the inspiring professionals

August 2020.cdrLETTERLETTERNEWS
CA Pawan Mittal Secretary
CA Vishesh Bhardwaj Treasurer
( Immediate Past Chairman )
04 GST compliance booklet
Efficient Tool to save tax and rules of Buy Back
Just Joking
Reporting Under Tax Audit
Statutory Bodies - Confusion Prevails
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Chairperson's Message 042
Chairperson's Message
Warm Greetings,
The month of August 2020 is a special one as it gives us an opportunity to pay tribute to our freedom fighters who gifted us a
wonderful and independent life. Also, we have one more celebration this month i.e. 'Raksha Bandhan' which signifies the
love between brothers and sisters.
I wish you all a very Happy Raksha Bandhan and Happy Independence Day.
This month's newsletter is a special edition which is designed in Tri colors to pay tribute to all our freedom fighters, soldiers
and leaders whose sincere efforts ensured the independence and sovereignty of this great nation.
Through the series of our monthly E-Newsletters, we are trying to share knowledge and wisdom among the members and
other stake holders. I hope you all benefit from this. Our last edition was a Marvelous CA Day Special Edition, which was
praised by one and all. I request you all to give your valuable suggestions and novel ideas for the betterment of the Branch.
There is no end to knowledge the more you share the more you learn.

What is that which cannot be stolen by thieves nor taken away by kings nor shared between/among brothers nor is it heavy on
the shoulders to carry. If spent well, always keeps growing. The wealth of knowledge is most superior wealth!
In order to keep the members updated we have conducted a series of Webinars last month on Accounting Standards & Ind
AS, Benami Transactions Prohibition Act 2016, a Motivational program for Women CA's 'Go Limitless, Fearless &
Irreplaceable'.
Also, I would like to bring to your notice the number of initiatives launched by the Committee for Members in Practice. ICAI
has launched various schemes for the benefit of small and medium practitioners such as:
· Various insurance schemes
· Credit facility
· Practice management software
· GST annual return software etc.
Members may make maximum use of these facilities in their offices.
Remembering our past is extremely important. But we also have to think about building our future. Let's do everything to
keep our freedom and carry it through the years.
Happy Independence Day to all. Let's take some resolutions on this Independence Day i.e. to Save Water, not to waste food,
help the needy, make effective use of time. I wish and pray to the almighty that we all and our near and dear ones come out
safely out of this Pandemic and enjoy our lives with great vigor and joy.
Wish you all Good Health & Happiness!!
Regards
Signicant Implications of ICDS and Reporting under Tax Audit
Direct Tax
Introduction and Applicability
q The Income Computation and Disclosure Standards (ICDS) are of much essence as there is
divergence between profits as per AS/ Ind AS and income for the purpose of charge of Income-tax.
q For this purpose, Central Government has issued 10 Income Computation and Disclosure Standards
on 29 September 2016.
q The ICDS are tax accounting standards which needs to be followed in order to compute taxable
income to bring uniformity in tax treatment.
q The journey of ICDS so far is as follows:
q Under ICDS, there is no requirement for maintenance of separate books of accounts.
q In case of conflict between the provisions of the Income-tax Act, 1961 and ICDS, the provisions of
the Act shall prevail.
q The power to notify ICDS has been derived from Section 145(2) of the Income Tax Act, 1961.
q As per Section 145(3), if the Assessing Officer is not satisfied about the correctness or completeness
of the accounts of the assessee, or where the method of accounting provided (cash or mercantile)has
not been regularly followed by the assessee, or income has not been computed in accordance with
ICDS, the Assessing Officer may make an assessment in the manner provided in section 144. Hence,
The Inspiring Professional’s | August 2020 05
it is mandatory to follow ICDS.
q The applicability of these ICDS is as under:
m ICDS apply to all assesses (other than an individual or a HUF not required to get
accounts audited in relevant previous year under section 44AB)
m following the mercantile system of accounting,
q For the purposes of computation of income under the head PGBP or Other Sources
Issue: Whether an assessee can follow different methods of accounting for different sources of
income under the same head of income, or different heads of income. Also, how ICDS will
apply in such cases.
Comments:
As per the current position of Income Tax Act, different methods of accounting for different heads of
income or different sources of income can be followed.
