As Narendra Modi government gets set to crack GST whip on tax evaders, India Inc voices concern

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According to Section 132 of the Central GST Bill cleared by the Lok Sabha recently, the taxman can also proceed against anyone for wrongly availing input tax credits.

Many functionaries from corporate India and tax experts have voiced concerns over the government’s plan to give unprecedented teeth to the country’s indirect tax administrators by making tax evasion above `5 crore a “cognizable and non-bailable offence” in the upcoming Goods and Services Tax (GST) regime. According to Section 132 of the Central GST Bill cleared by the Lok Sabha recently, the taxman can also proceed against anyone for wrongly availing input tax credits or refunds above the same threshold, treating it as a cognizable and non-bailable offence, where the police have the authority to arrest the person concerned without warrant.

While non-remittance of tax deducted at source could lead to non-bailable warrant under the Income-Tax Act, this has been sparingly used – one recent instance was that of the Bengaluru High Court denying a request of the I-T department to issue a non-bailable warrant against the beleaguered businessman Vijay Mallya.  The punitive provisions under indirect tax laws have, however, been less biting.

The service tax department had invited the Delhi high court’s ire last September for arresting a senior executive of travel portal MakeMyTrip for failing to deposit tax after collecting it from those who booked hotel room nights via the portal. Disturbed over the fact that the arrest took place without even issuing a show cause notice to the firm and giving it an opportunity to defend itself, the court awarded costs to the travel portal and asked the taxman to refund the service tax collected after the arrest. The tax department went in appeal against the court’s decision and the matter is now before the Supreme Court.

“It may be reasonable to make “collection of tax but non-payment to government’ a non-bailable offence, as there is very little room here for interpretation in such case. But availing tax credits through wrong invoices or obtaining higher-than-admissible refunds are subject to technical interpretations in the early days of GST and it would be extremely stringent to make these non-bailable offences,” Bipin Sapra, Indirect Tax partner at EY said. Echoing the view, Anita Rastogi, partner-indirect tax, PwC India said the country’s indirect laws have never had such tough provisions against tax evasion.

Section 132 of the CGST Bill also spells out the punishment for tax evasions above Rs.1 crore: if the amount evaded exceeds Rs. 5 crore, imprisonment up to five years is possible along with fine, Rs. 2-5 crore evasion could lead to imprisonment extending to three years and fine, Rs.1-2 crore evasion could invite up to 1-year jail term and fine.

Source: http://www.financialexpress.com/economy/as-narendra-modi-government-gets-set-to-crack-gst-whip-on-tax-evaders-india-inc-voices-concern/613908/

Tax avoidance rules: POEM norms to take effect from April, 2017

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Confirming that India’s so-called POEM regulations — which are meant to ascertain the residential status of companies and use it to curb tax avoidance — will take effect from April 1, the Central Board of Direct Taxes (CBDT) on Tuesday issued the final guidelines in this regard. While the draft Place of Effective Management rules issued in December 2015 had caused a stir in the industry for being out of sync with transnational business realities (under pressure from businesses, Budget FY17 deferred POEM activation by one year), the new draft narrowed the scope of the tool and sought to allay most concerns of the investor community about its potential improper use/misuse.

The CBDT has made it clear that POEM’s intent is  not to target Indian multinationals, which have legitimate business activities outside India, but to pin down shell companies  and firms created for retaining income outside India although the real control is exercised from India.

In what would reduce the chances of an assessing officer invoking the POEM provision without proper evaluation, the new rules state that she will need approval of a three-member collegium of her senior officers for triggering the test. Also, it has now been clarified that POEM guidelines won’t apply to companies having turnover or gross receipts of Rs 50 crore or less in a financial year. The regulations, the CBDT said, would apply for assessment year 2017-18 (FY17) and further.

“The guiding principles issued by the CBDT seeks to address some of the practical issues which could arise in application of the POEM test. The guideline strikes the right balance between providing certainty to taxpayers as well as ensuring that offshore companies with no substance or activities, which are controlled from India, are subject to Indian tax jurisdiction,” Rajendra Nayak, tax partner, EY India, said.

