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INTEGRITY FIRST

In looking for people to hire, you look for

three qualities: integrity, intelligence, and

energy. And if you don’t have the first, the

other two will kill you. Warren Buffett

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S. No. Topic

1.

Fraud Reporting

2.

Tax Compliance on Foreign Remittances

3.

Service Tax on Director’s Remuneration

4.

RBI Strategic Debt Restructuring Scheme

5.

Income Computation & Disclosure Standards

INDEX

This article highlights

Meaning of Fraud

Auditor’s Responsibility

Punishment of Fraud

Fraud Reporting

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Fraud Reporting

More Power to- Serious

Fraud Investigation Office

The SIFO is a multi-disciplinary

organization under Ministry of

Corporate Affairs, consisting of experts

in the field of accountancy, forensic

auditing, law, information technology,

investigation, capital market and

taxation for deducting and prosecuting

or recommending of white-collar

crimes/frauds.

The SFIO will normally take up for

investigation such cases, which are

characterized by:-

Complexity or having inter-

departmental and multi-

disciplinary ramifications.

Substantial involvement of public

interest to be judged by size, either

in terms of monetary

misappropriation or in terms of

persons affected, and;

The possibility of investigation

leading to or contributing towards

a clear improvement in systems,

laws and procedures.

Under certain circumstances, the

Central Government may order an

investigation into the affairs of the

Company under section 212 of

Companies Act, 2013-

On receipt of a report of the

Registrar or inspection under

section 208,

On intimation of a special

resolution passed by a company

that its affairs are required to be

investigated,

In public interest, or

On request from any Department

of the Central Government or State

Government.

Meaning of Fraud Section 447(i) of Companies Act, 2013 defines “fraud” in relation to affairs of a company or anybody corporate as

any act omission concealment of any fact abuse of position committed by any person or any other person with the connivance in any manner, with intent (i) to deceive (ii) to gain undue advantage from (iii) or to injure the interests of

a. the company b. its shareholders c. its creditors d. any other person

whether or not there is any wrongful gain or wrongful loss. “wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled “wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.

Auditor’s Responsibility The auditor is required to consider fraud as a risk that could cause a material misstatement in the financial statements and plan and perform such procedures that mitigate the risk of material misstatement due to fraud. These requirements are specified in Standard on Auditing (SA) 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements” Also Section 143(12) states “Notwithstanding anything contained in this section, if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed” Auditor needs to

report material fraud to the Central Government within 30 days. Immaterial frauds are to be reported to the board or the audit committee of

the company. Also the report is to be represented on the letter heads of the auditor, signed by them with their seals and provide their membership number.

Punishment for Default In case of non compliance of provisions given under section 143(12), the auditor is punishable with fine which shall

Not be less than ₹ 100,000/- Which may extend to ₹ 25,00,000/-

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Punishment for Fraud Section 447 of the Companies Act, 2013 deals with the provision relating to punishment of fraud.

It says any person who is found to be guilty of fraud shall be punishable with

imprisonment for a term which shall not be less than six months but which may extend to ten years and

and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to

three times the amount involved in the fraud

Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years

The following table includes some sections that attract liability u/s 447. These are cognizable offences and a

person accused of any such offence under these sections shall not be released on bail or bond, unless subject to

the exceptions provided u/s 212(6) of the Act:

Section

Fraud Who will be penalised

7(5) Registration of a company A person furnishing false information or suppressing any material information of which he or she is aware.

36 Inducing persons to invest money The person doing so.

45 Issuing of duplicate certificate Every officer of the company eligible to make certificate.

75(1)

Acceptance of deposit with intent to defraud depositors or for any fraudulent purpose

Every officer of the company who accepted the deposit

206(4) Conducting business of a company for a fraudulent or unlawful purpose

Every officer of the company who is in default.

