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Depreciation working solution for an Indian Partnership Firm – Real time posting as per Income Tax Act

Some Background

In India majority of the companies that opt for SAP ERP implementation are either a public limited or a private limited company , rest of the firm category such as sole proprietorship , HUF’s, partnership firm’s or LLP’s generally don’t invest in such multi-dimensional profoundly integrated ERP software may be considering their volume & scale of business however in rare cases it’s quite thinkable that a partnership firm with a decent business scale capacity would be interested or may have already invested in implementing SAP ERP for to manage their business operation.

Now the whole point is that the statutory laws of business in India which these firms category have to abide-by are slightly vary from each other, leaving the rest we will only talk about particularly private ltd. & a partnership firm’s “Fixed Asset Purchase, Sale & Deprecation” laws that they are supposed to abide by.

Below table put forward the differences in transaction & reporting between these 2 firm categories.

Reason for this blog

Few months back I was involved in an SAP implementation project which was my first ever implementation in an Indian partnership firm ,so with further business process discussion’s certain statutory business requirement’s came out for which the feasibility / solution is something I couldn’t found anywhere neither on SAP help nor on some SAP note or on a SCN community blog , press books etc., even raising an OSS with SAP considering its a statutory requirement couldn’t be of any help.

Here on SCN too there are similar threads/questions/business scenario’s I came across to which there was no concrete solution provided, hence I thought of sharing a workable solution that saved the day in our case.

https://answers.sap.com/questions/10797015/posting-depreciati%E2%80%8Bon-for-partnershi%E2%80%8Bp-firm-as.html

https://answers.sap.com/questions/10632314/real-time-posting-of-it-depreciation.html

https://answers.sap.com/questions/11164077/depreciation-posting-as-per-income-tax-act-in-indi.html

https://answers.sap.com/questions/12981988/asset-depreciation-working-as-per-income-tax-act-f.html

Requirement Synopsis

As mentioned above an “Indian partnership firm” follow’s norms & policies laid down by Income tax act 1961 and not by Indian companies act 2013 due to which the depreciation calculation method is different i.e. they don’t follow the useful life methodology laid down by the Indian companies act but a block wise percentage based depreciation that too with real time postings in systems which ideally doesn’t happen in case of Private Limited companies as they just have to report block wise asset statutory report as per IT act 1961 at the end of a fiscal year.

Below are the 3 major business requirements/scenarios with respect to fixed assets process

 

Business Scenario – 1 – Additional deprecation calculation

As per section 32 of Income tax act 1961, deprecation calculation differs in 180 days horizon of any fiscal year, it has an additional deprecation apart from normal depreciation depending upon asset class / type.

Below is the table for requirement understanding.

Note: – System should not only calculate deprecation as per below table but should be feasible enough to post it in real time during transaction posting / depreciation run in SAP.

Solution to Business Scenario – 1

Start with configuration of depreciation key’s in the combination of percentages as mentioned in above table i.e. 15% , 35% ,30% ,50% etc., then after creating asset code with T-code AS01 go to its change mode i.e. AS02 & here make necessary changes in “depreciation area” tab by utilizing interval option as per business process requirement.

Let’s understand this with an example

Create a fixed asset code with asset class of “Mould & Dies” & just for a scenario understanding consider asset purchase date / depreciation start date as 17.06.2020 (Before Sept. 2019) & accordingly make necessary changes in deprecation area tab.

First year will be 50% hence choose Depreciation key configured for 50%, we have JC50 for the same now double click on “JC50” and then click on

As per law, if the asset is acquired/put to use date falls on or before September 30th of any fiscal year, then the deprecation for first year should be 50% & for all subsequent years it should be fixed at 30%.

In our test case asset acquired on 17.06.2020 hence we will make the changes in interval accordingly.Now Click on 

 

 

Enter here the next interval date from which the depreciation percentage should change as per law, in our test case it should be the start date of next fiscal year i.e. 01.04.2021 & choose required deprecation key i.e. JC30 for 30%.

Save this data & continue with purchase/settlement transaction & go to T-code AW01N to check its deprecation calculation as per business scenario.

Note: – If the asset purchase/settlement falls an any date after 30th September 2020, we would have made three intervals accordingly as mentioned in business scenario table above.

Now after posting purchase/settlement transaction go to t-code AS03 (Asset Values Tab) or AW01N.

It can be seen from above image that for first fiscal year i.e. 2020 deprecation is calculated as 50000.

(Asset purchase value – 100000*50%=50000) & for fiscal year 2021 its 15000 (NBV 50000*30%=15000, same 30% is calculated in all subsequent years which is required as law).