Following different methods of accounting for different sources of income does not distort the
correct income for the particular source. What is now not permissible is following of a hybrid
method for the same source of income.
An assessee therefore continues to have the choice of following mercantile system of accounting for
certain sources of income, and cash system of accounting for other sources of income.
ICDS applicability
Where an assessee follows cash system of accounting for certain sources of income and mercantile
system of accounting for others, ICDS would apply only to those sources of income, where
mercantile system of accounting is followed and would not apply to those sources of income, where
cash system of accounting is followed.
Issue: Whether ICDS are applicable to taxpayers covered by Presumptive Tax Schemes.
Comments:
There is no specific exclusion under the notification for taxpayers falling under the presumptive tax
schemes from the purview of ICDS.
However, where the presumptive tax scheme involves computation of tax on the basis of gross
receipts, turnover, etc., the CBDT has taken a view that the ICDS on revenue recognition would
apply to compute the gross receipts or turnover in such cases. (Refer Question 3 contained in the
CBDT Circular no. 10/2017, dated 23rd March, 2017)
Assessee having PGBP and
Other Sources Income having
Others To Follow ICDS
ICDS I: Accounting Policies
Comments:
ICDS is not applicable for the purpose of maintenance of books of account and MAT and AMT are based
on book profits. So, ICDS would not apply to the computation of “book profits” for the purposes of MAT
and AMT.
q For compliance of ICDS, there is no separate certificate required rather the ICDS adjustments have
been made part of Tax Audit Report. The reporting is to be done in Clause No. 13 and 14 of Form
3CD.
Author's Note: The ICDS are the tax accounting standards. It is important to understand the differences between ICDS and
Accounting standards (AS/ Ind AS) so that necessary adjustments under ICDS can be identified and made in
computation of income. Hence, the focus is to understand those differences with proper support of examples in the form
of draft reporting in tax audit report.
This article covers only ICDS I to ICDS V. The list of differences discussed hereinunder is not an exhaustive list.
Detailed explanation on Prudence
As per ICDS I para 4(ii), no mark to market or expected losses would be allowed as deduction unless
specifically permitted in a particular ICDS or Income-tax law.
This provision has been supported amendment by Finance Act, 2018.
Section 36(1)(xviii) of IT Act- MTM (mark to market) loss or other expected loss, computed in
accordance with notified ICDS are allowed as deduction.
Section 40A(13) of the IT Act- Deduction or allowance in respect of MTM loss or other expected loss
would not be allowed, except when allowable under section 36(1)(xviii).
Reporting in Tax Audit Report
Particulars ICDS I AS 1 Ind AS 1
Materiality ICDS does not recognize the concept of 'materiality' for selection of accounting policies
Concept of materiality exists
Concept of materiality exists
Prudence No concept of prudence. No mark to market or expected losses would be allowed as Deduction unless specifically permitted in a particular ICDS or Income-tax law
Prudence is considered for selection and application of accounting policies
Similar to AS
Question: Whether the same provisions apply for MTM gain or other expected incomes as well. rd
Yes, Refer Question 8 of CBDT Circular 10/2017 dt. 23 March 2017Answer:
Increase in Profit Decrease in Profit Net Effect Remarks
ICDS I 1,00,000 1,00,000 Mark to market loss booked on Investment not held as stock in trade INR 1,00,000 not allowed as per ICDS
Author's Note: Though Income Tax Act does not recognize the concept of prudence and hence, mark to market losses or expected loss will not be allowed as deduction. Certain cases where ICDS allows mark to market losses can be:
a) ICDS VIII: The inventory being securities other than securities not listed on a recognized stock exchange, or listed but not quoted on a recognized stock exchange with regularity from time to time, shall be valued at lower of actual cost or net realizable value in accordance with ICDS. If NRV in these is lower than cost, such losses would be allowed as deduction.
B) ICDS VI: In case of Forward Exchange Contracts for underlying transaction, exchange differences are recognized in the statement of profit and loss in the reporting period in which the exchange rates change.
Substitution by Finance Act, 2018
Section 145A was substituted by Finance Act, 2018 which derives that
q The valuation of inventory shall be made at lower of actual cost or NRV computed in accordance
with ICDS
q The valuation of purchase and sale of goods or services and of inventory shall be adjusted to include
the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the
assessee to bring the goods or services to the place of its location and condition as on the date of
valuation.
