The earlier
notification by SEBI introducing the framework for SEBI (Investment Advisors)
(Amendment) Regulations, 2020 dated 3 July 2020 left many questions unanswered
of the RIA’s which drew many speculations and interpretations. Our article has
been divided into six sections mentioned below:
Segregation at client level for distribution and advisory
Agreement between IA and the client (Considerations & Contents)
Fee to be charged by IA to the client
Registration as a Non-individual Investment Advisor
Maintenance of records & Audit
Risk profiling and display of
details on website
IMPORTANT
DATES TO CONSIDER
These guidelines
shall come into force from 30 September 2020. Further, timelines specific to
the regulations specified have been stated in the table below:
Implementation of the respective regulations
Before 01 April 2021
Before 01 January 2021
Client
level segregation between distribution and IA clients
Maintenance
of all the records of communications with client
Considerations
& Contents of Agreements
Risk
profiling and suitability
Fee to be
charged to the client
Display
of details on the website
Registration
as non-individual if more than 150 clients as on 30 September 2020
Other
due dates to be considered under the regulations
Particulars
Date (Comply before)
Submission
of the report on the agreement implementation
30 June
2021
Qualifications
& certification requirements
3 years
for existing IA’s
Reporting
of adverse finding in audit report with action taken from the FY 2020-21
audit
30 days
from audit report or 31 October whichever is earlier
Reporting
by Individual IA having more than 150 clients as on 30 Sep 2020 file report
with SEBI in required format
15 October
2020
Particulars
Points to consider in the Guidelines
Segregation at client level for
distribution and advisory
Important points to
note:
Where existing clients are provided both, distribution & IA
services, option to be given for continuing with any one service to clientDiscretion given to the clients to keep holding such assets prior to
such applicability of selection between advisory/ distributionPAN to be considered for keeping control of clients for such
segregation. Family of the client to be considered as a single control recordIA to advice only direct plans, wherever available (Emphasis
supplied)Additional
Compliance:
Obtain an annual declaration from the client for having the
information on dependent family membersObtain annual certificate from auditor/ statutory auditor for client
level segregation
Action points:
IA’s offering both distribution and IA services should segregate the
clients by giving them option and obtain relevant declaration
Agreement
between IA and the client (Considerations & Contents)
Important points to note:
Terms & Conditions have been specified for the purpose of
inclusion in the IA agreement with the clientNo advice to be provided or fee to be charged until the agreement is signed
with the client and copy delivered to the client.
Now a question in
this scenario arises whether digital modes of signing would be considered as
valid when it has been specified that the agreement to be signed and
delivered to the client.Answer: In our
view, the intent of this is to have the client agreed to the terms as stated
by the IA in the agreement and delivering a copy of the same to the clients
knowledge. The modes of acceptance of a valid contract/ agreement should include
the way of digital signing like by way of ‘digital signature’ and having an
email of the same delivered to the registered email ID. We have also seen
lately many Fintech driven companies follow the process of e-signatures
followed by OTP verification where the agreements are integrated and signed
with the phone number or AADHAR number linked phone number, which means that
the client has given his consent, which is also considered as a valid
agreement in certain situations. However, one needs to verify the process
before implementing the same whether the process would be considered as valid
in the eyes of law depending upon the stakes involved.
All these agreements have to be done and executed with the existing
clients by 01 April 2021.
Additional
Compliances:
A report
confirming that all the agreements have been done by the format and per the
requirements of the regulations of IA needs to be submitted to SEBI by 30
June 2021.
Action
points:
The IA
should identify the differences between the existing agreements and the
proposed agreement under the IA regulations and can either opt to enter into
a fresh agreement or make an addendum to the existing agreement, based on his
requirements. However, he will have to confirm that all the clauses required
have been covered and those clauses which are against the interest of the IA
regulations have been omitted.
Fee to
be charged by IA to the client
Important points to
note:
Two methods have been prescribedAUA mode – 2.5% of AUA maximum can be
charged per annum across all services. Assets pertaining to pre-existing
regime of distribution shall be deducted from AUA.Fixed fee – maximum fee that can be charged
under this shall not exceed INR 1.25 lac p.a.The fee pattern agreed shall
remain for 12 months from the date of onboardingIA may charge in advance, however it shall not accept advance fee for
more than 2 quarters.The mode selected in the above can differ from client to client
Additional
Compliances: None
Action points:
The existing fee model will have
to be reworked and the IA will have to revisit on its terms with the client.
Since the family of a client will have to be considered as a single client,
the terms will have to be reconsidered and a thorough diligence of the
existing model and the revised model will have to be done to understand which
model is beneficial between the two client-wise.
Registration
as a Non-individual Investment Advisor
Important points to note:
Limitation prescribed to have not more than 150 clients as an
individual IAAn IA having more than 150 clients as on 30 September 2020, shall Apply for non-individual license
in Form AApplication to be made by 01 April
2020Not onboard further clientsCan continue servicing the existing
clients
Additional
Compliance:
Where the
IA has more than 150 clients as on 30 September 2020, he/she shall file the
details in required format to SEBI by 15 October 2020
Action
points:
Where the
individual IA is nearing the count of 150 clients or has already onboarded
more than 150 clients, should apply for the license in Form A to sustain
continuity.
Maintenance
of records & Audit
Important points to note:
All records of communications with the client shall be preserved by
the IA, i.e. from first communication until the advisory services existThe records shall be preserved for 5 years or until such time till the
dispute, if any, is resolvedAnnual audit shall be conducted for ensuring compliance with the
regulation within 6 months from end of financial year
Additional
Compliances:
Report on adverse
findings, if any, along with action taken, shall be submitted to the SEBI
office within 1 month from audit report and not later than 31 October from
the report of FY 2020-21
Action points:
The IAs are expected
to review all their previous audit reports and set in place their controls
and requirements per the regulations to avoid any adverse observations by the
auditors. It is advisable that the interim audit is conducted to identify the
issues and address them before the final audit.