213 Other cases: a. Business of a company being conducted with intent to defraud its creditors b. Fraud, misfeasance or other misconduct of the company or any of its members c. Company withholding information from members with respect to its affairs, which they may reasonably expect

Every officer of the company who is in default and the person(s) concerned in the formation of the company or management of its affairs.

229

Furnishing false statement or mutilation or destruction of documents

Person required to provide an explanation or make a statement during the course of inspection, inquiry or investigation, or the officer or other employees, as required.

251(1)

Application for removal of name from register with the object of evading liabilities/intent to deceive

Persons in charge of management of the company.

339(3)

Conducting business of company with intent to defraud its creditors, any other persons or for any fraudulent purpose

Every person who was knowingly a party to the business in the aforesaid manner.

448

Making a false statement in any return, report, certificate, financial statement, prospectus, statement or other document required by or for the purpose of any of the provisions of this Act or the rules made there under

Person making such a statement etc.

This article aims to explain

Statutory Provisions of Income Tax

applicable on Foreign Remittances.

Compliance Forms required to be filled

before remittance.

Certificate Required by a Chartered

Accountant in form 15CB

Tax Compliance on Foreign

Remittances

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Tax Compliance on Foreign Remittances

Definition of a Foreign Remittance

Transfer of money from a migrant worker to his family or other individuals in their home countries.

All foreign remittances from India are currently regulated under Foreign Exchange Management Act (FEMA). While FEMA plays an important role in deciding the permissibility of payments abroad, an equal role is played by Indian Income Tax Act (ITA) especially in transactions involving remittance of income.

Tax Compliance

FEMA allows permissible remittances by authorized dealer banks on production of relevant undertaking from the remitter and a certificate from a Chartered Accountant in the formats prescribed under ITA.

Correspondingly, ITA provides that any person responsible for making any payment to Non Resident in respect of any income chargeable to tax under the provisions of ITA is required to deduct tax at source from the concerned payment u/s 195.

The tax is required to be deducted irrespective of the mode of the payment and on accrual or payment basis, whichever is earlier. Further, one needs to examine the provisions of Double Tax Avoidance Agreement (DTAA) between India and specified country to confirm on taxes to be deducted under section 195 of ITA.

Also, one needs to check regarding the availability of Tax Residency Certificate (TRC) of Non Resident / Form 10F and Permanent Account Number (PAN) of Non Resident to conclusively decide on the applicable rate of withholding tax in respect of foreign remittance.

The Income Tax Law of our country requires authentication of foreign remittances (payments) made to a Non Resident or Foreign Company, for any amount which is taxable as per the existing laws. For this purpose, certain rules and guidelines (Income Tax Rule 37BB) have been framed by the Income Tax Act for making foreign remittances.

Finance Act, 2015 amended Section 195(6), as follows “The person responsible for paying any sum, whether chargeable to tax or not, to a non-resident shall be required to furnish the information of the prescribed sum in such form and manner as may be prescribed.” Due to this amendment w.e.f. 1st June, 2015, same authentication is required even for non taxable remittances.

A person making a remittance (a payment) to a Non Resident or a Foreign Company has to submit Form 15CA. This form is submitted online. In some cases, a certificate from a Chartered Accountant in Form 15CB is required before uploading Form 15CA online.

Here are certain payments such as investment abroad in equity capital, investment in debt securities, investment in branch or wholly owned subsidiaries, loans to non-residents, remittance for medical treatment, maintenance of close relatives, etc. that have been specifically excluded from the requirements of Form 15CA/ Form 15CB certification .In these cases, one needs to take care of only FEMA compliances.

