would be an input tax
credit structure in place to ensure that there is no slumping of taxes. GST is
levied only on the value of the good or service.

2. Abolition of Multiple Layers of Taxation :

One of the advantages of GST is that it integrated different tax lines such as
Central Excise, Service Tax, Sales Tax, Luxury Tax, Special Additional
Duty of Customs, etc. into one consolidated tax. It prevents multiple tax
layers imposed on goods and services.

3. Resourceful Administration by Government:

Previously, the management of indirect taxes was a complicated task for the
Government. However, under the GST establishment, the integrated tax rate,
simple input of tax credit mechanism and a merged GST Network, where
information is available, and administration of resources are well-organised
and straightforward for the Government.

4. Enhanced Productivity of Logistics:

The restriction on inter statement movement of goods has reduced. Earlier

logistic companies had to maintain multiple warehouses across the country
to avoid state entry taxed on interstate movements.
5. Creation of a Common National Market: 

GST gave a boost to India’s tax to Gross Domestic Product ratio that aids in
promoting economic efficiency and sustainable long – term growth. It led to
a uniform tax law among different sectors concerning indirect taxes. It
facilitates in eliminating economic distortion and forms a common national
market.

6. Ease of Doing Business:

42
 With the implementation of GST, the difficulties in indirect tax compliance
have been reduced. Earlier companies faced significant problems concerning
registration of VAT, excise customs, dealing with tax authorities, etc. The
benefits of GST has aided companies to carry out their business with ease.

7. Regulation of the Unorganized Sector under GST: 

It has created provisions to bring unregulated and unorganised sectors such

as the textile and construction industries to name a few under regulation with
continuous accountability.

8. Reduction of Litigation: 

GST aids in reducing litigation as it establishes clarity towards the

jurisdiction of taxation between the Central and State Government. GST
provides a smooth assessment of tax.

9. Increased Exemption Limit for Small traders or Service Providers:

Under the previous indirect tax structure, various indirect taxes had different
sales turnover limits for registrations.

10.Tackling Corruption and Tax Leakages:

With the GST online network portal, the taxpayer can directly register, file
returns and make payments of the taxes without having to interact with tax
authorities. A mechanism has been devised to match the invoices of the
supplier and buyer. This will not only keep a check on tax frauds and
evasion but also bring in more businesses into the formal economy.

43
 2. What is Electronic Cash Ledger?

Meaning:
Electronic Cash Ledger provides a summary of all your GST payments. It reflects
the cash available to pay off your GST tax liability. Thus, any deposit made on the
GST portal is credited to your Electronic Cash Ledger. This means that the amount
available in the Electronic Cash Ledger is used for making payments. These
payments are towards tax, interest, GST penalty fees and any other amount
payable.

Form GST PMT-05

You need to maintain the electronic cash ledger in Form GST PMT – 05 on the
common portal. The information in FORM GST PMT – 05 is divided into major
and minor heads. Major heads include IGST, CGST, SGST/UTGST, and CESS.
And the minor heads include tax, interest, penalty, fees, and others. These minor
heads form a part of the major heads.

Following are the components of Form GST PMT-05:

 Serial Number
 Date of Deposit
 Time of Deposit
 Reporting Date by Bank (Reference Number)
 Reference Number
 Tax period, if applicable
 Description
44
 Transaction Type (Debit/Credit)
 Amount Debited/Credited
 Integrated Tax
 Central Tax (CGST)
 State Tax
 Cess
 Total of above

1.Maintain Electronic Cash Ledger in Form GST PMT-05

You need to maintain the electronic cash ledger in Form GST PMT – 05 on the
common portal. Such a ledger reflects:
amounts credited against deposits and
amounts debited for payment of tax, penalty, interest, fees or any other amount.

2. Generate Challan in Form GST PMT-06

You need to generate Challan in Form GST PMT – 06 on the common portal in
order to begin the GST payment process. Then, enter details regarding the amount
to be deposited towards tax, interest, penalty, fees or any other amount. This is
done once the Challan is generated. Such a challan is valid for 15 days once it is
generated.