The POEM principle — which has found traction with tax authorities in capital-exporting countries and the OECD — was included in India’s I-T Act via the Finance Act, 2015 with the express purpose of discouraging the creation of shell companies with Indian shareholders in foreign jurisdictions to avoid tax residency in India. If a company is treated as resident in India, its worldwide income is taxable here, while only the India-sourced income of foreign companies is taxed. Although the tax rate on foreign companies is higher (40% versus the marginal rate of 30% for domestic firms), subjecting worldwide income to taxation could potentially increase the tax liability of many MNCs with Indian stakeholders. In fact, the real reason behind POEM is the tax department’s intent to curb corporate structures allowing passive foreign income — royalty, dividend, capital gains, interest income and the like — of firms incorporated in foreign countries with Indian ownership, escaping the tax net here. Tuesday’s draft, analysts said, gives further guidance on “active business outside India” test especially with respect to determination of passive income, total asset base, number of employees and payroll expenses in India and outside.

The new norms provide that if board of directors delegates authority to make key management decision/commercial decision to the promoter or strategic/legal/ financial advisors, the place of effective management will be the place where such persons makes those decisions.

Rakesh Bhargava, director, Taxmann, said: “In the final guidelines the CBDT has provided adequate safeguards to ensure that POEM guidelines does not become an oppressive tool in the hands of revenue to harass genuine assessees. Now, assessing officer can ascertain the residential status of foreign company on the basis of POEM guidelines only after taking two-stage approval; first approval is required before initiating any proceedings and second approval is needed before giving any final finding on residential status of foreign company.”

Giving additional clarifications, the CBDT said the decisions made by shareholder on matters which are reserved for shareholder decision under the company laws are not relevant for determination of a company’s POEM. However, the circular added, the shareholder’s involvement can, in certain situations, turn into that of effective management. “Therefore, whether the shareholder involvement is crossing the line into that of effective management is one of fact and has to be determined on case-to-case basis only,” the circular said.

Furthermore, the guidelines stressed that day-to-day decisions taken by junior or middle management of a company wouldn’t be taken into account for determining POEM. However, in certain situations where the person responsible for operational decision is also the one responsible for the key management and commercial decisions, it will be necessary to distinguish the two type of decisions and assess the location where the key management and commercial decisions are taken.

Source: http://www.financialexpress.com/economy/tax-avoidance-rules-poem-norms-to-take-effect-from-april-2017/521170/

New Year GIFT for MNC law and audit firms

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Foreign law and accountancy firms now have a chance to operate in India on their own. On January 3, the ministry of commerce and industry amended a rule allowing such foreign firms to set up offices and advise clients from SEZs. The move will initially benefit Gujarat International Finance Tec-City (GIFT).

Current regulations so far do not permit multinational law firms to operate in the country. Indian law and accountancy firms were also not allowed to operate from any of the SEZs. That rule has now been amended which would benefit financial centres.

The notification, dated January 6 but issued on January 3, by the department of commerce allows foreign law and accountancy firms to be established in SEZs. The earlier version of the rule, prior to the amendment, had excluded legal services and accounting.

“This will be the big enabler for the legal and accounting firms to expand their services in multi-services SEZ with IFSC (International Finance Service Centre) and thereby export their services to various global players,” said Nitin Potdar, partner, J Sagar, a law firm. As of now, only GIFT is a multi-services SEZ with an IFSC in India.

“Until now, no foreign law firm could operate in India and not even Indian firms were allowed to provide their services in any of the SEZs. The new amendment allows not only Indian law or accountancy firms to set up a base in GIFT, but even multinationals can directly advise upon international disputes or arbitration by setting up a base there,” Dipesh Shah, head, IFSC at GIFT, told ET.

While many foreign professional services firms such as Deloitte, PwC, KPMG and EY are present in India, they cannot directly operate as auditors and require an Indian affiliate. This amendment does away with that requirement at least in the case of GIFT.

Many Indian law firms have been opposing the entry of multinational law firms in India for some time. Going ahead, many multinationals could set up base in India but they will only be able to advise on cross-border transactions or disputes. Some are also looking to quickly take advantage of this and set up base in GIFT.