Form 15CA

Form 15CA is a Declaration of Remitter and is used as a tool for collecting information in respect of payments which are chargeable to tax in the hands of recipient non-resident. This is starting of an effective Information Processing System which may be utilized by the Income tax Department to independently track the foreign remittances and their nature to determine tax liability. –

COUNTRY 1 COUNTRY 2

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Form 15CB

Form 15CB is the Tax Determination Certificate where a Chartered Accountant determines the taxability of the remittance as per Income tax Act along with the provisions of Double Tax Avoidance Agreement with the Recipient’s Residence Country. If the remittance is taxable, then the same shall be remitted only after deduction of withholding tax (i.e, TDS). The information provided in Form 15CB mainly includes the details of the remitter, details of the remittee, nature of remittance (whether salary, commission, royalty etc) as per agreement between the two parties, Bank details of the remitter and Tax Residency Certificate from the remitter if DTAA (Double Taxation Avoidance Agreement) is applicable. Banks require FORM 15CA and FORM 15CB certificates before they make any remittance on your behalf outside India. Cases where Form 15CB is not required: In the following cases, Form 15CB is not required. However, Form 15CA is to be uploaded mandatorily. When remittance does not exceed Rs 50,000 (single transaction) and Rs.2,50,000 (aggregate in a

financial year).

When an application is made to the Assessing Officer by the person receiving the income to deduct tax at a lower rate or deduct no tax at all and a Certificate is obtained in this respect.

When the person responsible for making the payment considers that the whole of the remittance is not taxable and makes an application to the Assessing Officer to charge tax only on the taxable portion and Order is obtained from the Officer in this respect.

Useful Links: Detailed Guidelines for furnishing form 15CA https://onlineservices.tin.egov-nsdl.com/TIN/JSP/tds/Guidelines.html

This article aims to explain Understand the applicability and

provisions related to Service Tax on Director’s Remuneration

Service Tax on Director’s

Remuneration

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Service Tax on Remuneration to Directors Before going into the taxability or non- taxability of Remuneration paid to Directors, we will go through the Section 65B (44) of Finance Act, 1994 as introduced w.e.f. 01.07.2012 read as follows- “service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-

a) An activity which constitutes merely-i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner, ii) such transfer, delivery or supply of goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution or iii) a transaction in money or actionable claim. b) A provision of service by an employee to the employer in the course of or in relation to his employment.

c) Fees taken in any court or tribunal established under any law for the time being in force.

From the above Sec. 65B(44) Clause(b) is an important part for our consideration. In the said clause, it has been clearly stated, if there is an employer-employee relationship at the time of provision of service then it will not come under the ambit of word “Service” and hence, will not be chargeable to service tax. Thereafter, as per Rule 2(1)(d)(EE) of the Service Tax Rules inserted vide Notification No. 30/2012-ST, dated 20-6-2012 w.e.f. 7-8-2012 as amended vide NN 10/2014-ST,dated 11-07-2014 w.e.f 11-07-2014 -

Description of Service

Service Provider & its Percentage of Service Tax payable

Service Recipient & its Percentage of Service Tax payable

Service provided or agreed to be provided by a director of a company or a body corporate (e.g. Reserve Bank of India, Foreign Companies, etc.) to the said company or the body corporate (w.e.f 11-07-2014 vide NN 10/2014-ST,dated 11-07-2014 (see Note 1)

Director (s)

NIL

Company registered under Companies Act,1956 or Body Corporate

100%

1. Relationship between a director & a company considered as employer-employee relationship?

Yes. It can be said that there is an employer-employee relationship among director and a company, even if a Director is managing director or a whole- time director or executive Director.

Because, In Notification No. 45/12 ST dt.07.08.12 (as amended) which has inserted clause 5A in para II in table i) after SI.NO. 5 it is said that, ST will be payable under RCM, in respect of services provided or agreed to be provided by a director of a Company to the said company.

Hence, it is nowhere mentioned in the notification whether it will be a Whole- time Director or non- whole time Director. Therefore, sec.65B(44)(b) clarifies that, once there is employer-employee relationship, service tax will not be paid.

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2. How to identify relationship among the director and company?

Following are some of the circumstances through which one can decide the relationship among the director and company (list is only for illustration purpose, it may vary case to case)

Generally, whole-time/managing/executive directors are under a contractual employment. That means if it is clearly mentioned in the board resolution of company that whole-time director will receive salary/bonus for services rendered by them, then in obvious case it will not be considered as service and hence question of taxability under RCM does not arise.