3.Use One of the Prescribed Modes For Deposit:

You can make a deposit on the common portal using any of the following modes:

 internet banking through authorized banks

 credit or debit card through an authorized bank
 National Electronic Fund Transfer (NEFT)
 Real Time Gross Settlement (RTGS)
 Over the Counter Deposit through authorized banks for a payment up to Rs.
10,00 per challan for every tax period. Such a deposit can be made by cash, cheque

45
 or demand draft. However, the limitation for deposit does not apply to the deposit
made by any of the following entities:
 Government departments or any person notified by the commissioner
in this regard
 Proper officer having the authority to recover outstanding payments
from registered or unregistered persons. Besides dues, the officer also has the
authority to recover proceeds from selling immovable or movable properties.
 Proper officer having the authority to collect amounts on account of
investigation or enforcement activity or ad hoc deposit. Such amounts can be
collected by the way of cash, cheque or demand draft.

4.Payment By Unregistered Person:

The GST portal allows even the unregistered persons to make payments. These
individuals need to generate a temporary identification number on the portal.

5. Payment Through NEFT/RTGS:

One of the ways through which you can pay GST is through NEFT/RTGS from
any bank. In this case, the common portal generates a mandate form together with
challan. Both the form and challan are submitted to the bank through which
payment is to be made. This mandate form is valid for 15 days from the date the
challan is generated.

6. Bank Collects CIN:

The collecting bank generates a Challan Identification Number (CIN) after you
make GST payment. This number is indicated on the Challan. Now, the bank
generates CIN number only when the amount is credited to the concerned
government account. Furthermore, banks need authorization to maintain the
government account.

7. Amounts Gets Credited To The Electronic Cash Ledger:

Now, your cash ledger shows a credit balance once the CIN is generated. Thus,
CIN is mandatory to allow the portal to credit your electronic cash ledger. Finally,

46
the common portal generates receipt as a result of the balance credited to your
ledger.

8. In Case CIN Is Not Generated Or Not Updated:

There are cases when bank debits your account on making GST deposit. But it fails
to generate CIN in return. Or, the bank generates CIN but the number is not
updated on the common portal. In such cases, you can present these concerns to the
concerned bank electronically in form GST PMT – 07. You can present this form
to the bank either via common portal. Or you can present it through electronic
gateway via which payment was initiated.

9. Credit of Electronic Cash Ledger In Case of TDS Or TCS

There are taxpayers who pay TDS (under section 51) or collect TCS (under section

52) under GST. Further, these taxpayers claim the amounts deducted or collected
in Form GSTR – 2. Now in such cases, the electronic cash ledgers of taxpayers
paying TDS or collecting TDS gets credited.

10. Debit of Electronic Cash Ledger

The electronic cash ledger is debited if a taxable person has claimed any refund
from the ledger itself.

11. Rejection of Refund

There are situations when a GST refund claimed gets rejected, either fully or
partly. In such a cases, the amount debited under rule 10 is credited to the
electronic cash ledger of the said person.Such amount is restricted to the portion of
the refund claimed rejected. Furthermore, the said amount is credited by a proper
officer through an order in form GST PMT – 03.

12. Discrepancy In Electronic Cash Ledger

47
There are cases when there is any discrepancy in the electronic cash ledger. In
these scenarios, the registered person can communicates the discrepancy to the
concerned officer. Such a communication is made through the common portal in
form GST PMT – 04.

3. Explain various services exempted in GST

Introduction / Meaning:
Exempt from tax refers to the supplies which attracts the “Nil rate of Tax” or
which may be wholly exempt from tax and also includes non – taxable supply.
Section II of the CGST Act and Section 6 of the IGST Act, gives the power to
grant exemption from GST as well as the State Act consists the similar provisions
relating to granting power to exempt SGST.
Under the previous Indirect Taxation regime, taxpayers were enjoying large tax
exemptions which are now limited under GST.
The Central or State Government are empowered to grant exemption to the Goods
or Services  from tax either absolute or conditional, which should be in the public
interest on recommendation from the council by way of issue of notification.
The Central or State Government are empowered to grant exemption to the Goods
or Services  from tax either absolute or conditional, which should be in the public
interest on recommendation from the council by way of issue of notification.

VARIOUS EXEMPTED SERVICES IN GST.

