Harmonization of State Codes Across Different States – Challenges and Progress

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Published Date:  03-12-2023   Author:   sumith-roul
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The harmonization of state codes across different states is essential for the greater good of India. We will also be reading about the challenges and the progress that has been made thus far.

Introduction

In today’s blog, we will be learning about the harmonization of state codes across different states. Besides, we will shed some light on the challenges and progress made in this field. As you may know, accounting is the ability of a business to communicate financial information in an organized manner.

However, before the business does that, the results must be recorded in a proper, organized, and efficient manner. This ensures that the layman and the authorities can understand and get a proper view of the transactions.

India is recognized thanks to the IFRS-based accounting standards at the global level. India adopted the accounting standards in 2016. This was done in partnership with ICAI, and the MCA, to mandate these standards sequentially.

With the implementation of these IFRS-based Indian accounting standards, they have been able to create state code harmonization. Now, regulatory authorities, academicians, and businesses can continue the research on the financial reporting system in India. 

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What are the disadvantages of harmonization?

Business leaders have acknowledged that there is a need to harmonize the accounting standards. This can immensely help in the partnership and cooperation of businesses of various countries and help them come together.

Besides, this can help businesses to formulate strategies for themselves. Moreover, they can provide clarity in the financial documentation or data. This is possible thanks to the International Accounting Standards (IAS).

Not to mention, auditors, regulators, and investors are provided with the same accounting methodologies. It reduces international transactional rate risks, improves information transfer, and improves accountability. 

Despite these benefits, they also come with their drawbacks. That is why, if you are an entrepreneur or a businessman, you may want to take the time to understand the regulations so that you can meet standards without facing challenges.

  • Accounting standards integration problems

Many developed countries notably, the United States, England, Japan, and Canada have avoided the transition to International Accounting Standards. They feel that it is too complex. In this sense, the U.S., Securities and Exchange Commission has publicly traded companies to use the GAAP.

In the Internal Revenue Service tax codes, businesses need to use the modified accelerated cost recovery system for depreciating assets. So, when there is a change to the IAS accounting model, the government has to change tax accounting systems.

  • Bad effects on small businesses

Small businesses don’t stand to benefit much through the harmonization of accounting. This is in comparison to larger multinational companies. In many countries, even like India, smaller firms have to spend more on regulatory compliance.

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It is amazing to note that the regulatory costs to these small companies can come to around $2 trillion per year. When you have a company with less than five employees, then you may have to pay thousands per employee.

It burdens the small companies to several billion annually. This causes them to either file for bankruptcy or shut down if they can’t afford the tax compliance. As you can see, integrating the accounting standards results in higher costs for small businesses.

  • Sovereignty issues

In the US, the Financial Accounting Standards Board (FASB) settles the accounting standards. They do it based on federal securities laws and state CPA licensing laws. Even India has its own securities laws, tax laws, and financial regulations.

Moreover, there are state laws as well that govern business, and insurance activities. Sadly, when you adopt international accounting standards, it directly conflicts with the US statute law and laws that are associated with state’s rights.

  • Licensing and enforcement challenges

One of the main drawbacks of harmonization is licensing and enforcement. Individual accountants, globally, should be willing to comply with licensing through internationally accepted rules.

But when the international body does not have proper authority to penalize those for breaking the laws, then there is no purpose for them existing in the first place. When they have the prosecutorial authority, jurisdictional issues may arise about prosecuting them. 

What are the objectives of harmonization?

The objective of harmonization is to move accounting and reporting away from total diversity by making a commitment to find shared solutions, but at the same time recognizing that inherent differences would still exist. Harmonization is a process of change that continuously searches for mutual recognition.

What are the benefits of harmonization?