Risk
profiling and display of details on website
Important points to note:
For the purpose of risk profiling and suitability analysis of
non-individual clients, IA should document the investment policy approved by
such client’s board/ managementIn absence of the same, it should be to the discretion of the IA for
such onboardingIA shall display the relevant details provided in regulation on its
website and all communications
Additional
Compliance: None
Action
points:
The IA shall communicate to all the non-individual clients for their
management approved investment policyThe IA shall identify the standard formats of communication and also
on its website, the required details and make relevant edits thereto to
comply with the regulations
Indian e-commerce and DigiTech
industry have been grown to a new height in the past decade. We have seen
exponential rise in the way people look at business and the modus operandi of
managing a business. From high investments in space and layouts, people have
diverted to high investments and expenditure in technology and logistics. This
is the reason why logistics demand has also equally risen along with
e-commerce. From what we understand that in todays date, anyone can do business
and reach out to the end consumer from anywhere in the world. With this type of
structure since the economic presence is possible for a particular organisation
without having a physical presence in India, it became very important for the
revenue departments to tweak their provisions to get these e-commerce and
DigiTech giants under their purview. With that spirit, we have seen amendment
and changes coming in the Income-tax Act, 1961 and also in Goods & Service
tax Law in India.
Digital Technology (DigiTech)
Income tax
Equalisation levy on online advertisements on digital
platforms
Business may be
conducted in digital domain without regard to national boundaries. This may
dissolve the link between an income-producing activity and a specific location.
To tackle taxation issues in transaction conducted in cyber space, equalisation
levy was imposed. Equalisation levy had come in force from 1 June 2016 under
section 165 if Finance Act 2016. Equalisation levy is required to be charged at
the rate of 6 percent of the amount of consideration for specified services
received or receivable by a non-resident from a person resident in India,
if such amount paid/ payable is more than 1 lac in a particular previous year.
Specified services for this purpose mean online advertisement, any
provision for digital advertising space or any other facility or service for
the purpose of online advertisement and includes any other service as may be
notified by the Central Government in this behalf.
Where a person
resident in India who is carrying on business or profession in India avails the
specified services as mentioned above, then such person shall deduct
equalisation levy from the amount paid or payable to the non-resident in
respect of such specified services at 6 percent on such amount paid/
payable.
Example
The most common
example to consider in this situation is of payments made to Google &
Facebook for online advertisement where such payments are made to Foreign arm
of Google or Foreign arm of Facebook. Since these are purely considered as
advertisement in digital space and would be considered as online advertisement,
an Indian person carrying out business or profession in India and availing
these services of non-resident entities (Google & Facebook) would result to
deduction of equalisation levy of 6 percent.
Grossing up
Now the most
important part in this entire scenario which most of the Indian businesses face
is that such platforms which facilitate online advertisement, take such amounts
in advance and the entire amount is debited by registering your cards/ wallets
online. These platforms do not allow lower payments and therefore deduction and
payment to these platforms becomes almost impossible. In that scenario it has
been categorically stated that where in case the payer has not deducted/ failed
to deduct such levy from the amount paid/ payable, yet the amount is liable to
be paid. In such situation, the amount will have to be grossed up along
with the levy and the liability of the levy will have to be discharged by the
service recipient.
Compliance,
interest and penal provisions
Payment: The equalisation levy collected is required
to be paid by 7th day of the month following the month in which the
equalisation levy has been collected.
Furnishing of
statement: WHAPL shall
furnish a statement electronically in Form No. 1 in respect of all specified
service entered into during the financial year on or before June 30 immediately
following the respective financial year.
Interest: Failure to make the payment would lead to
interest payment at simple interest method of 1 percent for every month (or
part of the month) upto the month of payment.
Penalty: where there has been a failure to deduct
equalisation levy (wholly or partly), penalty equal to equalisation levy is
required to be paid. Further, failure to furnish the statement in Form No. 1 as
specified above would make WHAPL liable for INR 100 per day of default.
Disallowance
of expense u/s 40(a)(ib)
Any
consideration paid or payable to a non-resident for a specified service
(mentioned above) on which equalisation levy is deductible under the provisions
of Chapter VIII of the Finance Act, 2016 and such levy has not been deducted or
after deduction has not been paid on or before the due date of filing the
return of income is disallowable u/s 40(a)(ib) of the Income-tax Act, 1961.
Further, if such equalisation levy has been deducted in any subsequent year or
has been deducted during the previous year but paid after the due date of
filing return of income (u/s 139(1) of the Income-tax Act, 1961), then such
expense shall be allowed as deduction in computing the income of the previous
year in which such levy has actually been paid.
Income tax
benefits
The Income-tax law has been amended to provide for exemption arising
from any income arising from any e-commerce supply or services made or provided
or facilitated, and chargeable to equalization levy as explained above.
Goods & Service tax
GST on RCM basis on import of service
As per Section 2(11) of IGST Act, import of
service means supply of service, where:
Supplier of service is located outside India
Recipient of Service is located in India
The place of supply of service is in India.
Applicability of GST on Import of Service
on Reverse Charge Mechanism (RCM) basis:
In terms of Notification no.10/2017-IT(R) dtd 28.06.2017, one of the notified category on which GST is applicable
under RCM is “any service supplied by any person who is located in a
non-taxable territory to any person other than non-taxable online recipient”.
IGST liability under RCM in case of Import of service has
to be paid in cash/bank. GST ITC to the extent of IGST paid can be availed
and utilized in the same month subject to ITC eligibility.
Therefore,
considering the above, the import of services from in the form of online advertisements
on digital platforms (like Google/ Facebook (Foreign entities)) would be liable
to GST on RCM basis at 18 percent.
E-commerce
Income-tax
Equalisation levy on E-commerce operators
The concept of equalisation levy was
introduced by Finance Act 2016 to tax certain services and recently through its
amendment in the Finance Act 2020, its scope has been enhanced to cover further
transactions. This levy is not through the Income-tax Act, 1961, but through
the Finance Act 2016. Through the amendment made through Finance Act, 2020,
equalisation levy of 2 percent has been imposed on the e-commerce
operators on the amount of consideration received or receivable for e-commerce
supply or services made or providedor facilitated by it
on or after 1st day of April 2020.