A. Exemptions from GST (Health Care Services):
1. Health care services provided by clinical establishments or medical practitioner
or paramedics are exempted under GST
2. Services provided by way of transportation of patients in an ambulance, other
than covered in (a).
3. Services provided by cord blood banks by way of preservation of stem cells or
any other services in relation to such preservation.

48
4. Services provided by operators of the common bio-medical waste treatment
facility to a clinical establishment by way of treatment of disposal of bio-medical
waste or the processes incidental thereto.
5. Services provided by Veterinary clinic in relation to health care of animals or
birds.

B. Charitable and Religious Sector Exemptions from GST:

1. Services by an entity registered under Section 12AA of the Income Tax Act,
1961 by way of Charitable activities.
2. Religious activities by way of –
(a) Conduct of Religious ceremony
(b) Renting of precincts of religious place meant for general public, owned or
managed by an entity registered as a charitable or religious trust either under sec
12AA of the Income Tax act, 1961 or a Trust or an institution registered under sec
10(23C)(v) or a body or authority covered under sec 10(23BBA) of the Income
Tax Act subject to some exceptions.
C. Exemptions from GST in Legal Sector:
1. Services provided by an arbitral tribunal to any person other than a business
entity or a business entity with an aggregate turnover upto 20 lakh rupees (10 lakh
in special category states) in the preceding F.Y.
2. Services provided by a partnership firm of advocates or Individual as an
advocate other than senior advocate by way of legal services to –
> An advocate or partnership firm of advocates providing legal services,
> Any person other than a business entity or
> A business entity with an aggregate turnover of Rs 20 Lakh rupees (10 Lakh in
special category states) in the preceding F.Y.
3. A senior advocate by way of legal services to any person other than business
entity or business entity with an aggregate turnover upto 20 lakh (10 Lakhs rupees
in the case of special category states) in the preceding F.Y.
D. Exemptions related to Agriculture Services:
1. Agriculture services which are exempt under GST are as follows –
a) Cultivation of Plants
49
 b) Rearing of all life-forms of animals, for food, fibre, fuel, raw material, or
other similar products
c) Except the rearing of horses.

2. Or Agriculture produce by way of –

(a) Agricultural operations directly related to production of any agricultural
produce including cultivation, harvesting, threshing, plant protection or testing.
(b) Supply of farm labour.
(c) Process carried out at an agriculture farm including tending, pruning, cutting,
harvesting, drying, cleansing, trimming, sun drying, fumigating, curing, sorting,
grading, cooling or bulk packaging and such like operations which do not alter
essential characteristics of agricultural produce but make it only marketable for the
primary market.
(d) Renting or Leasing of agro machinery or vacant land with or without a
structure incidental to its use.
(e) Loading, Unloading, Packing, Storage or Warehousing of agriculture produce.
(f) Agricultural extension services i.e. research services.
(g) Services by any agricultural produce marketing committee or board of services
provided by commission agent for sale or purchase of agricultural produce.
3. Services by way of Loading, unloading, packing, storage or warehousing of rice.

E. Exemptions from Transport Sector:

1. Services of transportation of passengers, with or without accompanied
belongings by –
(a) Railway in a class other than First Class or Air Conditioned coach.
(b) Metro, Monorail or Tramway,
(c) Inland Waterways
(d) Public Transport other than predominantly for tourism purpose, in a
vessel (e)between places located India; and
(f) Metered Cabs or Auto Rickshaws
2. Transport of Passengers with or without accompanied belongings by –
50
(a) Air Embarking from or terminating in an airport located in the state
of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim,
or Tripura or at Bagdogra located in West Bengal.
(b) Non – AC coach carriage other than radio taxi, for transportation of passengers,
excluding tourism, conducted tour, charter or hire or
(c) Stage carriage other than air-conditioned stage carriage.