In case of any other directors i.e., non-whole time director or non-executive director there may be an employer-employee relationship among directors & co. & it can be decided from the work of director and agreement by company. But, generally non-executive directors are not employees of the company and hence any kind of amount received by them as in remuneration, sitting fees, commission etc. will be chargeable to tax under RCM.

If company is deducting TDS u/s 192 of Income Tax Act, 1962 for making salary payment to directors and issuing Form-16 to its director, then again no service tax is required to be paid.

In many cases it was so happened that, company giving salary to directors, but not making any contribution towards PF as per the provisions of respective Act, then due to non-contribution for PF will be considered that there is no employer-employee relationship?? As an author my point of view is, just because company has not deducted PF amount from salary does not conclude that there is no employer-employee relationship. Here again agreement among company and director must given a consideration. If it is clearly stated in the agreement regarding relationship among company and director then no need to pay the service tax.

3. Mode of payment will not alter the nature of service

As long as there is an employer-employee relationship, mode of payment will not alter the nature of service provided by a director.

For eg:- if company is offering options, shares, debentures of company in lieu of salary for services rendered by director then also it will not taxable if there is an employer-employee relationship. Circular No. 115/096/09 ST dt.31.7.09 has also clarified to the department officials that mode of payment to directors will not alter the employer-employee relationship. This clarification would apply even under the new provision w.e.f.01.07.12.

4. If service tax has to be paid, on what amount should it be calculated in case of Directors?

Directors are paid sitting fees for attending meetings of Board, travelling & conveyance charges and other related charges for attending meetings of Board and Board committees. Thus service tax should be calculated on these payments made to directors. However, it should be noted that mere reimbursement of expenses on actual basis is not a part of remuneration and service tax would not apply to such reimbursements.

5. Liability to pay service tax-

As per Rule 2(1)(d)(EE) of Service Tax Rules as mentioned in the table given above the company or body corporate receiving the services of directors of a company or a body corporate is liable to pay service tax under reverse charge mechanism. If the remuneration paid to directors does not cross Rs. 10 Lacs per annum, even then the company or body corporate would be liable to pay service tax, as the exemption to small-service providers is not available to service receivers who are liable to pay tax under reverse charge mechanism. In case a director provides services to the company or a body corporate in any other capacity other than as a director, then in such cases, the director would be liable to levy service tax on his own and pay it.

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6. Utilization of Cenvat Credit to pay service tax

The company can have sufficient cenvat credit available. However this cenvat credit cannot be used for paying service tax of directors because as per Cenvat Credit Rules, cenvat credit can be utilized for payment of service tax only as a service provider and not as a service recipient. Hence in this case, service tax would have to be paid in cash only.

7. Availability of Cenvat credit of service tax paid under reverse charge

Directors look after the day-to-day working & management of the company. As per Rule 2(1) of Cenvat Credit Rules, input services include services provided in relation to working of factory, office, production, marketing, sales, accounts etc. since all these services are related to day-to-day management of the company, Cenvat Credit can be availed of service tax paid on remuneration to Directors. The GAR-7 challan used to pay service tax can serve as correct document to avail Cenvat Credit.

This article aims to explain

Introduce to Strategic Debt

Reconstruction

Features of SDR

Recent cases of SDR

RBI Strategic Debt

Restructuring Scheme

RBI Strategic Debt Restructuring Scheme

Over the past decade the banking industry has witnessed many positive developments. The banking industry in India compares quite well with many of its international counterparts on metrics such as growth, NPAs, ROA, etc. Although the Indian banking industry has witnessed significant growth in last few years but there are many factors which are becoming hurdles for the growth of Banks one of them is Not Performing Assets.