“Allowing law firms in GIFT for arbitration or other work would work as a catalyst for economic activities in the country. We ourselves are in discussions to set up an office in GIFT,” said Nishith Desai, founder of law firm Nishith Desai Associates.

But the amendment does not permit foreign law firms to advise Indian clients on local businesses and regulations. Their advice and help would be strictly restricted to arbitrations fought in GIFT, international mergers and acquisitions, international taxation or any other advice for operations outside India.

Industry experts say some foreign law firms may consider partnerships with Indian firms under the arrangement. There could also be stiff competition as both Indian and foreign firms would compete for the same clients in GIFT.

“Many law firms may set up their base in GIFT but that would take some time. And I am a firm believer that it would only lead to betterment of all law firms,” said Desai.

Source: http://economictimes.indiatimes.com/articleshow/56529046.cms

Rotation of auditors and its side effects

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The Companies Act, 2013, has introduced important audit reforms. One of the important reforms is rotation of the auditor.

Important provisions under this reform

  • All listed companies; unlisted public limited companies having paid-up share capital of Rs 10 crore or more; all private limited companies having paid-up share capital of Rs 20 crore or more, and all companies having public borrowings from financial institutions, banks or public deposit of Rs 50 crore or more are required to rotate their auditor.
  • An individual cannot continue as an auditor for more than one term of five years and an audit firm cannot continue as an auditor for more than two terms of five years
  • The cooling off period is five years.
  • The provision must be complied by April 1, 2017.

Benefits of this reform

  • This is expected to improve audit quality, resulting in improved financial reporting.
  • Would give local auditors more leverage, if implemented properly along with some other measures.

Local auditors v/s the Big Four

  • Local firms dominate the Indian audit market. However, the presence of the Big Four audit firms (Deloitte, PWC, E&Y and KPMG) cannot be ignored.
  • The Big Four are the largest professional service network in the world. They provide audit, assurance, tax, consulting, advisory, actuarial, corporate finance and advisory services. In India, they cannot provide audit services directly.
    • It is alleged that they flout rules while providing audit and assurance services. Many foreign investors put a condition that the auditor of their choice should be appointed. This helps the Big Four audit firms to grow in India.
    • There is an apprehension that many companies that get their accounts audited by local firms will appoint one of the Big Four or another large international professional service network as auditors.
    • Hence, the Ministry of Corporate Affairs had notified the constitution of a three-member expert group to look into the complaint that the Big Four are circumventing rules and to find ways to help local firms.

Should the government intervene?

  • Local auditors are mostly present in tier 2 and tier 3 cities and audit 62 % of the companies listed on BSE 500.
  • They provide a variety of services to small companies. They lack aspiration to become big.
  • Therefore, it is debatable whether there is a case for government’s intervention to protect local audit firms

Way ahead and Conclusion

Chartered accountants are prohibited from soliciting professional work through advertisement or otherwise. But they can respond to tenders.

  • The practice of issuing a tender for the appointment of internal auditors is quite common among public enterprises. Such a practice is not common among private-sector companies.
  • Tendering is the right method to search for the right audit firm. This increases choice and reduces auditing cost through competition.
  • Companies should not limit their choice to the Big Four and other international firms or a few large local audit firms.
  • There are local firms that have capabilities to audit large and complex transactions. Search through tendering process would help to identify such firms.

It will be interesting to see how the new rules regarding rotation of auditors will actually impact the auditing profession.

 

Source: http://www.business-standard.com/article/opinion/rotation-of-auditors-and-its-side-effects-116100900736_1.html

GST Council: Tax exemption threshold fixed at Rs 20 lakh

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The first session of the GST Council that concluded here on Friday made good progress in ironing out some of the contentious issues between the Centre and states: The exemption threshold for the goods and services tax (GST) has been fixed at Rs 20 lakh for all states except the northeastern ones and the three hill states of Jammu and Kashmir, Uttarakhand and Himachal Pradesh, in whose case this limit would be Rs 10 lakh; states will have the assessment powers for units with annual turnover up to Rs 1.5 crore while in the case of bigger businesses too, the one-taxpayer-one-authority principle will be retained and either the Centre or the state concerned will be accorded the assessing power based on risk profiling.