Having
understood the above, it becomes very important to understand the scope of
e-commerce supply or service and the scope of e-commerce operators, which is
covered by this amendment and therefore it is important to understand how the
Finance Act 2020 defines these terms, which has been stated as under:
“e-commerce supply or services” means—
(i)
online sale of goods owned by the e-commerce operator; or
(ii)
online provision of services provided by the e-commerce operator; or
(iii)
online sale of goods or provision of services or both, facilitated by
the e-commerce operator; or
(iv)
any combination of activities listed in clause (i), (ii) or clause (iii);]
Therefore, the scope above is
wide to cover the goods owned or facilitated by the
e-commerce operator. Therefore, if an e-commerce operator sells its owned goods
on the e-comm platform, still the same will fall within the purview of the
equalisation levy provisions introduced. However,
it is imperative to understand whether who all would be covered within the
ambit of e-commerce operator as per the amendments made by Finance Act,
2020.
“e-commerce operator” means a non-resident
who owns, operates or manages digital or electronic facility or platform for
online sale of goods or online provision of services or both
From the above, it is
clear that the Finance Act, 2020 intends to cover only
non-residents who own, operates or manages digital or electronic
facility/ platform.
Example: E-commerce
giants who are operating from their home countries or countries outside India,
like certain hotel accommodation reservation platforms, etc. will have to pay
this levy for the bookings made through their portal online.
The difference
between the provisions of equalisation levy in case of online digital
advertisement services and in case of levy on such e-commerce operators is that
in case of former, the deduction has to be done by the service recipient
whereas in case of later, the levy has to be charged by the e-comm operator and
recover from the customer and pay to the Government Treasury.
Exclusions
where the
e-commerce operator has a permanent establishment in India and such e-commerce
supply or services is effectively connected with such permanent establishment
where the
equalisation levy is leviable on online advertisement and related activities
sales, turnover
or gross receipts, of the e-commerce operator from the e-commerce supply or
services made or provided or facilitated is less than INR 20 million during the
financial year.
Compliances, interest & penalty
The equalization levy is to be paid by the non-resident e-commerce
operator quarterly within the following due dates:
Date of ending of the quarter
Due date
30 June
7 July
30
September
7
October
31
December
7
January
31 March
31 March
Interest:
Delayed
payment carries simple interest at the rate of 1 percent for every month
or part of a month
Penalty: Failure to pay equalisation
levy attracts penalty equal to the amount of equalisation levy
Income-tax benefits
The Income-tax
law has been amended to provide for exemption arising from any income arising
from any e-commerce supply or services made or provided or facilitated, and
chargeable to equalization levy as explained above.
Impact analysis
Previously,
the government had introduced the concept of “Significant Economic Benefits” in
the definition of “Business Connection” which specifically aimed towards
getting the non-resident entities operating in India through digital means
under the tax regime. However, the treaties benefitted the respective
non-residents as there was no such provision under the PE articles of the
treaties. Having said that, the Government of India has now introduced this
concept of taxing such e-commerce companies under equalization levy which will
have a significant impact on the non-resident supplying goods and services
digitally. This is so because the definition of ‘e-commerce operators’ and
‘e-commerce supply or services’ are very wide in scope. Therefore, taxpayers
may now need to evaluate various scenarios to understand the implication under
this. For instance, even where the parent company provides any IT services to its
subsidiary company, such provisions will have to be looked into from
applicability perspective.
More
importantly, it is also pertinent to note that supply of goods or service from
one non-resident to other also may attract these provisions (where the is some
nexus with India). It is important to note that the provisions of equalization
levy are not part of Income-tax and therefore benefit of treaty may not be
available in relation to such levy. Additional guidance on this subject is
awaited from the Government on these provisions.
TDS u/s 194-O for E-commerce operators
The Finance Act 2020 has inserted a new section 194-O in the Income-tax Act, 1961 where an e-commerce operator facilitating the sale of goods or provision of service of an e-commerce participant through a digital or electronic facility or platform of such e-commerce operator, then such e-commerce operator shall at the time of payment or credit of amount of sale or service or both to the e-commerce participant, whichever is earlier, deduct tax at 1 percent of the gross amount of such sales or service or both.
Therefore, in
order to understand the applicability of the provisions of this section, it is
ideal to first understand as to who would be considered as an e-commerce
operator and who would be considered as an e-commerce participant:
“e-commerce operator” means a
person who owns, operates or manages digital or electronic facility or platform
for electronic commerce;
“e-commerce participant” means a person
resident in India selling goods or providing services or both, including
digital products, through digital or electronic facility or platform for electronic
commerce;
“electronic commerce” means the
supply of goods or services or both, including digital products, over digital
or electronic network;
Therefore, any person resident in
India sells goods or providing services or both (including digital products)
through digital or electronic facility or platform, then such person would be
eligible to receive such receipts from sales occurred through such platform or
electronic facility after deduction of 1 percent as TDS by such operator who
owns, operates or manages such digital or electronic facility. This amount so
deducted will have to be deposited by such e-comm operator with the Credit of
Central Government and the e-comm participant will claim credit of the same in
its ITR.
Tax not deductible
Tax is not deductible under the
said section if the e-comm participant is an Individual or HUF and the gross
amount of such sale of goods/ services through the said e-comm operator during
the previous year does not exceed Rs. 5 Lac and such e-comm participant has
furnished his PAN or Aadhar to the e-comm operator.
Therefore, it is important to
note that:
An e-comm operator u/s 194-O can be a resident or a
non-resident
An e-comm participant u/s 194-O has to be a resident person
There can be a situation where e-comm operator will have to
comply with both Equalization Levy as well as provisions of deductions u/s
194-O
The provisions of this section are so vide that it may also
include operators selling financial products on the digital platform for eg.
Mutual fund distributors, insurance policy aggregators, etc.
Board may have to come out with a clarification where it lays
down the inclusions and exclusions of this provision to remove difficulties
Goods & Service tax
TCS for E-commerce operators
Electronic Commerce has
been defined in Sec. 2(44) of the CGST Act, 2017 to mean the supply of goods or
services or both, including digital products over digital or electronic
network.
Electronic Commerce Operator
has been defined in Sec. 2(45) of the CGST Act, 2017 to mean any person who
owns, operates or manages digital or electronic facility or platform for
electronic commerce.