How this is achieved / Changes made in SAP ( Master/Config)

Only changes to be done at asset master data level as explained in the above example, no config changes except the one-time creation of percentage wise deprecation keys.

Business Scenario -2- Not allowed to consider current year depreciation in case of asset sale

In an ideal scenario asset deprecation has to be calculated on pro-rata basis till the last date of sale/scrap transaction with its gain/loss on asset sale however in case of partnership firm business scenario sale of asset, law doesn’t permit to take current year depreciation ( which is an accumulated depreciation of current year of a particular asset) , this accumulated current year deprecation is otherwise allowed to post if asset is not sold till the year end book closing.

Below is the table for requirement understanding

Note: – System should not only calculate deprecation as per below table but should be feasible enough to post it in real time during transaction posting / depreciation run in SAP.

Solution to Business Scenario – 2

Assume a fixed asset purchased few years back, now the net book value (NBV) as on 31.03.2020 is Rupees 1,00,000 and in our test example we are selling this asset on 10.01.2021 so again in an ideal business case the accumulated depreciation should have been calculated till 09.01.2021 i.e. from 01.04.2020 till 09.01.2021 & accordingly gain/loss derivation should have worked out considering sale value.

However as mentioned above, law doesn’t permit this accumulated depreciation as on sale date therefore below is our test example with sale value rupees 90000.

It can be seen in the above screenshot i.e. asset net book value as on 31.03.2020 is 100000 and asset is getting sold on 10.01.2021 with 90000 as sale value & a loss on sale of 10000 is getting booked with no deprecation or accumulated depreciation entry.

*Above mentioned years are considered just for an example elaboration*

How this is achieved / Changes made in SAP (Master/Config)

Removed “Dep. to the day” tick at deprecation key level / config change.

T-code – AFAMA

Business Scenario -3 – Depreciation calculation in first year of Asset purchase/acquisition

In an ideal asset purchase scenario it’s pretty simple that from the date of purchase/put to use, the depreciation should start accordingly i.e. on a pro-rata basis from that particular date or month however same is not the case with the partnership firms asset purchase business scenario , the laws states the calculation of deprecation varies with respect to its purchase happened within a horizon of 180 days in any fiscal year before sept 30th & after sept. 30th.

Below is the table for requirement understanding.

Note: – System should not only calculate deprecation as per below table but should be feasible enough to post it in real time during transaction posting / depreciation run in SAP.

Solution to Business Scenario – 3

3.1 Asset purchase/acquired on 16.06.2020 i.e. before Sept. 30th Sept

Note : – It can be seen from both the above screenshots that the asset acquired/ settled on 16.06.2020 however here on deprecation area depreciation start date is picked as 01.04.2020 , please note this is done in accordance to law and this date is auto picked through an existing standard functionality.

Now click on “Asset values” option to check out the depreciation calculation

It can be seen in the above screenshot that despite asset being acquired on 16.06.2020 of value Rupees 51,155 with 30% (JC30 Dep. Key) as dep. rate, full year deprecation (51,555*30%=15,346.52) got calculated i.e. from 01.04.2020 and not on pro-rata basis.

3.2 Asset purchase/acquired on 18.03.2021 i.e. after sept. 30th

Note : – It can be seen from both the above screenshots that the asset acquired/ settled on 18.03.2021 however here on deprecation area depreciation start date is picked as 01.10.2020 , please note this is done in accordance to law and this date is auto picked through an existing standard functionality.

Now click on “Asset values” option to check out the depreciation calculation

It can be seen above that despite asset acquired on 18.03.2021 of value Rs 55,000 with 40% as dep. rate, deprecation is getting calculated from 01.10.2020 only i.e. 11000 = (55000*40%*6/12) & from the next year onwards the usual full depreciation is calculated = 17,600 (44,000*40%).

How this is achieved / Changes made in SAP ( Master/Config)

Replaced period control in all deprecation keys

T-code – AFAMA

 

Conclusion

Please note that just like other 2 business scenario solutioning ,for this particular requirement also I have explored & tested with multilevel , period control ,other such depreciation parameter with trial & error method and eventually found out that this period control “IN1” which is default delivered by SAP to be used for Indian IT act deprecation (ideally used for IT dep reporting by Private/Public Ltd companies ) is working absolutely fine as required by Indian partnership firms.

Hence, I have replaced period control with “IN1” in all our deprecation key’s & it’s working fine as required for our client to comply with statutory as well as P&L posting business requirement.

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