ICDS II: Valuation of Inventories
Particulars ICDS II AS 2 Ind AS 2
Dissolution of Firm/AOP
In case of dissolution of a partnership firm/AOP, inventory on date of dissolution to be valued at NRV whether business is continued or not
No such specific provision though on liquidation, realizable values are used (since the enterprise is no longer a going concern)
Same as AS 2
Taxes and Duties
The costs of purchase shall cons i s t o f purchase pr ice including duties and taxes, f r e i g h t i n w a r d s & o t h e r expenditure directly attributable To the acquisition. (Inclusive method)
The costs of purchase shall consist of purchase price including duties & taxes ( o t h e r t h a n t h o s e subsequently recoverable by the enterprise from the taxing authorities), freight inwards & other expenditure directly attributable
Similar to AS 2
Total
Purchase 9,00,000 90,000 9,90,000
Sale 9,00,000 90,000 9,90,000
As per AS/ Ind AS (Exclusive Method), trading account would be as under:
Hence, there will not be any impact on taxable profits.
Particulars Amount Particulars Amount
To Gross Profit 3,00,000
30,000
60,000
6 GST credit availed on cost of goods sold 60,000
Total 2,10,000 2,10,000
Revenue in case outcome of contract cannot be measured reliably
Revenue should be recognized only to the extent of contract cost incurred
However, non-recognition of margins is permitted only up to stage of completion of 25% (but not beyond that)
Revenue should be recognized only to the extent of contract cost incurred of which recovery is probable
The above is not subject to any threshold
Similar to AS 7
Future/ anticipated losses are not permitted to be recognized upfront.
Only losses actually incurred are allowed as a deduction.
When it is probable that total contract costs will exceed total contract revenue, the expected loss is required to be recognized as an expense immediately
Similar to AS 7
Retention Money
ICDS III specifically provides that retention money shall accrue to the contractor for computing revenue based on percentage of completion method
No explicit guidance in the s t anda rd bu t a s imi l a r approach is followed
N o e x p l i c i t guidance in the standard but a similar approach is followed
Insertion by Finance Act, 2018
A new section 43CB has been inserted by Finance Act 2018 which supports the above provisions
included in ICDS is as follows:
q Profits and gains arising from a construction contract or a contract for providing services shall be
determined on the basis of percentage of completion method.
q However, the profits and gains arising from a contract for providing services,
q a) with duration of not more than 90 days be determined on the basis of project completion
method;
q B) involving indeterminate number of acts over a specific period of time shall be determined
on the basis of straight line method
q The same provisions shall apply to retention money as well.
ICDS III 1,10,000 1,10,000 Retentions not Charged to revenue -50,000 Expected losses Charged to PL as per AS 7 – 60,000
ICDS IV: Revenue Recognition
Particulars ICDS IV AS 9 Ind AS115
Revenue Recognitio n- percentage Completio n method
Revenue to be recognized on percentage of completion method Completed service contract method permitted only for service contracts wi th duration of not more than 90 days.
P e r c e n t a g e completion method to be followed Completed service c o n t r a c t m e t h o d permitted in some cases only There is no bright-line of 90 days
When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue can be recognized only to the ex ten t of the expenses r e c o g n i z e d t h a t a r e recoverable. Further, there is no bright- line of 90 days.