F. Transportation of Goods Exemptions from GST:

1. Services related to transportation of goods by road are exempt from tax except
the services of GTA (Goods Transport Agency) or Courier Agency.
2. Services related to transportation by way of inland waterways.
3. Services by way of transportation of goods by an aircraft from a place outside
India upto a custom station of clearance in India.
4. Transportation in relation of following goods by Rail, Vessel & GTA are –
(a)Agricultural Produce
(b)Milk, Salt and Food Grain, including floor, pulses, and rice
(c)Organic Manure
(d)Newspapers or Magazines registered with the registrar of Newspapers.
(e)Relief Material meant for the victims of natural or man-made disasters,
calamities, accidents or mishap.
(f) Defence or military equipments.

G. Exemptions from GST relating to Renting of Immovable Property:

1. Services by way of renting of residential dwelling for use as residence.
2. Services by way of a Hotel, inn, guest house, club or campsite by whatever
name called for residential or loding purposes, having declared tariff of a unit of
accommodation below Rs 1000/- per day or equivalent.

H. Exempted from GST related to Entertainment Sector:

1. Services by an artist by way of performance in folk or classical art forms
of Music, dance or theater if the consideration charged for such performance is not
51
 more than Rs 1,50,000 (Exemption not applicable to services provided by Brand
Ambassador).
2. Services by way of right to admission to –
3. Circus, dance or theatrical performance including drama or ballet,
4. Services by way of admission to a museum, national park, wildlife sanctuary, or
tiger reserve or zoo.

I. Exemptions Related to Banking and Financial Sector:

 Services by way of –
o Extending deposits, loans or advances in so far as the consideration is
represented by way of interest or discount (other than interest in credit card
services).
o Inter se sale or purchase of foreign currency amongst banks or
authorised dealers of foreign exchange or amongst banks and such dealers.
 Services by an acquiring bank, to any person in relation to settlement of an
amount upto two thousand rupees in a single transaction transacted through credit
card, debit card or charge card or other payment card service.
Education and Training Sector Exemptions from GST

J. Exemptions from GST in Government Sector:

 Services by way of access to a road or bridge on payment of toll charges
 Services by way of access to a road or a bridge on payment of annuity.
 Services provided by Reserve Bank of India. (Services to RBI is taxable).
 Services by a Foreign Diplomatic Mission located in India.
Exemptions from Services Provided by Government
 Services provided by CG, SG, Union Territory or Local Authority to a
business entity with an aggregate turnover of upto twenty lakh rupees (ten lakh
rupees in special category state) in preceding F.Y.

K. Exempted Services Provided to Government:

52
 Services provided by Fair Price Shops to CG by way of sale of wheat, rice
and coarse grains under the Public Distribution System (PDS) against
consideration in the form of commission or margin.
 Services provided by Fair Price Shops to SG or Union territory by way of
sale of Kerosene, Sugar, Edible Oil, etc under Public Distribution System against
consideration in the form of commission or margin.
 Services provided to Govt. of article 243G in relation to any function
entrusted to a Panchayat or article 243W to Municipality.
 Services provided by way of pure labour contracts of Construction, Erection,
Commissioning, installation, completion, fitting out, repair maintenance,
renovation or alteration of –
o Civil Structure or
o Any other original works
Pertaining to the beneficiary-led individual house construction or enhancement
under the Housing for All (Urban) Mission or Pradhan Mantri Awas Yojana.

L. Other Goods and Services covered under Exemption from GST:

 Services by way of transfer of Going Concern as a whole or an independent
part thereof.
 Services by an organiser to any person in respect of a business exhibition
held outside India.
 Services by an unincorporated body or Non Profit Entity registered under
any law for the time being in force, or to its own members by way of
reimbursement of charges or share of contribution –
 Slaughtering of Animals services.
 Services by way of public conveniences such as provision of facilities of
bathroom, washroom, lavatories, urinal or toilets.
 Supply of services associated with cargo to Nepal and Bhutan (landlocked
countries).

4.Explain rules & procedures for GST Registration

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Introduction:
Registration of any business entity under the GST Law implies obtaining a unique
number known as the GSTIN/UIN from the tax authorities so that the registered
person can collect tax on behalf of the government and there by avail Input tax
credit for the taxes on his inward supplies. Without registration, a person cannot do
the same.
♦ Liability for Registration (Section 22) : According to Section to 22(1) of
the CGST Act, 2017, If the Supplier makes a taxable supply of goods or service or
both from his State or Union territory and his aggregate turnover in a financial
year exceeds 20 lakhs rupees, he shall be liable to be registered. However, if such
person makes taxable supply from any of the special category of states, he shall be
liable to be registered if his aggregate turnover in a financial year exceeds 10 lakhs
rupees. However, as per Amendment act 2018, the threshold limit has been
increased to 20 lakhs rupees for seven specified category of states.