As per Section 24(x) of the CGST
Act, 2017 the benefit of threshold exemption is not available to e-commerce
operators and they are liable to be registered irrespective of the value of
supply made by them.
Tax collections
The e-commerce operator is required
to collect an amount at the rate of one percent (0.5% CGST + 0.5% SGST) of the
net value of taxable supplies made through it, where the consideration with
respect to such supplies is to be collected by such operator. The amount so
collected is called as Tax Collection at Source (TCS). An e-commerce company is
required to collect tax only on the net value of taxable supplies. In other
words, the value of supplies which are returned are adjusted in the aggregate
value of taxable supplies.
Credit of TCS
The amount of TCS paid by the
operator to the government will be reflected in the GST returns of the actual
registered supplier (on whose account such collection has been made) on the
basis of the statement filed by the e-comm operator. The same can be used at
the time of discharge of tax liability in respect of the supplies made by the
actual supplier.
Disclaimer: The views expressed in this note are the personal
view of the writer and should not be considered as an opinion by any manner.
For deciding any implication, it is always advised that you approach a
consultant and obtain a professional advice.
MSME stands for Micro, Small and
Medium Enterprises. In a developing country like India, MSME industries are the
backbone of the economy.
The MSME sector contributes to 45% of
India’s Total Industrial Employment, 50% of India’s Total Exports and 95% of
all industrial units of the country and more than 6000 types of products are
manufactured in these industries. These industries are also known as
small-scale industries or SSI’s.
Statutory
Provision related to MSMEs
With a view to boost the development of small
enterprises in the country, the Government of India has enacted “Micro Small
and Medium Enterprises Development (MSMED) Act, 2006 and set up a separate
Ministry of Micro Small and Medium Enterprises, which came into force w.e.f.
02.10.2006.
Classification of
MSMEs
Earlier
scenario (till 13th May 2020): Classification of MSMEs have been done based on
investments in plant and machineries.
MSME are classified
into two categories:
Manufacturing
enterprise; and
Service
enterprise.
Classification
Micro
Small
Medium
Manufacturing Enterprises
25 lakhs
less than 50 lakhs
less than 1 cr.
Service Enterprises
less than 10 lakhs
less than 20 lakhs
less than 50 lakhs
Current
Scenario (from 14th May 2020): Classification of MSMEs have been done based on
investments in plant and machineries and Turnover and now there is no
distinction between manufacturing enterprise and service enterprises.
Classification
Micro
Small
Medium
Manufacturing &
Services enterprises
Investment less
than 1 cr.
and
Turnover less than 5 cr.
Investment less
than 10 cr.
and
Turnover less than 50 cr.
Investment less
than 20 cr.
and
Turnover less than 100 cr.
Registration
Process
The
entire registration process for MSME have been made very simple and
self-declaration basis. Applicant should visit www.udyogaadhaar.gov.in and
following information should be kept ready before filing of registration e-form:
–
Mobile
No. & valid E-Mail ID of applicant.
Aadhar
Number & PAN number.
Office
Address.
Bank
account details of applicant
Investment
in Plant & Machinery above information will be helpful in easy filling of
online e-form and after submission of form, Udhyog Aadhar Memorandum (UAM)
certificate will be generated.
Pros of being
MSMEs
50% Subsidy on Patent
Registration if MSMEs have created
something new (Product/models etc.)
MSMEs
will get collateral free loans for running their businesses.
MSMEs
will get exemption of interest on Overdraft if they have good credit history
and have good relations with their banks.
Central
government has reserved the purchase of more than 350 products exclusively from
this sector.
The
government helps MSME to upgrade their equipment through latest technology by
helping them get low-interest loans from banks.
MSMEs
will get protection against payments from buyer (i.e. buyer will pay within 45
days) irrespective of agreement between them.
Cons of being
MSMEs
MSME have more
difficulties to find funding as they do not have the financial power that large
companies have
It may be difficult to
reach many customers and earn their trust.
SMEs
will have enormous impediments to benefit from the economy of scale, which will
cause costs to be higher in certain types of business.
d. Despite being more flexible in dealing with
changes, the lack of financial capability can cause major problems for an SME
if it is forced to endure long periods of crisis.
MSME
have low bargaining power with suppliers and customers.
MSMEs
have limited Access to skilled personnel.
Relief provided to MSMEs due to
Covid-19 pandemic
Collateral-free
automatic loan which have 4 years tenor with moratorium of 12 months on
principal repayment.
Subordinate
Debt for Stressed MSMEs to be provided.
Equity
infusion for MSMEs with growth potential through fund of funds model.
Definition
of MSME to be revised to increase investment and turnover limit to expand the
coverage (already discuss in classification of MSME).
Conclusion
To conclude, the MSME sector of India is today at the
gateway of global growth on the strength of competitive and quality product
range. However, facilitation from the Government is required to minimize the
transaction costs of technology upgradation, market penetration, modernization
of infrastructure etc. The MSME sector has often been termed the ‘engine of
growth’ for developing economies. We begin with an overview of this sector in
India and look at some recent trends which highlight the development and
significance of this sector vis-à-vis the Indian economy. The factors like
export promotion, reservation policy, tooling& technology, manpower
training, technology and managerial skills gave enormous opportunities for
growth and better performance in the economy. It is concluded that MSMEs in the
Indian Economy have shown tremendous growth and excellent performance with the
contribution of policy framework and efficient steps which had been taken by
the government time to time for the growth and development of the MSMEs.
Physical verification of inventory is the
responsibility of management of the entity. Management is required to establish
procedures under which inventory is physically counted at least once a year to ensure
existence, condition, and support valuation of inventory.
The Companies (Auditor’s Report) Order, 2016 (CARO
2016) also requires auditors to comment on “Whether physical verification of
inventory has been conducted at reasonable intervals by the management and
whether any material discrepancies were noticed and if so, whether they have
been properly dealt with in the books of account”.