Expected losses
Expected losses on executory contracts not permitted to be recognized upfront (ICDS IV scopes out executory contracts)
AS 29 requires recognition of provision for onerous contracts
Similar to AS 29
Dividend Income
To be dealt as per Income Tax Act
Dividends from investments in shares are not recognized in the statement of profit and loss until a right to receive payment is established
Requirements for recognition of dividend income are similar to AS 9 but are governed by Ind AS 109
Interest Income
Interest income is to be recognized on time basis determined by the amount outstanding and the rate applicable
Same as ICDS Interest is recognized using the effective interest method
Interest on tax refunds
Interest on refund of any tax/duty etc. shall be deemed to be the income of the previous year in which such interest was received
No specific provision. General principle of accrual may or may not give the same result as is envisaged in ICDS
No specific provision. General principle of accrual may or may not give the same result as is envisaged in ICDS
Discount or premium on debt securities
Discount or premium on debt securities usually is treated as it were accruing over the period to maturity
Usua l l y, d i s coun t o r premium on debt securities i s t r ea ted as i t were accruing over the period to maturity. However, some companies treat discount or premium on redemption as a deduction from Securities Premium Account
The requirement is to treat it as per effective rate method
Substitution by Finance Act, 2018
Section 145B was substituted by Finance Act, 2018 which derives that
q Interest received on compensation or on enhanced compensation, deemed to be income of year in
which it is received
q Claim for escalation of price in a contract or export incentives shall be deemed to be the income of
the PY in which reasonable certainty of its realization is achieved
ICDS IV 20,000 20,000 Interest Income as per effective interest method as per Ind AS INR 1,00,000 while interest Income on time proportion basis as per ICDS INR 1,20,000
ICDS V: Tangible Fixed Assets
Particulars ICDS V AS 10 Ind AS16
Revaluation of fixed assets
AS 10 provides guidance on revaluation of items of PPE
Revaluation of PPE is permitted
Depreciation Depreciation is governed by the provisions of Income-tax Act
The depreciable amount of an asset is allocated on a systematic basis over its useful life
Similar to AS 10
Sale of asset Income from sale of asset shall be computed as per requirements of Income Tax Act (Block of assets concept)
The gain or loss arising on sale of asset is the difference between the net disposal proceeds, if any, and the carrying amount of the item
Similar to AS 10
Conclusion
ICDS have great importance to bring uniformity in tax treatment. As some taxpayers follows AS while
some other follows Ind AS. It is important to bring all on a common platform to compute taxable income.
Sources
q CBDT Notification No. 87/2016 dated 29 September 2016
q CBDT Notification No. 88/2016 dated 29 September 2016
q FAQs on ICDS issued via Circular No. 10/2017 dt. 23dr March 2017
q Finance Act, 2018
Net Effect Remarks
ICDS V 5,000 + 5,000
10,000 Depreciation effect on taking it as per IT Act- Depreciation as per IT Act 25,000 and as per Co. Act 20,000
Profit on sale of assets 5,000 taken on block of Asset method
Reverse charge on payments to Government and other statutory bodies – Confusion Prevails
Under GST, normally the liability to pay GST remains with the supplier unless the said supply is
covered by the reverse charge mechanism.
Section 9(3) of the CGST Act provides that GST would be payable on reverse charge basis by the
recipient of service on specified categories of supply of goods or services, as may be notified by the
government.
Furthermore, Notification No. 13/2017 – Central Tax (Rate) provides the list of services in respect of
which CGST is payable on reverse charge basis.
Sr. No. 5 of Notification No. 13/2017 provides that any business entity located in the taxable territory
would be liable to pay GST on reverse charge basis on all the services provided by the government or
local authority except for the services of renting of immovable property, services by the department
of post, etc.
The relevant entry in consideration is:
A taxpayer makes various kinds of payments to statutory authorities such as factory licence fees,
ROC fees, royalty charges, spectrum charges, pollution control fees, external development and
infrastructure, development charges, licence fees, registration fees, payments made to drug
controllers, BIS etc.
In authors, views, in order to examine whether a payment made by the taxpayer will attract GST on
Sl. No.
Recipient of services
5 Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding, - (1) renting of immovable property, and (2) services specified below- (I) services by the Department of Posts by way of
speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority;
(II) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
(III)Transport of goods or passengers.
Central Government, State Government, Union territory or local authority
Any business entity located in the taxable territory.
Indirect Tax
CA Pooja Raheja ACA, B.Com
reverse charge, the following steps have to be taken:
Step 1 The first step would be to determine whether the authority/body to whom the payment is being made qualifies as a 'government' or 'local authority' Step 2 If yes, then the second step would be to determine whether the payment is a consideration for any supply made to the tax payer. Step 3 If Yes, whether the same is exempted under GST Law.
