Applicability of the Companies Act 2013 to Auditors Report to FY 2014-15 and Onwards

Applicability of the Companies Act 2013 to Auditors Report to FY 2014-15 and OnwardsDear Members,

As you are aware, the Ministry of Corporate Affairs, on 26thMarch 2014 notified a majority of the remaining sections of the Companies Act 2013, including sections 139 to 148, relating to audits and auditors. The Act is stated to be effective from 1stApril, 2014.

Queries are being raised by a number of members as to whether any auditor's report of a company being signed on or after 01stApril, 2014 would be in accordance with the requirements of section 143 of the Companies Act 2013.

In this context, it may be noted that the Ministry of Corporate Affairs (MCA) has, on 04thApril 2014,videits General Circular No. 08/2014,clarified that the financial statements (and documents required to be attached thereto), auditor's report and Board's report in respect of financial years that commenced earlier than 01stApril, 2014 shall be governed by the relevant provisions/Schedules/rules of the Companies Act 1956. This MCA Circular can be seen at URLhttp://www.mca.gov.in/Ministry/pdf/General_Circular_8_2014.pdf.

Therefore, it is clear from MCA's aforesaid General Circular that the auditor's report of a company pertaining to any financial year commencing on or before 31stmarch 2014 , would be in accordance with the requirements of the Companies Act 1956 even if that financial year ends after 01stApril 2014.For example, where the financial year of a company is 01stJanuary 2014 to 31stDecember 2014, the statutory auditor's report signed therefor would be in accordance with the requirements of the Companies Act, 1956.

As a corollary to MCA's General Circular, it appears that the provisions of the 2013 Act would apply only to the financial years commencing on or after 01stApril 2014.Thus, for example, the statutory auditor's report signed in respect of the financial year of the company ended 31stMarch 2015 would need to be issued in accordance with the provisions of the Companies Act 2013.

Regards

(CA ABHIJIT BANDYOPADHYAY)Chairman, Auditing & Assurance Standards Board

Key Highlights of Proposed Direct Tax Code 2013In this article, author attempts to explain key insights ofDirect TaxCode 2013, comparing with DTC 2010 and Income Tax Act, 1961, wherever required. For any queries, author can be reached atgarimamittal@live.inIntroduction:The Indian Government unveiled theDirect Tax Code (DTC) 2009along with a discussion paper for public comments to replacethe Income TaxAct, 1961 and the Wealth Tax Act, 1957 in August 2009. However, in August 2010, Government tabled revisedDTC 2010 in Lok Sabhawhich was then referred to the Standing Committee on Finance for its review and comments and the same submitted its report to Parliament on March 2012. TheFinance Minister now released DTC, 2013for public discussion on 1stApril 2014.

Key Highlights:As per news report, out of 190 recommendations made by Committee, the Finance Minister accepted 153 either wholly or with partial modification. The new tax code is meant to create an efficientdirect taxsystem by replacing the archaic Income Tax Act.

Personal Income Tax:Raising of Exemption limit to Rs 3 lakh not acceptable:Though the standing committee of finance recommended raisingthe income taxexemption limit to Rs 3 lakh, revisedtax slabsforpersonal income taxand removal of cess not accepted by Finance Minister as it wouldresult inhuge revenue loss of around Rs, 60,000 crores.

Abolition ofSecurities TransactionTax not acceptable:This recommendation is not acceptable as rate of tax already been reduced significantly in Finance Act 2013.

Higher Tax Rate, 35%for individuals/HUF having income exceeding Rs 10 crore:With a view to maintain overall progressivity in levy of income-tax, the revised Code provides for a fourth slabfor individuals, HUFs and artificial judicial persons.

Interest deduction on loan for self occupied property:For the purpose of deduction in respect of loan taken for self occupied house property, the loan given by employer should also qualify for this concession.

Corporate Tax:Minimum Alternative Tax (MAT):MAT is levied if the tax liability under the regular provisions is lower than 18.5% of book profits (after prescribed additions/ deletions). DTC 2013 proposes to levy MAT @18.5% as compared to 20% in DTC 2010. The provisions of MAT applicable to Insurance, Banking and Electricity companies as well. However, income fromlife insurance companiesbusiness is not covered under MAT provisions under DTC 2013.

DTC 2013 proposes to introduce the concept of Alternate Minimum Tax (AMT) applicable to firm in line with existing provisions under the Act. AMT is levied @18.5% if tax liability under the regular provisions is less than 18.5% of adjusted total income.

As far as carry forward of MAT credit is concerned, DTC 2013 propose to allow MAT credit for 10 years as compared to 15 years prescribed under DTC 2010.

Source Rule WidenedThe Income-tax Act, 1961 provides for the taxation of interest payable by the non-resident in respect of debt incurred and used for the purpose of business carried on by non-resident in India.