SA 500, “Audit Evidence” prescribes that the objective
of the auditor is to design and perform audit procedures in such a way as to
enable the auditor to obtain sufficient appropriate audit evidence to be able
to draw reasonable conclusions on which to base the auditor’s opinion. When
inventory is material to the financial statements, SA 501, “Audit Evidence –
Specific Considerations for Selected Items” requires that the auditor shall
obtain sufficient appropriate audit evidence regarding the existence and condition
of inventory by:
(a) Attendance at physical inventory
counting, unless impracticable to:
Evaluate management’s instructions and procedures for
physical inventory counting.
Observe the management’s count procedures.
Inspect the inventory.
Perform test counts; and
(b) Performing audit procedures over the entity’s
final inventory records to determine whether they accurately reflect actual
inventory count results.
In some cases, attendance at physical inventory
counting may be impracticable. This may be due to factors such as the nature
and location of the inventory, e.g. where inventory is held in a location that
may pose threats to the safety of the auditor.
Auditor’s
consideration in various scenarios
The COVID-19 outbreak could create several potential
challenges for management of an entity to conduct physical inventory counting
and for the auditors to attend these counts. With scenarios like lockdown,
travel restrictions etc. as imposed by Government of India, physical inventory
counting would be challenging and in some cases it would be impracticable.
Possible challenges in this regard are discussed below.
Management
unable to conduct physical inventory counting as on the date of financial
statements: Due to Government imposed restrictions, inventory
is held in locations which are closed due to Government imposed lockdown. In
such a scenario, management should inform the auditors and those charged with
governance the reasons of not conducting the inventory counting.
Physical
inventory counting conducted by management at a date other than the date of
financial statements: If auditor decides to observe physical inventory
counting at the date other than the date of financial statement than he needs
to perform roll-back and roll-forward procedures, it is viable option where the
entity has continuous inventory counting system.
Auditor has to ensure that inventory counting being
performed reflects the appropriate assessment of the physical condition of
inventory. Auditor should have adequate controls and should exercise
professional skepticism while observing inventory count.
Alternative
audit procedures where it is impracticable for auditors to attend physical
inventory counting: If attendance at physical inventory counting is
impracticable, the auditor shall perform alternative audit procedures to obtain
sufficient appropriate audit evidence regarding the existence and condition of
inventory. If it is not possible to do so, the auditor shall modify the opinion
in the auditor’s report.
Following are the examples of alternate audit
procedures adopted by auditor for verification of Inventory:
Using the work of Internal Auditor (SA 610).
Engaging other Chartered Accountant(s) to attend physical verification.
Use of technology in inventory counting (Virtual attendance i.e. video
call)
Inventory held by a third party: Where the entity has inventory under the custody and control of a third
party, it may be possible, to place reliance on confirmation received from that
third party regarding the quantities and condition of the inventory held on
behalf of the entity.
In such circumstance’s auditor would need to exercise professional
skepticism and perform careful evaluation of such confirmation since auditors
themselves have not been able to attend the physical inventory counting. It
would be preferable that such confirmations are obtained by the direct confirmation
requests addressed to the auditor directly without the management being
involved in the process
Inventory in transit / cut-off
procedures: Due to the lockdown
situation, it might be possible that inventory purchased or sold might be locked
up in transit. Auditors should obtain suitable audit evidence regarding the
location and condition of the inventory including documentary records about
purchases/sales. Appropriate cut-off procedures need to be employed to ensure
appropriate quantities are considered in the inventory.
Conclusion
The primary responsibility of the auditor is to physically attend the inventory counting either at/ prior to/ post the balance sheet date. But when situation like Covid-19 arise than it is impracticable for auditor to observe physical inventory counting, in this situation auditor should performed alternative procedures for verification of physical inventory (already discussed in above paragraphs), subject to alternative audit procedure should provide sufficient and appropriate audit evidence to conclude that inventory is free from material misstatement.
However,
if it is not possible to perform alternative audit procedures or to obtain
sufficient appropriate audit evidence in relation to material inventory
balances, in this case auditor should modify the opinion in the auditor’s
report in accordance with SA 705(Revised).
This article is based on guidance note issued by Auditing and Assurance
Standard Board of ICAI.
FA 2020 has introduced lower rate of deduction @ 2% instead of 10%, under section 194J, if the service is in the nature of:
For the part of royalty, there should be no confusion to understand as it has been categorically included only for one segment. However, when one tries to interpret and differentiate the inclusions under professional service or technical service, they will refer to the definition under the act, which has been reproduced under:
professional service
isservices rendered by a person in the course of carrying on legal,
medical, engineering or architectural profession or the profession of
accountancy or technical consultancy or interior decoration or
advertising or such other profession as is notified by the Board for the
purposes of section 44AA or of this section
fees for technical services
means any consideration (including any lump sum consideration) for the
rendering of any managerial, technical or consultancy services (including the
provision of services of technical or other personnel) but does not include
consideration for any construction, assembly, mining or like project undertaken
by the recipient or consideration which would be income of the recipient
chargeable under the head “Salaries”.
So as per the definition of professional service, consultancy which is in the nature of technical consultancy gets covered there and tax should be deducted at 10% on the same, however, the definition of fees for technical service includes consultancy (including the provision of services of technical or other personnel). There has been no explanation provided to differentiate between what would fall under “technical consultancy” and what would be considered as consultancy under the definition of “fees for technical services” (FTS). Therefore, having said that, a person would have to be technically and academically prepare and decide if his service is in nature of FTS by concluding on the fact that the service would be only managerial, technical or consultancy in nature, and does not fall within the ambit of “technical consultancy” to claim the benefit of lower rate of TDS. Having understood from the various case laws (referred below), there is a very thin line to differentiate between these two and even if one does, he will have to convince the tax authorities (if called for) to substantiate that the service is not in the nature of professional service, because professional service is very widely defined.