STEP 1
Under GST Law, the legislature has used following terms: A. Government B. Local Authority C. Governmental Authority D. Government Entity
Thus, it is pertinent to analyse the meaning of the above terms so as to determine the person liable to pay GST on such supply. The provisions of reverse charge is applicable only in case of supply of services by Government and local authority. In case, services are provided Governmental Authority, then the liability to pay GST shall rest with such Governmental Authority. The statutory definition of such terms are as under:
Government (Section 2(53) of the CGST Act)
Local Authority (Section 2(69) of the CGST Act)
Governmental Authority (Para 2(zf) of The Notification No. 11/2017- CT(R)
Government Entity
“Government ” to mean the Central Government. Similarly, respective StateGST Acts defines “Government ” to mean theState Government
“Local authority” means as below-
(A) a Panchayat (B) a Municipality
(C) a Municipal Committee, a Zilla Parishad, a District Board, and any other authority legally entitled to, or entrusted by the Central Government or any State Government with the control or management of a municipal or local fund;
(D) a Cantonment Board asdefined in section 3 of the Cantonments Act, 2006;
(E) a Regional Council or a District Council constituted under the 6th Schedule to the Constitution;
(F) a Development Board constituted under article 371 of
the Constitution; or (G) a Regional Council constituted
under article 371A of the Constitution;
“Governmental A u t h o r i t y ” a s a n authority or a board or any other body, - (I) set up by an Act of Parliament or a State Legislature;or (II) established by any Government,with 90 per c e n t o r m o r e participation by way of equity or control, to c a r r y o u t a n y function entrusted to a Munic ipa l i ty under Article 243 W of the Constitution or to a Panchayat under Article 2 4 3 G o f t h e Constitution.
“ G o v e r n m e n t Enti ty”means an authority or a board or any other body including a society, trust, corporation, (I) set up by an Act of Parliament or State Legislature; or (II) established by any Government, with 90 per cent o r m o r e Participation by way of equity or control, to carry out a function entrusted b y t h e C e n t r a l Government, State Government, Union Territory or a local authority.”
Thus, the taxpayers as a first step are required to determine whether the authority/body to whom the payment is being made qualifies as a 'government' or 'local authority'.
STEP 2
The second step is to determine whether the amount paid is for receipt of a supply?
Section 7 of the CGST Act, 2017 which explains the scope of the term supply has been succeeded by the term 'for consideration'. The term consideration has been defined under Section 2(31) of CGST Act as-
(a) Any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b) The monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:
Provided that the deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply
From the above definition, it can be said that the concept of consideration embodies the concept of quid pro quo, which means that there must be a reciprocity and the person providing the consideration is expected to receive something in return. Therefore, it is clear that unless and until there is reciprocity for the amount paid, the same does not partake the character of consideration. In light of the same, it will be correct to infer that not every payment made to the government and authorities is leviable to GST
Further, it is imperative to keep in mind the distinction between the taxes, cesses and fees. The definition of fee has undergone a sea of change and a quid pro quo doesn't necessarily need to be established. The Courts in India has segregated the fees into two categories:
A) Compensatory fee
B) Regulatory fee The compensatory fee will be of a nature of quid pro quo whereas regulatory fee will be in the nature of license fee. Fee can also be said to be charged when it is for a specific purpose for a specific category of persons and that the benefit is given to only that specific category. Further, tax is of a compulsory nature which is imposed by a public authority for a public purpose.
CBEC Circular No. 192/02/2016-ST, dated 13.4.2016 which inter alia clarifies as under:
5. Services provided in lieu of fee charged by Government or a local authority.
It is clarified that any activity undertaken by Government or a local authority against a consideration constitutes a service and the amount charged for performing such activities is liable to Service Tax. It is immaterial whether such activities are undertaken as a statutory or mandatory requirement under the law and irrespective of whether the amount charged for such service is laid down in a statute or not. As long as the payment is made (or fee charged) for getting a service in return (i.e., as a quid pro quo for the service received), it has to be regarded as a consideration for that service and taxable irrespective of by what name such payment is called. It is also clarified that Service Tax is leviable on any payment, in lieu of any permission or license granted by the Government or A local authority.
Basis above discussion, so long as the payment is for a receiving service (i.e. in case where quid pro
quo is established) GST will be payable.
STEP 3
If a taxpayer comes to a conclusion that the payments made are for the services provided by the Government or Local authority and there exist a quid pro quo, the next step is to determine whether the same is covered under any exemption Notification or not. Some of the exemptions which may be relevant in the present case are tabulated hereunder:
Sl. No.