Indian Banks are witnessing rising NPA’s (Non-Performing Assets) due to the slowdown in the Indian economy and high interest costs. The Reserve Bank of India has introduced various measures for controlling NPAs in the Bank including Asset Reconstruction Companies, SARFESI Act, Joint Lenders Forum (JLF), etc., However, the NPA figure in banks continue to remain high and hence the RBI has recently introduced the Strategic Debt Restructuring Scheme. In this article, we look at the Strategic Debt Restructuring Scheme in detail.

Strategic Debt Restructuring Scheme (SDR)

The RBI in its “Framework for Revitalising Distressed Assets in the Economy – Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP)”, has suggested change of management as a part of restructuring of stressed assets. With this principle in view and to ensure that the shareholders bear the first loss rather than the debt holders, the RBI suggests transfer of equity shares of the Company by promoters to lenders to compensate for their sacrifices. Traditionally in many cases of restructuring, borrower companies are not able to come out of financial stress due to operational or managerial inefficiencies despite substantial sacrifices made by the lending banks. In such cases, change of ownership will be the most preferred option for the Lenders. Hence, the RBI suggests that Joint Lenders’ Forum (JLF) should actively consider such change in ownership and take necessary action.

The salient features of Strategic Debt Restructuring are: -

Following are the condition which Lender’s needs to fulfill to opted SDR :-

1. A decision on invoking the SDR by converting debt into equity should be taken by the JLF as early as possible and within 30 days after a review of the account.

2. The decision of invoking SDR should be well documented and approved by the majority of JLF member i.e. minimum of 75% of creditors by value and 60% of creditors by number

3. Post the conversion, all lenders under the JLF must collectively hold 51% or more of equity shares of the borrowing company.

4. Conversion of outstanding principal as well as unpaid

interest into equity instrument should be at a Fair Value. Fair value will not exceed the lower of the following, subject to the floor of face value: a) Market Value (for listed companies): Average of the

closing prices of the instrument on a recognized stock exchange during the ten days preceding the reference date.

b) Break-up Value (for unlisted companies): Book value per share to be calculated from the company’s latest audit balance sheet adjusted for cash flows and financial post the earlier restructuring. Revaluation reserve will be ignored for the calculation. The balance sheet should not be more than a year old. In case of balance sheet is not available the break- up value will be Re1.

5. The pricing formula under SDR would be exempt from SEBI’s Substantial Acquisition of Shares and Takeovers and Issue of Capital and Disclosure Requirements Regulations 2009.

6. On completion of conversion under SDR, the asset classification existing on the reference date (i.e. the date on which JLF made decision to undertake SDR) will continue for a period of 18 months from the reference date. Thereafter the bank will follow IRAC norms for the classification of asset.

7. Joint Lender Forum will appoint suitable professional management to run the affairs of the company.

Recent Cases where Lenders are planning to SDR

1. Lanco Teesta Hydro Power Private Limited: Lanco Teesta Hydro Power Pvt Ltd. (LTHPPL) is a Hydro Electric Power Project- across the Teesta River by obtaining debt support from a consortium of lenders lead by ICICI Bank Limited. The projects is setting up a 500MW hydropower project on the river Teesta in Sikkim with the initial project cost estimated at about Rs.3,000 crore, with a debt equity ratio of 80:20, comprising Rs.2,400 crore of debt and Rs.600 crore of equity. Recently Lenders to Lanco Teesta Hydro Power will convert part of their Rs. 2,400-crore outstanding loans to the company into 51% equity in the most significant such takeover since the Reserve Bank of India allowed lenders to do through SDR so when borrowers fall behind on repayments.

2. Electrosteel Steels Ltd.: Electrosteel Steels reportedly owes its lenders about Rs 9,500 crore.

Electrosteel Group ventured into the steel manufacturing industry through Electrosteel Steels Limited, which was setting up a 2.5 million tonne per annum (MTPA) greenfield integrated steel plant near Siyaljori village, in Bokaro district of Jharkhand. The 27 lenders that have an exposure to the steel maker may take the Strategic Debt Restructuring or SDR route to recover their money. The Joint Lenders Forum (JLF) formed by banks is headed by State Bank of India, which alone holds about 20 percent of the entire debt.