Some reference case laws:
Delhi ITAT in Le Passage to India Tours &
Travel (P) Ltd. [2014] 369 ITR 109
E-bay International AG vs ADIT (2012) 25
taxmann.com 500 (Mum)
Endemol South Africa (Proprietary) Ltd. vs DCIT
[2018] 98 taxmann.com 227 (Mum ITAT)
Skycell Communication Ltd. vs DCIT [2001] 251
ITR 53
Understanding the Intent:
In order to get some clarity on this
amendment, it is important that we understand the intent behind having this
amendment. From the memorandum to Finance Bill 2020, we understand that this
amendment was brought in order to reduce the litigations where a particular
service falls within the definition of 194J (where 10% TDS rate was applicable)
or 194C (where 2% rate is applicable). To our understanding, the litigations
which have been referred to in memorandum would be around a particular work has
been argued to either fall under the definition of ‘work’ for section 194C of
the Act or under the definition of FTS under section 194J of the Act. This
would for instance include services like an AMC service provided by a technical
company which would undertake to maintain the entire server system or computer
systems of an organisation, whether the same would fall under the definition of
work or technical service, has been a point of argument in this instance.
Similarly there have been other examples, inference can be drawn from the same
to take guidance.
Conclusion
Therefore, while deciding the deductibility
of a rate, the above intent should be considered and decided about the rate of
deduction. However, considering that the interpretation has a very thin line as
explained above and there have already been so many litigations, this intent of
reducing the litigations might turn the other way. CBDT should therefore come
out clarifying the background and earmarking the list of services which would
fall under 10 percent deduction and 2 percent deduction for section 194J of the
Act.
Valuation u/r 11UA (2)(b) of
Income-tax Rules, 1962 (‘the Rules’) by a Chartered Accountant removed
The valuation rules specified
under Rule 11U, Rule 11UA, Rule 11UAA and Rule 11UB for various provisions
under the Income-tax Act, 1961 (‘the Act’) cover valuation options in case of various
assets including equity shares and other securities. These rules specify the
methodology to be adopted at the time of arriving at fair market value in
different scenarios. Among the various provisions of the Act, the provision u/s
56(2)(viib) states that where a company other than a company in which public
are substantially interested, issue shares at more than fair market value to a
resident person, then the differential value between such issue price and fair
market value will be considered as income under such provision of the Act.
The methodology to be adopted for
the purpose of valuation under this section has been specifically stated under
rule 11UA(2) separately for equity shares and shares other than equity shares.
Sub clause (b) under this sub-rule states that the fair market value of
unquoted shares and securities other than equity shares in a company which are
not listed in any recognized stock exchange shall be estimated to be price it
would fetch if sold in the open market on the valuation date and the assessee
may obtain a report from a merchant banker or a Chartered Accountant in respect
of which such valuation. This has been amended vide notification dated 24 May
2018 which states as follows:
‘2. In the Income-tax Rules, 1962 (hereinafter referred to as the
principal rules), in rule 11U, clause (a) shall be omitted.
3. In the principal rules, in rule 11UA, in sub-rule (2), in clause
(b), the words “or an accountant” shall be omitted.’
The word accountant has been
omitted under Rule 11U and Rule 11UA(2)(b) which implies that for the purpose
of section 56(2)(viib), in case of shares other than equity shares, the
valuation certified by only merchant bankers will be valid.
Thin
Capitalisation Rules under the Income-tax provisions (section 94B of Income-tax
Act, 1961)
‘Thin Capitalisation’ is a
situation where an entity is financed at a relatively high level of debt
compared to equity. Some multinational companies engage in aggressive tax
planning techniques such as placing higher levels of third party debt in high
tax countries, using intragroup loans to generate interest deductions in excess
of their actual third party interest expense, using third party or intragroup
financing to fund the generation of tax exempt income.
In order to curb such structuring
by the multinational group Companies having their presence through
subsidiaries/ associate companies or permanent establishments in India, the
Finance Act 2017 introduced a new section 94B under the Income-tax Act, 1961
(‘the Act’), in line with the recommendations of OECD BEPS Action Plan 4, from
the FY 2017-18, to provide that interest expenses claimed by an entity to its
associated enterprises shall be restricted to:
– 30% of its earnings
before interest, taxes, depreciation and amortization (EBITDA) (or)
– Interest paid or payable
to associated enterprise
whichever is less
The provision shall be applicable
to an Indian company, or a permanent establishment of a foreign company being
the borrower who pays interest in respect of any form of debt issued to a
non-resident or to a permanent establishment of a non-resident and who is an
‘associated enterprise’ of the borrower. Further, the debt shall be deemed to be
treated as issued by an associated enterprise where it provides an implicit or
explicit guarantee to the lender or deposits a corresponding and matching
amount of funds with the lender.
Relaxations Provided
1. A threshold limit of
interest expenditure of INR 1 crore (INR 10 million) is provided to carve-out
entities which have a low level of interest expense on the borrowings from
their non-resident associated enterprises.
2. Further, to reduce the
impact of earnings volatility on the ability of an entity to deduct interest
expense, the interest expense which is disallowed can be carried forward up to
8 immediately succeeding tax years.
3. Moreover, taxpayers
engaged in the business of banking or insurance are excluded from the scope of
this provision keeping in view their specific sector-related features.
In addition to the above, the
provisions of GAAR will have to be simultaneously considered at the time of
considering the transfer pricing implications on the transactions.
Frequently asked questions (FAQs)
What
is the definition of EBITDA?
EBITDA has not been
defined in section or in the memorandum, however considering the language of
the section, it can be interpreted to mean accounting EBITDA.
Whether
transfer pricing adjustment and other disallowances will be considered for the
purpose of determination of EBITDA u/s 94B(2)? i.e. Tax EBITDA v/s. Accounting
EBITDA?
The language of the section reads as
‘earnings before interest, taxes, depreciation and amortisation’ thereby giving
room for adjusting only interest, taxes, depreciation and amortisation to the
net earning and ruling out other disallowances, if any. However, if the
transfer pricing adjustment has been made and if it falls within the purview of
secondary adjustment (i.e. more than 1 crore) which will be accounted as
receivable from the associated enterprise (u/s 92CE of the Income-tax Act,
1961), then the same may be considered for the purpose of calculating EBITDA.
Whether
interest paid to non-resident AE only to be considered for the purpose of
disallowance under section 94B?
As mentioned in the below email, the
provision shall be applicable to an Indian company, or a permanent
establishment of a foreign company being the borrower who pays interest in
respect of any form of debt issued to a non-resident or to a permanent
establishment of a non-resident and who is an ‘associated enterprise’ of the
borrower. Further, the debt shall be deemed to be treated as
issued by an associated enterprise where it provides an implicit or explicit
guarantee to the lender or deposits a corresponding and matching amount of
funds with the lender. Therefore, the limit of INR 10 million of
borrowing cost mentioned under provision of section 94B will apply to the
borrowings of the nature mentioned above.