Harmonization in accounting is a set of standards and guidelines that have been discussed and agreed upon by a group of organizations. There are several benefits to progress in state code unification standards:

  • Enhanced comparability: It makes it easier to compare financial statements between businesses and different countries. Since they are using a similar set of guidelines, analysts and investors can find this data crucial for their businesses. 
  • Increased transparency: As they are following a standard set of rules, there is an increase in transparency.  The financial statements of the business and the companies are clear, strategic, and transparent. It reduces fraud and financial irregularities.
  • Decreased complexity: It simplifies the process of preparing financial statements. Now, businesses don’t have to follow multiple sets of rules depending on their location.
  • Improved efficiency: It enables the decrease of the cost and time required to design the financial statements.
  • Proper credibility: This also improves the credibility of financial statements. The statements are prepared using a reliable set of international guidelines. Now, investors and stakeholders will be prepared to take the plunge into the business.

As you can see, harmonized accounting standards improve the quality and reliability of financial information of any business. This immensely helps to ensure that there is clarity among investors, businesses, and stakeholders.

What is the process of harmonization in accounting?

Harmonization is the process of designing proper standards that can be followed flawlessly across the internal market. It helps in the creation of regulations, laws, and practices so that the same rules can be applied to businesses.

The following have been noted in the harmonization, which is driven by the international accounting standards boards.

  • The process is led by professional associations, and by state regulators solely. They take the lead in transformation when compared to periods earlier to 1990.
  • Accounting standards are set at an international level after careful deliberation with several countries. Eventually, reputed bodies like the International Accounting Standards Board (IASB) set the rules. 
  • The International Financial Reporting Standards  (IFRS)  are implemented on a global range and are achieving universal recognition.

Some of the particular strategies that are used for harmonizing accounting standards are given below:

  • Mutual recognition

Mutual recognition is achieved when the financial information given by a business located in one country is accepted by another country. Most of the time, they are designed using different accounting principles. 

  • Reconciliation

Reconciliation happens when a company is allowed to use its home country accounting standards. But the other country must agree upon that. It is done with the reconciliation of crucial accounting data including net profit.

  • Standardization

Standardization happens when all participants prefer to use the common accounting standards. This is one of the best methods, where the details and financial data are transparent. It also ensures that the partnership moves quickly. 

What is the concept of harmonization?

The concept of harmonization in accounting ensures that the reporting standards can achieve comparability in their financial statements. As you may know, financial statements are designed and then presented in several methods to different financial reporting standards. 

This makes it challenging to compare them. It is also a process of increasing the comparability of accounting practices. In many ways, standardization seems to make an imposition giving a more narrow set of rules.

Harmonization in accounting enables the departments in local authorities to share the same vision, work together, and optimize the use of resources. The goal of financial data harmonization is to enable the data to become more accessible, and comparable.

It can help immensely in ensuring that international trade follows the proper accounting procedures. Moreover, it also helps stakeholders get the right kind of information to make the right choices.

What are the barriers to accounting harmonization?

With the progress that has been made in accounting harmonization, there are, unfortunately, some challenges in state code harmonization. Below are some of the barriers that have the ability to design obstacles in the harmonization process of accounting both in India and internationally.

  • Spirit of nationalism

The spirit of nationalism among accounting professionals of different nationalities in India may create hurdles in accepting compromises. Some of them may be reluctant to alter their accounting practices.

They feel that they are superior to other nations, and hence don’t want to willingly accept the data of another country. This may happen, though the accountant is a strong participant in harmonization.

  • Several legal environments

The legal environment of a country may play a significant role in the development of accounting. The same can be applied in India. As you may know, the legal system varies from one country to another.

The legal system of India may have a powerful influence over the accounting practices done by the accountants. Only when there is uniformity in laws, can things change. Otherwise, the goal of harmonization can be extremely challenging to achieve.

Hence, there needs to be a common civil code, and a law system for things to function smoothly. However, countries that have a continental system can be hesitant to implement the rules. 

  • Objectives of financial reporting

Likewise, the objectives of financial reporting are not the same for each country. It may vary because of the reporting practices. You may want to note that the financial reporting differs from country to country.

It depends on the target audience. For example, in America, the target audience is mainly creditors and investors. Likewise, in Europe, the audience consists of government and revenue agencies.