Importantly, the Centre agreed to the states’ demand for including the proceeds from sundry cesses levied by them in the definition of “revenue”, a step that could increase its compensation payouts. This would also mean that the states would cease to levy the cesses, the proceeds from which stood at close to Rs 40,000 crore in FY16.

The council decided to take 2015-16 as the base year to compute compensation to states for any future revenue loss, but left open the question of projecting the business-as-usual rate of increase in revenue, crucial for quantifying compensation. Finance minister Arun Jaitley said three options were under consideration for projecting the revenue growth rate: A mutually agreed-upon fixed rate; the average of the three best (high-growth) years in the past five years; and the average of median three of the last five years. States had earlier turned down the Centre’s proposal for taking the average of the last three years for projecting future revenue growth, saying these years haven’t been particularly good due to the economic slowdown.

Jaitley said the Centre will continue to assess the 11 lakh service tax assessees (even those below Rs 1.5 crore) but added that states will be given training to assess them and once they acquire competence, the future addition to this taxpayer base will be shared with them for the purpose of assessment.

Regardless of whether the Centre or the state has control on an assessee, the tax proceeds will be shared between the two — the central GST component will go to the Centre and the states will appropriate the state GST, which could be slightly higher than central GST. As far as integrated GST — to be levied on interstate transactions and imports — is concerned, the place of supply rules will decide who the appropriating authority will be; of course, the basic principle is that tax needs to be paid where the consumption takes place.

The council, Jaitley said, would meet again on September 30 to finalise the draft rules on the council’s functioning and the exemption thresholds and decide how the grandfathering of tax sops (like the area-based excise exemptions) will be carried out. The crucial question of the GST slab structure, the revenue-neutral rate (RNR) and actual GST rates would be discussed by the council between October 17 and 19. The Arvind Subramanian panel that had estimated a RNR of 15-15.5% had said if the standard rate is 17%, it could comprise central GST of 8% and state GST of 9%.

Tax experts welcomed the outcome of the first meeting of the council. Harishanker Subramaniam, national leader, indirect tax, EY India, said: “It is interesting is that for GST on services, the Centre will have administrative control irrespective of threshold at least in the initial years till states are trained to handle services. This may be a good news for industry as many were worried as to how states will handle complexity of services.”

According to Pratik P Jain, leader, indirect tax, PwC India, enhancing the annual turnover for exemption to Rs 20 lakh from Rs 10 lakh contemplated earlier would be administratively easier for the government as several small businesses would be out of the GST ambit. “Industry would also welcome the move to have a single assessing authority, instead of having a dual system of assessment and scrutiny, which was a major concern for businesses,” he said.

Source: http://www.financialexpress.com/economy/threshold-for-gst-fixed-at-rs-20-lakh/389350/

Government may offer foreign auditors direct access

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In a move that signals the government’s intent to allow foreign audit firms to register and operate directly in the Indian market, the Ministry of Corporate Affairs has written to the Institute of Chartered Accountants of India (ICAI) to seek its views and recommendations on the government proposal.

Currently, Indian laws don’t allow any multinational accounting firm to be registered in India as auditors. The thinking within the government is that as part of an ongoing reforms process, the services sector should also be liberalised and global auditing firms could be allowed to operate directly here to make the profession more competitive and robust.

The ministry has written to the institute on August 10, said ICAI president M Devaraja Reddy . The institute is set to discuss this proposal in a meeting to be held on August 24 and then respond to the the request, he added.

The government will have to amend the Chartered Accountants Act, 1949 that regulates the accounting profession in India to allow foreign firms to operate in India.

Currently, MNC professional services firms that offer auditing services in India, including the Big Four – EY, PwC, Deloitte and KPMG – audit Indian companies through a bunch of their network or affiliate firms.

Though for all internal purposes, the accounting practice in any of the Big Four is treated just as any other practice area like tax, transactions, or advisory , but on paper, the affiliate firms are run as separate partnerships.

If the Indian government does allow direct entry, more global firms are likely to invest big in their India network and also the market could see the entry of new players.