Rules:
* As per Section 2 (6) of the CGST Act, Aggregate turnover means the aggregate
value of all taxable supplies (excluding the value of inward supplies on which tax
is payable by a person on reverse charge basis), exempt supplies, exports of goods
or services or both and inter-State supplies of persons having the same Permanent
Account Number, to be computed on all India basis but excludes central tax, State
tax, Union territory tax, Integrated tax and cess.
* For the purposes of this sub-section, a person shall be considered to be engaged
exclusively in the supply of goods even if he is engaged in exempt supply of
services provided by way of extending deposits, loans or advances in so far as the
consideration is represented by way of interest or discount.
* The Government may, at the request of a special category State and on the
recommendations of the Council, enhance the aggregate turnover referred above
from ten lakh rupees to such amount, not exceeding twenty lakh rupees and subject
to such conditions and limitations, as may be so notified.
* A supplier is not liable to obtain registration if his aggregate turnover consists of
goods or service or both which are not taxable under GST.
* Every person being an Input Service Distributor shall make a separate
application for registration as such Input Service Distributor.

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* Aggregate turnover should include all supplies whether made on his own account
or behalf of principal.
* The supply of goods by a registered job worker after completion of job work
shall be treated as the supply of goods by the principal referred to in section 143,
and the value of such goods shall not be included in the aggregate turnover of the
registered job worker.
According to Section 22 (2), every person who is registered or holds a license or
registration under any existing indirect tax law on the day immediately preceding
the appointed day i.e. date on which the GST Act came into force, shall be liable to
be registered under this Act with effect from the appointed day. According
to Section 22 (3), if  a business carried on by a taxable person registered under this
Act is transferred, whether on account of succession or otherwise, to another
person as a going concern, the successor shall be liable to be registered with
effect from the date of such transferor succession. However, according to Section
22(4), in case of transfer, amalgamation, demerger of two or more companies by
order of court, the transferee shall be liable to be registered, only from the date on
which the Registrar of Companies issues the certificate of incorporation giving
effect to such Order.
Thus, a summary on the various threshold limits have been given below:- 
♦ Persons not liable to registration (Section 23) :According to Section 23(1), the
following persons are not liable to register under the Act :-
♦Any person engaged exclusively in a supply that is not liable to tax or is wholly
exempt from tax under the GST Act
♦An agriculturist, who is supplying produce out of cultivation of land.
According to Section 23 (2), The Government may, on the recommendations of the
Council, by notification, specify the category of persons who may be
exempted from obtaining registration under this Act.

As per N. 5/2017-C.T. dt. 19th June, 2017 the Government has exempt such

persons who are only engaged in making supplies of taxable goods wherein
the total tax is payable by the recipient under reverse charge mechanism under
section 9(3).
♦ Compulsory registration (Section 24) : Notwithstanding anything contained in
sub-section (1) of section 22, the following categories of persons shall be required
to be registered under this Act:-

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  Persons making any inter-State taxable supply
 Casual taxable persons making taxable supply
 Persons who are required to pay tax under reverse charge.
 Non-resident taxable persons making taxable supply
 Persons who are required to deduct tax i.e. TDS under section 51, whether or
not separately registered under this Act
 Persons who make taxable supply of goods or services or both on behalf of
other taxable persons whether as an agent or otherwise
 Input Service Distributor, whether or not separately registered under this Act
 Persons who supply goods or services or both, other than supplies specified
under sub-section (5) of section 9, through such electronic commerce
operator, who is required to collect tax at source under section 52
 Every electronic commerce operator who is required to collect TCS u/s 52
 Every person supplying online information and data base access or retrieval
services from a place outside India to a person in India, other than a
registered person
 Such other person or class of persons as may be notified by the
Government on the recommendations of the Council.