Would
hedging or swap cost be considered for this purpose or would the interest paid
to AE be considered for this purpose?
As per section 94B of the Act, ‘… where
an Indian company, or a permanent establishment of a foreign company in India,
being the borrower, incurs any expenditure by way of interest or of
similar nature exceeding one crore rupees which is deductible in
computing income chargeable under the head “profit and gains of business or
profession” in respect of any debt issued by a non-resident,
being an associated enterprise of such borrower, the interest shall not
be deductible in computation of income under the said head to the
extent that it arises from excess interest, as specified in sub section (2)’
Sub-section (2) states that ‘For the
purpose of sub-section (1), the excess interest shall mean an amount of total
interest paid or payable in excess of thirty per cent of earnings before
interest, taxes, depreciation and amortisation of the borrower in the previous
year or interest paid or payable to associated enterprises for that previous
year, whichever is less.’
Therefore, a consolidated reading of the
above would mean that for the purpose of calculation of initial limit of INR 10
million for the trigger of this section 94B, interest or sums of similar
nature in respect of any debt issued is considered, whereas for the purpose
of quantifying the amount of disallowance, only interest in excess of 30
percent of EBITDA is disallowed/ adjusted. However, it is pertinent to note
that the word interest has been separately defined in the Act u/s 2(28B) as ‘”interest”
means interest payable in any manner in respect of any moneys borrowed or debt
incurred (including a deposit, claim or other similar right or obligation) and
includes any service fee or other charge in respect of the moneys borrowed or
debt incurred or in respect of any credit facility which has not been
utilised”’
To conclude, even if one excludes the swap cost and other charges
while interpreting section 94B of the Act, it will be included in accordance
with the definition of interest under the Act.
Back in 2006, when I entered in
CA profession, we were thought that CAs are expected to be perfect in their
accounting skills. Accounting was considered to be all about accounting
standards, be it IGAAP or IFRS, and about the disclosure requirements along with
Balance Sheet, Profit & Loss A/c and Cash Flow Statement. While we were
trying to cope up with the international standards during all these years,
there were drastic changes globally peoples approach in carrying out their
business. Ideally, CAs role is directly related to the business environment of
the nation. Which is to say that since the CAs are accountable for the
businesses they audit or advice, they are also expected to understand the
environment in which these businesses operate.
While the business owners were
adapting to the new technologies and the latest modes of carrying out their
business which included digitisation of the transactions, payments,
communication, etc. CA curriculum in India have always been kept traditional.
All these years since the independence, where the business developments have
happened in a phased manner, in the last 5 years there has been complete change
in the way business is looked at in India. People have been shifted to digital
means to transact, be it marketing, be it sales, be it payments, etc. Having
understood this, one has to realise the requirement for a complete shift in the
curriculum of CA and the approach which should be deliberated for the CA
students, from the old school to the Digital Era.
Why is this so important?
Ofcourse, this would be the first question which anyone would get in their mind
while starting this topic. We have always seen in Indian Bollywood movies that
the cops arrive at the scene after the incidence is occurred and the mischief
has happened. This culture remains throughout all verticals in India, including
the professional environment. There was a time when the E-commerce entered the
Indian economy, it was a welcome move where trading became of products was
moved from showrooms to cellphones, ticket booking was moved from windows to
mobile apps, etc. The Indian systems have, after deliberating on the subject
have lately comforted themselves with the way E-commerce works, excluding the bureaucrats,
who are still struggling to understanding the modus operandi, due to lack of
training, again its because of their curriculum which still remains old school.
And now they have seen the shift again, a new technology has stepped in the
economy, BLOCKCHAIN. Blockchain, having its own advantages, has its own way of
functioning. Professionals in each field which include accountancy, technology,
marketing, designing, and so on, need to understand this technology. One of its
most critical and important changes which has even impacted the economy which
functions with blockchain technology was introduction of CRYPTOCURRENCY.
Having understood that the
cryptos have a huge impact on the economy of any nation, it is also important
that the nation should understand the pros and corns both of this technology.
The
Finance Act, 2016 introduced Equalisation Levy with effect from 01-06-2016.This
levy is charged at the rate of 6% from the consideration paid or payable to a
non-resident person for the online advertisement services. The Finance Bill,
2020, as passed by the Lok Sabha, has extended the scope of Equalisation Levy
to cover within its scope the consideration received or receivable for
e-commerce supply or services made or facilitated by an e-commerce operator.
Equalization
Levy
When to be charged?
From
01-04-2020, the equalisation levy shall be charged at the rate of 2%
from the consideration received or receivable by an e-commerce operator from
e-commerce supply of goods or services made or provided or facilitated by it to
the following persons:
A
person who is resident in India;
non-resident
in ‘specified circumstances
who buys such
goods or services or both using internet protocol address located in India.
E-commerce operator means a non-resident who
owns, operates or manages digital or electronic facility or platform for online
sale of goods or online provision of services or both
E-commerce supply or
services
means:
Online sale of goods
owned by the e-commerce operator;
Online provision of
services provided by the e-commerce operator;
Online sale of goods or
provision of services or both facilitated by the e-commerce operator; or
Any combination of above
activities
specified circumstances means
sale of
advertisement, which targets a customer, who is resident in India or a customer
who accesses the advertisement though internet protocol address located in
India; and
sale of data,
collected from a person who is resident in India or from a person who uses
internet protocol address located in India.
When
not to be charged?
where the
e-commerce operator has a permanent establishment in India and such e-commerce
supply or services is effectively connected with such permanent establishment
where the equalisation levy is leviable on online
advertisement and related activities
sales, turnover or gross receipts, of the
e-commerce operator from the e-commerce supply or services made or provided or
facilitated is less than INR 20 million during the financial year.
Who
needs to comply with such compliance?
The equalization levy is
to be paid by the non-resident e-commerce operator quarterly within the
following due dates:
Date of ending of the quarter
Due date
30 June
7 July
30 September
7 October
31 December
7 January
31 March
31 March
Consequences
of non-compliance?