“Given the significant exposure of global investors in Indian firms, it’s natural to ask for an auditor who they are more comfortable with. More global players will mean more choice and better quality of services. It will also enhance the credibility of Indian markets,” says the CEO of a global firm.

For Indian audit firms, the move could spell further trouble, as they have been steadily losing the most lucrative audit assignments to the Big Four over the past two decades.The four global firms now dominate the book-keeping business in India. As it is, the mandatory audit rotation brought in by the Companies Act 2013, is set to kick off from April 1, 2017 and that will further see a movement of big accounts away from Indian firms towards the Big Four and other two prominent network firms, Grant Thornton and BDO.

In major markets, the global giants have a monopoly over the audit business – 99 per cent of companies in FTSE are audited by the Big Four firms, while 86 per cent of those listed on the NYSE work with these audit firms.

But in India, 62 per cent of the BSE 500 companies, including some of India Inc’s biggest firms, are still not audited by the Big Four.For example, Reliance has had Chaturvedi & Shah as auditors for decades, L&T books have been audited by Sharp & Tannan and Hindalco had stayed on with Singhi & Co for long time.In China, the Big Four lost domination to local firms after the government brought in regulations that were unfavourable for the global players. Indian accounting firms are also betting on government regulations that will keep their interests protected.

“The government will have to find a middle ground. It will have to create a regulatory framework that allows the global firms to invest and practice, also keeping in mind the concerns of the Indian accounting firms which service a large section of Indian companies, both big and small,” said the CEO of a leading Indian accounting firm.

PE exits set to see new record through IPOs this year

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With RBL Bank and Aster DM Healthcare planning to raise Rs 1,500 crore and Rs 1,600 crore, respectively, through initial public offerings (IPOs) this year, private equity investors are set to make a record exit using the primary market route.

According to Prime Database, a Delhi-based financial services firm providing research on IPOs, the first six months of the year saw PE investors exit stakes worth Rs 2,993 crore across six IPOs. These include small finance bank Equitas raising Rs 2,176 crore through IPO in April. Twelve PE investors including International Finance Corporation and Sequoia Capital sold stake worth Rs 1,454 crore in the issue, making part or full exit.

The first six months of the year has already seen more PE exits through IPOs than the annual record of Rs 2,346 crore across 12 IPOs in 2015.

“The value of exits is related to the size of the company looking to list and in recent times, we have seen larger companies coming to the market,” said Subhrajit Roy, executive director and head (equity capital markets origination) at Kotak Investment Banking. “Investors are increasingly focusing on post-listing liquidity, which is enhanced by a higher free float. The average deal size has been increasing to adhere to this requirement,” said Roy.

While Ratnakar Bank’s IPO will see PE funds Gaja Capital and Capvent India making part exits, that of DM Healthcare will see India Value Fund and Olympus Capital paring their stake. Another PE-backed company, Varun Beverages, has also planned to raise Rs 1,000 crore through an IPO this year by providing liquidity platform for its PE investors AION Global and Standard Chartered Private Equity. “The PE activity over the past few months was characterised by an increase in buy-outs, the restart of investments in infrastructure projects especially roads, PE-backed IPOs and continued robustness in fund raisinPE exits set to see new record through IPOs this yearg,” said Mayank Rastogi, partner and leader for PE at consulting firm EY.

“Owing to the strong listing performance of PE-invested firms in the past 12 months, a long list of IPOs is being lined up amongst PE-invested companies,” said Rastogi.

PE exits set to see new record through IPOs this year. Increasing PE exits through IPOs is also credited to the performance of secondary markets. Sensex, the benchmark index of the BSE, has risen four per cent to 27,167 this year. Also the average price-to-earnings ratio for 30 Sensex companies is 20.13 now, against five-year average of 17.93. This has given PE-backed companies an opportunity to provide their investors’ exit through the IPO route.

“As the broad secondary markets remain buoyant, we will see more and more PE-backed IPOs where the investor would make only partial exits,” says Pranav Haldea, managing director at Prime Database Group. “PEs want to keep their skin in the game as they expect secondary markets to do better from hereon.”

Source: http://www.business-standard.com/article/specials/pe-exits-set-to-see-new-record-through-ipos-this-year-116070600752_1.html