This is very prevalent in countries like Germany & France. 

  • There is a lack of professional accounting institutes

It is understood that IASC is playing a dominant role at a global level in the development of the IAS’s. The committee works through national professional institutes like ICWAI, ICAI, and others, which are members of IASC.

Sadly, in some countries, these professional institutes are not present. When that is the case, they cause disruption in the standards that have to be implemented. Then it becomes a challenging task to bring harmonization to the accounting practices.

  • Massive gap in the economic front between developed and developing countries

It is a known fact that there is a massive gap in the economic front between the developed and developing nations. This gap causes difficulties in harmonization in accounting practices. Here, accountants would be better if they could understand the relationship between the economy and the accounting system.

Accountants from developing nations may want to maintain a strong network and communication with accountants from developed countries. This can help them immensely in understanding the practices in developed countries.

Moreover, it also helps in building cooperation among politicians, accountants, economists, and educationists.

  • Competition prevalent in international institutes

Accountants might be aware of the prevalent competition among international institutes. These institutes are actually involved in designing accounting standards. This can be a huge step in churning out harmonization.

However, it is heartening to note that the IFAC, ISAB, and OECD are reviewing and designing new methods to reduce the competition. This enhancement in the harmonization can be done only if efforts are put forth by the international institutes.

Conclusion

There you go. We hope you found this article on the harmonization of state codes across different states in India useful. To help us understand the topic better, we also read about the disadvantages of harmonization, the objectives of harmonization, and the benefits of harmonization.

We also learned about the process of harmonization in accounting, the concept of harmonization, and the barriers to accounting harmonization. Globalization has led to growth, enabling businesses to raise funds from the offshore international capital market.

Businesses have to make sure that they follow stringent policy decisions after discussing with their stakeholders and identifying the risks. Besides, they might want to check the internal controls for the proper convergence.

Also Read:

How Do HSN Codes Work?

What Are the Benefits of Using HSN Codes?

How are HSN Codes Used?

FAQs

  • Are HS codes different for each country?

Yes, different countries have different HS codes. In total, there are six digits in an HS code, and these codes are used as they are a universal classification tool. Many government agencies add this HS number to differentiate products in certain categories.

  • What is the Harmonized System code in India?

India has its own harmonized system code. It consists of an 8-digit HSN code where the first six digits are given by WCO and the last two other digits are additional. The HSN codes can be segregated into 21 sections, and 99 chapters.

Each of the chapters has its own product category that includes tariff item, heading, and subheading.

  • What is the difference between the HS code and the HSN code?

The HSN code is similar to the HS Code. These are commonly used in the shipping industry. However, it is called the HSN in India. The HS Code list, the HSN codes are used for export & import. They comprise six digits.

  • How many harmonized codes are there?

The Harmonized System (HS) for classifying goods consists of a six-digit code system. Besides, the HS Code has more than 5,000 product descriptions, which appear as headings and subheadings.

These can be arranged as 99 chapters that can be grouped into 21 sections. Moreover, the six digits can be parted into three parts.

  • Can the HSN code be the same for the two products?

You can find two products having the same harmonized system of nomenclature (HSN) codes. The HSN codes are used to classify products and services for tax and trade purposes. A seasoned trader or accountant knows how to differentiate products having the same HS Code.

  • What is the penalty for HSN code mismatch?

You have to pay a penalty for HSN Code mismatch. A penalty of Rs 50,000, where Rs 25,000 under CGST and Rs 25,000 under SGST is levied on your business. So, you must be careful with the HSN Codes, when entering them, while registering your business.

These need to be reported accurately on your tax invoices and GSTR-1.

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Sumith Roul

Sumith Roul has post-graduation in computer science from Vellore Institute of Technology (VIT), then he decided to become a content writer. He has a writing career spanning more than 18 years, and He has worked with several international clients. His work involves several niches including GST, finance, stock market, and so on. I have designed & worked on several hundred product reviews, blogs, PRs, and other forms of content as well.

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