Interest: Delayed payment carries simple interest at the rate
of 1 percent for every month or part of a month
Penalty: Failure to pay equalisation levy attracts penalty
equal to the amount of equalisation levy
Whether
income tax benefits available?
The Income-tax law has been amended
to provide for exemption arising from any income arising from any e-commerce
supply or services made or provided or facilitated, and chargeable to
equalization levy as explained above.
What
would be the impact?
Previously, the government had
introduced the concept of “Significant Economic Benefits” in the definition of
“Business Connection” which specifically aimed towards getting the non-resident
entities operating in India through digital means under the tax regime.
However, the treaties benefitted the respective non-residents as there was no
such provision under the PE articles of the treaties. Having said that, the
Government of India has now introduced this concept of taxing such e-commerce
companies under equalization levy which will have a significant impact on the
non-resident supplying goods and services digitally. This is so because the
definition of ‘e-commerce operators’ and ‘e-commerce supply or services’ are
very wide in scope. Therefore, taxpayers may now need to evaluate various
scenarios to understand the implication under this. For instance, even where
the parent company provides any IT services to its subsidiary company, such
provisions will have to be looked into from applicability perspective.
More importantly, it is also
pertinent to note that supply of goods or service from one non-resident to
other also may attract these provisions (where the is some nexus with India).
It is important to note that the provisions of equalization levy are not part
of Income-tax and therefore benefit of treaty may not be available in relation
to such levy. Additional guidance on this subject is awaited from the
Government on these provisions.
Understanding
the Taxation and other related issues related to Bitcoins (Cryptocurrencies)
Crypto Currencies are decentralized virtual or digital currencies
which are neither issued by any Central Bank nor are backed up by any
Government. These currencies are quite popular because they provide secure and
anonymous way of remittance of money and entering into a transaction. These
currencies are acceptable as a mode of payment by some entities. The Honourable
Finance Minister in the Budget speech of 2018 mentioned that Cryptocurrency is
not legal tender in India but the government will explore its underlying
technology, called blockchain, to usher in the digital economy, finance
minister Arun Jaitley said on Thursday while presenting Union Budget 2018. The
government will take measures to eliminate use of crypto-assets in financing
illegitimate activities or as part of the payment system, the finance minister
said. The focus, however, would be on the distributed ledger system or
blockchain technology that allows organization to record and authenticate
transactions without the need of intermediaries.
Cryptocurrency
is digital money. It is considered to be more secure that the real money.
Cryptocurrency uses something called cryptography to secure its transactions.
Cryptography, to put it in simple words is a method of converting
comprehensible data into complicated codes which are tough to crack.
Cryptocurrencies are classified as a subset of digital currencies, alternative
currencies and virtual currencies.
Bitcoin was the first ever cryptocurrency created in the year
2009. Subsequently, there has been a rapid increase in the number of
cryptocurrencies that have been created some of which are Litecoin, Ethereum,
Zcash, Dash, Ripple etc.
Bitcoins, in India, have slowly started gaining popularity,
given the efforts of the government to move towards a cashless economy.
However, one should know that bitcoins, as of today, are not centrally
administered or regulated by any specific body like the RBI which administers
physical currency in India. In fact, peer-to-peer transactions with bitcoins
are managed using something known as the blockchain technology which serves as
a public ledger for all transactions.
Source
of generation of Bitcoins and its taxability
Considering that there is no specific mention in the Income-tax
regarding taxability of cryptocurrencies, one needs to understand the possible
views which the income tax authorities might take in order to get the income
generated from such transactions within the gamut of taxation in India.
Bitcoins taxability may be looked into from the following
perspective:-
1. Mining
Mining is an activity where an individual (called
the “miner”) uses his computer ability to crack computationally difficult
puzzles. The process of cracking such puzzles which are integral to the
blockchain technology, help in maintaining them. As a reward for this, the
miner gets new bitcoins which is nothing but creation of a bitcoin or mining.
Bitcoins created by mining may be considered as self-generated
capital assets. Subsequent sale of such bitcoins would, in the ordinary course,
may give rise to capital gains. However, one may note that the cost of
acquisition of a bitcoin cannot be determined as it is a self-generated asset.
Further, it also not fall under the provisions of Section 55 of the Income-tax
Act, 1961 which specifically defines the cost of acquisition of certain
self-generated assets.
Therefore, the capital gains computation mechanism fails
following the Supreme Court decision in the case of B.C. Srinivasa Shetty.
Hence, no capital gains tax would arise on mining of bitcoins.
This position would hold till such time the government thinks of
coming up with an amendment to Section 55 of the Act and considering that the
tax authorities consider the income from Bitcoin as capital gain.
However, it is probable and there are high possibilities that
the income-tax authorities may consider income from Bitcoins as ‘income from
other sources’. If the same is considered under ‘income from other sources’, it
will be taxed at the rate of 30% (if it exceeds 10 lacs) instead of 20% in case
of Long term capital gains and the benefit of indexation would not be
available.
2. Bitcoins held as stock-in-trade
Bitcoins held as stock-in-trade and which are transferred in
exchange of acceptable negotiable instrument in India would give rise to income
from business and accordingly, the profits arising out of such business would
be subject to tax as per the individual slab rates.
3. Bitcoins being received as consideration on sale of goods and services
In
case of receiving bitcoin against sale of goods/ services, the bitcoins so
received should be treated at par with receiving of money. Such sale of goods/
services should be taxed under income from business/ profession.
4. Bitcoins held as an investment being transferred in exchange for acceptable Negotiable Instrument
This might have two views. One where Bitcoins are
considered as capital assets then in that case the real currency realised over
and above the cost of bitcoin may be treated as capital gain long term capital
gain/ short term capital gain based on the period of holding. However, if the
income-tax authority do not consider bitcoin as capital asset, then the
provision of capital gain may not be applicable and the same may be taxed under
“income from other sources”.
While this article covers the taxability of Bitcoins, the tax
treatment on transacting with other similar cryptocurrencies would also be
similar to that in the case of Bitcoins considering that they operate in
similar way.