 According to Section 25 (2), every person seeking registration under this Act shall
be granted a single registration in a State or Union territory. However, as per N.N.
03/2019 – C.T. dt. 29th January 2019, any person having multiple places of
business in a State or Union territory may be granted a separate registration for
each such place of business in FORM REG-01 subject to the following conditions
as prescribed in Rule 11:-

 such person has more than one place of business

 such person shall not pay tax under section 10 i.e. composition scheme for
any of his places of business if he is paying tax under section 9 for any other
place of business
 all separately registered places of business of such person shall pay
tax under the Act on such supply made to another registered place of
business of such person and issue a tax invoice or a bill of supply, as the
case may be, for such supply

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Voluntary Registration: As per section 25(3), Any person even though not liable to
be registered under section 22 or section 24 may get himself registered voluntarily,
and all provisions of this Act, shall apply to such person.

 Other relevant points :-

 As per Rule 10, if the applicant applies for registration within 30 days of

becoming liable for registration, Effective date of registration shall be date
on which he becomes liable to registration. However, in any other case, it
shall be the date of grant of registration certificate.
 As per Rule 12, Any person required to deduct tax u/s 51 or required to
collect tax at source u/s 52 shall electronically submit an application, duly
signed or verified in FORM GST REG-07 for the grant of registration.
 As per Rule 14, Any person supplying online information and database
access or retrieval services from a place outside India to a non-taxable online
recipient shall submit an application for registration, in FORM GST REG-
10, at the common portal.
 Rule 18 talks about Display of registration certificate and GSTIN on the
name board exhibited at the entry of his principal place of business and at
every additional place or places of business.

Registration procedure for Casual taxable person and Nonresident

taxable person (Section 27) : 
Every Casual taxable person and Nonresident taxable person will have
to compulsorily get registered under GST at least 5 days prior to commencement of
business irrespective of the threshold limit by submitting as application in FORM
GST REG-09(Rule 13). For a Nonresident taxable person, a valid passport instead
of a PAN would suffice. At the time of submission of such application, such
person is required to pay an amount equal to the Estimated Net tax liability as
advance. The registration certificate issued to them would be valid for period
specified in the registration application or 90 days from effective date of
registration (which can be further extended up to 90days in FORM GST REG -11
under Rule 15)
Amendment of registration (Section 28) : 

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As prescribed under Rule 19,In case of any change in particulars furnished while
registration , the registered person will be required to furnish details in FORM
GST REG-14 within 15 days of such change along with all the relevant documents
as may be required by the proper officer for approval of such change. Once the
officer is satisfied regarding such amendment, he shall grant an order in FORM
REG-15 In case of amendment of noncore field, the registration certificate would
stand amended upon submission of application i.e. FORM GST REG-14. 
Cancellation of registration (Section 29) :
As per section 29(1), the proper officer may, either on his own motion or on an
application filed by the registered person under Rule 20 in FORM GST REG 16 or
by his legal heirs, in case of death of such person, cancel the registration. The same
can be cancelled in the following cases :
 Business discontinued
 Transferred fully for any reason including death of the proprietor
 Amalgamation or demerger or disposal of the business entity
 Change in the constitution of the business
 Taxable person who is no longer liable to be registered under section 22 or
section 24.
Cancellation by the proper officer can be done in the following cases
 Contravention of Rule 21e. conduct of business from a place which is not his
place of business as declared, issue of invoices in contravention of the rules
and provisions, violation of section 171 i.e. adoption of anti profiteering
measures and violation of Rule 10A
 Non filing of return for6 consecutive months or 3 consecutive tax periods in
case of a composition dealer
 Non commencement of business within 6 months from date of registration in
case of voluntary registration
 Registration obtained by fraud.
 Revocation on cancellation (Section 30) : 
As per Rule 23,  A registered person, whose registration is cancelled by the proper
officer on his own motion, may submit an application for revocation of
cancellation of registration, in FORM GST REG-21. The proper officer may, by
order, either revoke cancellation of the registration or reject the application.
Provided that the application for revocation of cancellation of registration shall not
be rejected unless the applicant has been given an opportunity of being heard. He
would first issue a Show cause notice for such rejection to the applicant seeking
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 clarification within 7 working days. Where the proper officer is satisfied, that there
are sufficient grounds for revocation  he shall revoke the cancellation of
registration by an order in FORM GST REG-22 within a period of thirty days from
the date of the receipt of the application.