Description
1. Entry 5 Services provided by Governmental Authority by way of any activity in relation to any function entrusted to a Panchayat Under Article 243G of the Constitution.
2 Entry 6 Services by the Central Government, State Government, Union territory or local authority excluding the following services- a. services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than the Central Government, State Government, Union territory; b. services in relation to an aircraft or a vessel, inside
or outside the precincts of a port or an airport; C. transport of goods or passengers; or
any service, other than services covered under entries (a) to (c) above, provided to business entities
3. Entry 9 Services provided by Central Government, State Government, Union territory or a local authority where the consideration for such services does not exceed five thousand rupees: Provided that nothing contained in this entry shall apply to-
(i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than the Central Government, State Government, Union territory;
(ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
(Iii) transport of goods or passengers:
Provided further that in case where continuous supply of service, as defin of the ed in sub-section (33) of section 2 Central Goods and Services Tax Act, 2017 , is provided by the Central Government, State Government, Union territory or a local authority, the exemption shall apply only where the consideration charged for such service does not exceed five thousand rupees in a financial year.
In a nutshell, the first step would be to determine whether the authority/body to whom the payment is being made qualifies as a 'government' or 'local authority'. If yes, then the second step would be to determine whether the payment is a consideration for any supply made to the tax payer. If Yes, whether the same is exempted under GST Law.
4. Entry 47 Services provided by the Central Government, State Government, Union Territory or a local authority by Way of: (I) registration required under any law for time being in force; (II) testing, calibration, safety check or certification relating to protection or safety of workers, consumers or public at large, including fire license, required under any law for time being in force,
5. Entry 61 Services provided bythe Central Government, StateGovernment, Union territory or local authority by way of issuance of passport, visa, driving licence, birth certificate or Death certificate
6. Entry 62 Services provided by the Central Government, State Government, Union territory or local authority by way of tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to the Central Government, State Government, UnionTerritory or local authority under such contract.
7 Entry 63 Services provided by the Central Government, State Government, Union territory or local authority by way of assignment of right to use natural resources to an individual farmer for cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel, raw Material or other similar products.
Corporate Law
Buy Back of Shares by an Unlisted Company- Efcient Tool to save tax and rules of Buy Back
A company having distributable reserves or adequate profits has two options to distribute the same to
its shareholders:
I. Declare dividend to shareholders; or
II. Buy Back of shares, which enables a company to purchase its own shares.
With the change regarding taxability of dividends in the hands of shareholders, buy back of shares
can prove to be a tax efficient tool for are an unlisted company vis-à-vis distribution of dividend.
1. TAXABILITY OF DIVIDEND UNDER OLD PROVISIONS AND TAX ON BUY BACK OF
SHARES UNDER NEW PROVISIONS.
1.1.Up-till now domestic companies distributing, dividend were required to pay Dividend
Distribution tax (DDT), at an effective tax rate of 20.35% as per Section 115-O of the Income tax
act. Also, dividend received by certain specified assessee (for instance Individuals, but excluding
domestic companies), in excess of Rs.10 lakhs, was chargeable to tax at a flat rate of 10%, as per
Section 115BBDA.
1.2.The amendment through Finance Act, 2020, provides that DDT is no longer applicable to
dividends declared on or after 1st April, 2020 (AY 2021-22 onwards). Further, exemption under
Section 10(34) and tax under Section 115BBDA is no longer applicable after that date.
Resultantly, dividends received, on or after 1st April, 2020, will be taxed in the hands of the
shareholders, at the rates applicable to them.
1.3.Now individual shareholders having taxable income of more than Rs.50 Lacs and for corporate
shareholders, the effective tax rate on dividend is between 34.32% to 42.74%, depending upon
applicable slab rate and applicable surcharge. Whereas Finance Act, 2013, inserted Section
115QA, which provides for the levy of tax, on account of buy-back of shares, at an effective rate
of 23.296% (20% + 12% SC + 4% H&EC), in case of a domestic unlisted company. There is no
tax in the hands of the share holders on receipt of consideration on buy back of shares by the
company as the tax is to be paid by the company itself on the distributed income. Thus, buy back
of shares by unlisted companies is a tax efficient mechanism for distributing surplus to its
shareholders.
