Stox N Tax

Revenue Recognition for Spillover Projects and GST Implications

1. Introduction

Revenue recognition is a critical aspect of financial reporting, particularly for service-based businesses and infrastructure projects that span multiple financial years. The timing of recognizing revenue has direct implications on taxation, financial reporting, and compliance under Ind AS (Indian Accounting Standards) and GST laws.

In this article, we explore:

  • The appropriate timing for recognizing revenue under Ind AS for spillover projects.
  • Whether revenue should be recognized on a contract completion basis or a proportionate basis (percentage of completion method).
  • The GST implications of revenue recognition in cases where services are provided over multiple financial years.

2. Understanding Revenue Recognition for Spillover Projects under Ind AS

Under Ind AS 115 – Revenue from Contracts with Customers, revenue recognition depends on whether the control over goods or services is transferred to the customer at a specific point in time or over time. The standard defines two primary methods:

  1. Point-in-Time Recognition (Contract Completion Basis)
    • Revenue is recognized only when the contract is completed, and the customer obtains control over the delivered service.
    • This is typical for contracts where the final product/service is delivered in full at a particular time (e.g., turnkey contracts, one-time consulting engagements).
  2. Over-Time Recognition (Proportionate Basis / Percentage of Completion Method – POCM)
    • Revenue is recognized over time, based on progress toward completion of the performance obligation.
    • Suitable for long-term contracts where services are performed continuously, such as annual maintenance contracts, multi-year construction projects, and IT service contracts.

3. When Should GST Be Recognized for Spillover Projects?

GST is a transaction-based tax, and its liability arises at the time of supply as per Section 12 and 13 of the CGST Act, 2017. The key points to consider:

A. Time of Supply for Services under GST

The time of supply for services is determined based on:

  1. Invoice Date: If an invoice is issued within 30 days of service completion, GST is applicable on the invoice date.
  2. Receipt of Payment: If payment is received before invoicing, GST becomes payable on the date of receipt.
  3. Completion of Service: If an invoice is not issued within 30 days of completion, GST is applicable on the date of service completion.

Thus, even if revenue recognition is deferred under Ind AS, GST liability may arise before the contract is completed, leading to cash flow mismatches.

B. GST Implications for Over-Time Revenue Recognition

For contracts where revenue is recognized progressively (POCM), businesses must:

  • Raise periodic invoices based on milestones achieved.
  • Pay GST on each invoice, even if the contract extends into the next financial year.
  • Maintain proper documentation to justify the progressive transfer of control to the customer.

4. Practical Scenarios for Revenue Recognition and GST Implications

Scenario 1: IT Consulting Contract (Contract Completion Basis)

  • A consulting firm signs a ₹10 lakh contract to develop software for a client, with final delivery in March 2025.
  • The firm works on the project throughout 2024-25 but does not invoice or receive payment until completion.
  • Revenue recognition under Ind AS happens in March 2025.
  • GST liability arises only when the invoice is issued upon project completion.

 Compliance Approach: Recognize revenue in FY 2024-25, issue invoice, and pay GST in March 2025.

Scenario 2: Construction of a Factory (Percentage of Completion Basis)

  • A contractor signs a ₹50 crore contract to build a factory over three years (2024-27).
  • The contract allows for milestone payments after completion of each phase.
  • The contractor recognizes revenue progressively (e.g., 30% in Year 1, 40% in Year 2, and 30% in Year 3).
  • GST liability arises at each milestone invoice.

 Compliance Approach: Recognize revenue in phases, issue milestone invoices, and pay GST on progressive billings.

Scenario 3: Annual Maintenance Contract (Service-Based POCM)

  • A telecom company enters a ₹12 lakh annual maintenance contract for network services, valid from July 2024 to June 2025.
  • The service is provided continuously over 12 months.
  • The company recognizes ₹1 lakh revenue per month (Ind AS 115).
  • GST liability arises at the time of each monthly invoice.

 Compliance Approach: Recognize revenue monthly, issue invoices, and pay GST on a monthly basis.

5. Key Considerations for Businesses

 Choose the Right Revenue Recognition Method:

  • If the contract involves continuous transfer of benefits → Use Proportionate Basis (POCM).
  • If the contract delivers value only at the end → Use Contract Completion Basis.

 Ensure Proper Invoicing to Avoid GST Mismatch:

  • Issue invoices as per contract milestones to avoid early GST liability.
  • Use GST-compliant documentation to prove revenue recognition timing.

 Manage Cash Flow by Aligning GST Payment with Revenue Recognition:

  • If GST is payable before revenue is recognized (e.g., advance received), factor in the tax cost in contract pricing.
  • Utilize Input Tax Credit (ITC) efficiently to offset GST liability.

6. Conclusion

Revenue recognition for spillover projects must align with Ind AS 115 principles while ensuring compliance with GST laws. Businesses should carefully determine whether to recognize revenue on a contract completion basis or proportionate basis, considering the following:

  • Nature of service provided.
  • Contractual obligations and milestones.
  • Time of supply provisions under GST.

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