PROCEDURE FOR GST REGISTRATION [Section 25]

Procedure to Register in GST:
Step 1 – Go to GST portal. Click on Register Now under Taxpayers (Normal)
Step 2 – Enter the following details in Part A –
 Select New Registration
 In the drop-down under I am a – select Taxpayer
 Select State and District from the drop down
 Enter the Name of Business and PAN of the business
 Key in the Email Address and Mobile Number. The registered email id and
mobile number will receive the OTPs.
 Click on Proceed
Step 3 – Enter the OTP received on the email and mobile. Click on Continue. If
you have not received the OTP click on Resend OTP.
Step 4 – You will receive the Temporary Reference Number (TRN) now. This will
also be sent to your email and mobile. Note down the TRN.
Step 5 – Once again go to GST portal. Click on register now.
 Step 6 – Select Temporary Reference Number (TRN). Enter the TRN and the
captcha code and click on Proceed.
Step 7 – You will receive an OTP on the registered mobile and email. Enter the
OTP and click on Proceed
Step 8 -You will see that the status of the application is shown as drafts. Click on
edit Icon.
Step 9 – Part B has 10 sections. Fill in all the details and submit appropriate
documents.
Here is the list of documents you need to keep handy while applying for GST
registration–
 Photographs
 Constitution of the taxpayer

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 Proof for the place of business
 Bank account details
 Authorization form
Step 10 – Once all the details are filled in go to the Verification page. Tick on the
declaration and submit the application using any of the following ways –
 Companies must submit application using DSC
 Using e-Sign – OTP will be sent to Aadhaar registered number
 Using EVC – OTP will be sent to the registered mobile.
Step 11 – A success message is displayed and Application Reference Number
(ARN) is sent to registered email and mobile.
You can check the ARN status for your registration by entering the ARN in GST
Portal.
Documents Required for GST Registration:
 PAN of the Applicant
 Aadhaar card
 Proof of business registration or Incorporation certificate
 Identity and Address proof of Promoters/Director with Photographs
 Address proof of the place of business
 Bank Account statement/Cancelled cheque
 Digital Signature
 Letter of Authorization/Board Resolution for Authorized Signatory
Penalty for not registering under GST
An offender not paying tax or making short payments (genuine errors) has to pay a
penalty of 10% of the tax amount due subject to a minimum of Rs.10,000.
The penalty will at 100% of the tax amount due when the offender has deliberately
evaded paying taxes
5. Explain levy of tax under GST

Introduction:

Under the GST law, the levy of tax is as follows:

(a) In the hands of the supplier – on the supply of goods and / or services (referred
to as tax under forward charge mechanism);
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(b) In the hands of the recipient – on receipt of goods and / or services (referred to
as tax under reverse charge mechanism)
When the goods/ services are supplied by a supplier, who is un-registered person to
a receiver, who is registered person, the liability to pay tax on such supplies will be
on recipient under reverse charge basis. Thus, a registered person would be
required to pay GST on all supplies received by it from un-registered persons.

Levy of tax:
Every supply will be liable to tax. The nature of tax would depend upon the nature
of supply, viz., inter-State supplies will be liable to IGST and intra-State
supplies will be liable to CGST and SGST (UTGST).

(i) Supply should involve goods and / or services – viz., either as wholly goods or
wholly services. Even where a supply involves both, goods and services, the law
provides that such supplies would classifiable either as, wholly goods or wholly
services. Schedule II of the Act provides for this classification. 