DTC 2013 expanded the scope of the above mentioned provision to include interest payable by the non resident in respect of debt incurred and used for the purpose of earning any income from any source in India.

Analysis: DTC 2013 proposal extended the scope of taxability of income in India.

General Anti-Avoidance Rules (GAAR):GAAR were originally introduced in DTC 2009. Subsequently, GAAR has been included in the Act with certain modifications.

(A)Impermissible Arrangement:Under theIncome Tax Act, 1961,the entire arrangement may be declared as impermissible arrangement even if a part of arrangement is impermissible arrangement.

TheStanding Committee of Financehad proposed that only such part of the arrangement would be invoked which is proved as impermissible and not whole of it.

DTC 2013proposed that entire arrangement may be declared as impermissible arrangement even if a part of arrangement is impermissible arrangement.

(B)Onus of proofTheStanding Committee of Financehad recommended that the onus of proof should rest on the tax authority invoking the provision of GAAR.

DTC 2013proposes to rest the onus of proof on the taxpayers.

IndirectTransferOf Capital Asset:

DTC 2013 proposed that in case of indirecttransferof asset situated in India if 20% of the total assets of company are located in India, then the income arising from such transaction will be taxed in India.

Analysis: This move seems aimed at making sure India to get its due when foreign companies buy sell subsidiaries or units that are based in India For instance, Vodafone which enters India in 2007via Hutchison Whampoa deal, is contesting a tax bill of about 112 billion rupees relating to acquisition. The Indian Supreme Court ruled in 2012 that Vodafone was not liable to pay any tax over the transaction but the government changed the rules allowing it to make retroactive tax claims on completed deals. .

As per DTC 2010, indirecttransfershould be taxed in India if the companies involved should have at least 50% of their assets located in the country. Analyzing the same, 50% threshold is too high, there could be situation that a company has 33.33% assets in three countries but it will not get taxed anywhere. Contrary in DTC 2013, companies with as little as 20% of their global assets in India could find themselves facing tax bills in deals involving their domestic units under changes done in DTC 2010.

No Deduction of Corporate Social Responsibility(CSR) Expenditure in Backward Regions and Districts:As perCompanies Act, 2013, every company on fulfilment of certain conditions is required to incur expenditure on CSR.

There isno specific provisionto allow such expenditure either inthe Income TaxAct, 1961 or DTC 2010.

DTC 2013 does not provide for allowability of CSR expenditure. The website of income tax department, i.e. www.incometaxindia.gov.in , provides a rational that CSR expenditure cannot be allowed as a business deduction as it is an application of income. Further, allowing the same would imply that the government would be contributing 1/3 of this expenditure, as revenue foregone.

Additional tax on recipient of dividend exceeding 1 crore rupeesDTC 2013 proposed to levy of 10% additional dividend distribution tax on the resident taxpayers if the total dividend in recipients hands exceeds Rs 1 crore.

Analysis:Under Income Tax Act, 1961 and also in DTC 2010, the dividend distribution tax is to be levied at 15% tax rate. This favours high net worth taxpayers who pays only fraction of their earnings as tax on their investments in the capital market. The draft DTC 2013 proposed to remove this analogy.

Place of Effective ManagementDTC 2013 provided that a foreign company is considered to be resident in India if its Place of Effective management at any time in the year is in India. The term Place of Effective management is defined as the place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are in substance made.

The definition of Place of effective management has been changed from DTC 2009 & DTC 2010. This change is in line with the Standing Committee of Finance recommendation that the term executive directors, and officers may be removed from the definition of Place of Effective management and the definition should be more objective and in line with internationally accepted standards.

However, underthe Income TaxAct, 1961, foreign company is treated as resident in India only when its place of control and management of its affairs is situated wholly in India.

Reduction of weighted deduction for scientific research as compared to DTC 2010:

DTC 2013 provides for weighted deduction of 150% for in-house scientific research as compared to 200% in DTC 2010 and also provides for weighted deduction of 125% to donor on any donation made by it to the specific institution to be utilised by them in scientific research in DTC 2013 as compared to 175% in DTC 2010.

DTC 2013 does not provide for Settlement Commission machinery as it has not achieved its intended purpose of early settlement of cases and additional revenue realization.

Conclusion:The DTC 2013 drafted keeping in mind the prevailing Act, DTC 2010 and the loopholes which existed in the Act. The proposed direct tax code provides better and more efficient tax structure by eliminating & reducing loopholes prevailing at present in economy. Readers requested to note that DTC 2013 proposed lots of recommendations and the highlights mentioned is an inclusive list of the same. For reading the full context of proposed Direct Tax Code 2013, readers requested to please visit the income tax website.