This article aims to: Harmonize the AS with the DT laws

Ensure clarity on tax-related issues

Standardize the computation methods

Income Computation &

Disclosure Standards (ICDS)

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Income Computation & Disclosure Standards (ICDS)

Need for ICDS

It has been a discussion since two decades that the Accounting Standards issued by the ICAI are so

flexible that it’s easy for an assesse to avoid precise payment of income taxes. Hence it is in the first

quadrant of importance to standardize the computation methodologies under the Income Tax Act.

The Government has notified new accounting standards for computation of business income which will

ensure consistency and help minimize tax related disputes. The Income Computation and

Disclosure Standards (ICDS) is aimed at having consistency in respect of issues that come under this

ambit.

This ICDS is applicable for computation of income chargeable under the head ‘Profits and Gains from

Business or Profession’ or ‘Income from Other Sources’ and not for the purpose of maintenance of books

of accounts.

The Finance Ministry has suggested tax accounting standards for various matters. Summarized list of

ICDS is given below:

Standard ICDS No. AS No.

1. Accounting Policies

1 1

2. Valuation of Inventories

2 2

3. Construction Contracts

3 7

4. Revenue Recognition

4 9

5. Tangible Fixed Assets

5 10

6. Effects of Changes in Foreign Exchange Rates

6 11

7. Government Grants

7 12

8. Securities 8 13 9. Borrowing Costs

9 16

10. Provisions, Contingent Liabilities and Assets

10 29

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Business Impact

Starting F.Y. 2015-16, Companies were to follow ICDS for arriving at the fund transfer amount for the first

quarter advance payments. But this does not mean that the assessee has to maintain two set of books, one

for tax and other in accordance with AS issued by the ICAI as the ICDS is applicable only for computation

of income and not for maintenance of books.

Further, if a conflict between the Provisions of Income Tax Act and the ICDS arises, then the provisions of

the Income Tax Act would prevail.

Advantages

The Taxable income might now be visibly delinked from the Accounting income as both will be

computed under different set of standards and principles.

It will avoid litigation on some of the contentious tax issues, by bringing in clarity and

mandatory disclosures.

No two separate set of books need to be maintained by the assessee.

Harmonization of Accounting Standards with the Direct Tax Laws in India.

Drawbacks

ICDS has been drafted keeping the existing AS as a base. There are significant differences

between the AS and the IND-AS. Hence additional adjustments are required to be made.

Some of the judicial pronouncements which were in favor of the assessee might no longer be

operative.

ICDS has not adequately addressed certain areas such as Financial Instruments, Share based

payments, etc which are quite prevalent in today’s business environment.

Conclusion

Though the Income Tax Accounting Standards are notified to ensure clarity and consistency on taxation

issues, Tax Accounting Experts feel that these efforts may not completely eliminate the inconsistencies

between IND-AS and Tax Accounting Standards (TAS) and could lead to potential litigations

between assessee and the department, for instance, different interpretations of the standards from both

the ends. Also AS-22 “Accounting for Taxes on Income” will still have impact of identifying the book tax

differences in creation of deferred tax asset or liabilities.

KGS

Contact Name E-mail Mobile Mr. Anuj Somani anujsomani@kgsomani.com +91 9871098777 Mr. Bhuvnesh Maheshwari bhuvneshmaheshwari@kgsomani.com +91 9810031993

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Disclaimer

• This material and the information contained herein prepared by the authors is of a general nature and does not exhaustively deal with the subject discussed. • Although the authors have put their earnest effort in providing accurate and appropriate information, the article is not intended to be relied upon as the sole basis for any decision which may affect you or your business. The authors recommend you take professional advice before acting on specific issues. • KGS is neither responsible for any views, opinions and statements made by the authors nor is liable for consequences, if any, arising from actions based on such views or opinion.

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