(ii)Where a supply involves multiple (more than one) goods or services, or a

combination of goods and services, the treatment of such supplies would be as
follows:
(a) If it involves more than one goods and / or services which are naturally bundled
together: These are referred to as composite supply of goods and / or services. It
shall be deemed to be a supply of those goods or services, which constitutes the
principal supply therein.
(b) If it involves supply of more than one goods and / or services which are not
naturally bundled together: These are referred to as mixed supply of goods and / or
services. It shall be deemed to be a supply of that goods or services therein, which
are liable to tax at the highest rate of GST
A supply of more than one goods and / or services as a bundle will be reckoned
as ‘mixed supply’ if: (i) such goods and / or services are supplied together for
a single price (ii) they are not naturally bundled together and (iii) it does not
qualify as composite supply.
Some Important Points about Supply:
A) Supply should be in the course or furtherance of business:

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 For a transaction to qualify as ‘supply’, it is essential that the same is ‘in the
course or furtherance of business’. This implies that any supply of goods and / or
services by a business entity would be liable to tax, so long as it is in the course or
furtherance of business. Supplies which are not in the course of business (or in
furtherance of business) will not qualify as ‘supply’ for the levy of tax, except in
case of import of service for consideration, where the service is a supply whether
or not it is made in the course or furtherance of business.
B) Import of service will be taxable in the hands of the recipient (importer):
The word ‘supply’ includes import of a service, made for a consideration (as
defined in Section 2(31)) and whether or not in the course or furtherance of
business. This implies that import of services even for personal consumption
would qualify as ‘supply’ and therefore would be liable to tax. This would not be
subject to the threshold limit as tax is expected to be payable on reverse charge
basis, and the threshold limits do not apply in case of supplies attracting tax on
reverse charge basis.
C) Transactions without consideration:
The law provides that in certain cases, even though there is no consideration, the
same would be treated as ‘supply’. Such cases are listed in Schedule I.
(i) Permanent transfer of business assets where input tax credit has been availed:
The word ‘transfer’ in this clause suggests that there should be another person who
would receive the business assets at the other end.   The use of the words
‘permanent transfer’ implies that the goods should be transferred without any
intention or requirement of having to receive the goods back.
E.g.: Goods sent on job work or goods sent for testing or goods sent for
certification would not qualify as ‘supply’ under this clause since there is no
permanence in transfer
Typically, donation of business assets or scrapping or disposal in any other manner
(other than as a sale – i.e., for a consideration) would qualify as ‘supply’ under this
clause, where input tax credit has been claimed on the same.
(ii) Supply of goods and / or services between related person, or between distinct
persons as specified in Section 25(4) or 25(5), when made in the course or
furtherance of business
(iii) Supply of goods by a principal to his agent, where the agent undertakes to
supply such goods on behalf of the principal

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(iv) Supply of goods by an agent to his principal, where the agent undertakes to
receive such goods on behalf of the principal
(v) Import of services by a taxable person from a related person, or from any of his
other establishments outside India, in the course or furtherance of business:
Importation of services as covered by the definition does not include importation
without consideration. Therefore, this clause is inserted to rope in such services
that are received from related persons / their establishments outside

D) Certain supplies will be neither a supply of goods, nor a supply of services:

The law lists down matters which shall not be considered as ‘supply’ for GST. This
list includes:
  Activities/ transactions in Schedule III:
 (i) Services by an employee to an employer in the course or in relation to his
employment;
(ii) Services by any Court or Tribunal established under any law for the time being
in force;
(iii) Functions performed by MPs, MLAs, etc.; the duties performed by a person
who holds any post in pursuance of the provisions of the Constitution in that
capacity; the duties performed by specified persons in a body established by the
Central State Government or local authority, not deemed as an employee;
(iv) Sale of land and Sale of Building (except sale of under-construction premises
where the part or full consideration is received before issuance of completion
certificate or before its first occupation, whichever is earlier.;
(v) Actionable claims, other than lottery, betting and gambling and
(vi) Services of funeral, burial, crematorium or mortuary including transportation
of the deceased.
Reverse charge mechanism:
Normally, the supplier of goods and / or services will be liable to discharge tax on
the supplies effected. However, the Central or State Governments upon
recommendation of the GST Council are empowered to specify by notification the
categories of supplies in respect of which the recipient of goods and / or services
will be liable to discharge the tax.

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All other provisions of this Act will apply to the recipient of such goods and / or
services, as if the recipient is the supplier of such goods and / or services – viz., for
the limited purpose of such transactions, the recipient would be deemed to be the
‘supplier’. Similarly, when any registered taxable persons receive any supply from
unregistered person, he shall be required to pay tax on such inward supplies under
reverse charge mechanism.

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