2. BUY BACK OF SHARES – WHETHER SECTION 56(2)(x) GETS INVOKED?
2.1.Section 56(2)(x) starts with “where any person receives, in any previous, or persons on or after
the 1st day of April, 2017, any property, other than immovable property….”.
2.2.Thus, for Section 56(2)(x) to be made applicable on a company, buying back its shares, the
Author can be reached at [email protected]
CA SatishGoyal FCA, B Com
Shares so bought back should become the “Property” of such company.
2.3. As per Sub-Section (7) of Section 68 of Companies Act “Where a company buys back its own
shares or other specified securities, it shall extinguish and physically destroy the shares or
securities so bought back within seven days of the last date of completion of the buy back.”
2.4. Thus, in a scheme of buy back, shares bought back are no more in existence as they are
extinguished by writing down the Share Capital. So, when a company buys back its shares, such
shares do not become “property” or asset of the company.
2.5. As a result, in our opinion provisions of Section 56(2)(x) cannot be invoked in the case of any
company buying back its own shares.
3. BUY BACK OF SHARES – WHETHER SECTION 50CA GETS INVOKED?
3.1. Next question which crops up is whether provisions of Section 50CA of the Income Tax Act, would
be applicable on the shareholders offering their shares for buy back?
3.2. Taxability of buy back of shares is governed by Section 115QA, introduced by Finance Act, 2013.
Section 115QA(1) starts with “Notwithstanding anything contained in any other provision of this
Act”. Thus being a non-obstante clause it shall supersede other provisions, in relation to buy back in
the I T Act.
3.3. Further, Section 10(34A), also introduced through Finance Act, 2013, provides for exemption of
“any income” arising to an assessee, being a shareholder, on account of buy back by a company, as
referred to in Section 115QA. Thus, whatever income arises to a shareholder of unlisted company on
account of buy back of shares is exempt.
3.4.As per Section 115QA, read with Section 10(34A), incidence of tax on buy back of shares by the
company arises at the company level and thereafter no tax is required to be paid by the shareholder.
Thus, shareholder need not calculate any income under the head Capital Gains, in accordance with
Section 46A, read with 48, of the Income Tax Act.
3.5. Since there is no taxability, under the head Capital Gains, of the income arising to the shareholder on
buy back, in our opinion computational provisions as contained in Section 48 are not invoked.
Resultantly, there is no applicability of Section 50CA.
4. DETERMINATION OF VALUE OF SHARES FOR BUY BACK
4.1. Although, there does not appear to be any bar on the company, to determine the value at which the
buy back of the shares can be undertaken, however, still, value of the shares has to be determined on
some basis.
4.2. The value determined should not be higher than the FMV of the shares of the company, as otherwise,
the differential amount can be charged to tax as deemed dividend u/s 2(22)(e), if relationship
between the shareholder and company, as provided under that section is satisfied.
5. SECTION 68 (COMPANIES ACT, 2013) – PRE-REQUISITES FOR BUY-BACK
5.1. Let us now understand the provisions applicable in case of buy back under the Companies Act,
2013.
5.2. Provisions governing the buy back under Companies Act, 2013 are contained in Section 68 to
Section 70 and also Rule 17 of the Companies (Share Capital and Debenture) Rules, 2014.
q We have to confirm that :
Norms to be complied for Buy Back of Share
Action to be taken
1. Call a Board Meeting to approve buyback scheme.
q If buyback is up to 10 %, of the total paid up Equity Capital and Free Reserves (including securities premium) of the Company. Only Board approval is required.
q If in excess of 10 % but less than 25%, go for passing Special Resolution. Notice should be accompanied by an explanatory statement stating particulars like necessity for buy back, class of shares, Method, Price of buyback, Basis of choosing price of buyback, Maximum amount of buyback, Source of getting finance and Time Limit of completion of process.
q -Buy-back is authorized by its Articles of Association.
q Special resolution is passed by the company authorizing buy-back. However, if the buy-back is 10%
or less of the total paid-up equity capital and free reserves (including securities premium), board
resolution, in this regard, would suffice.
q The buy-back has to be 25% or less of the total paid up Equity Capital and Free Reserves (including
securities premium) of the Company.
q The Ratio of debt (secured and unsecured) owed by the company is not more than twice the Share
Capital and its free reserves (2:1) after such buy-back.
q All the shares or other specified securities for buy-back are fully paid up.
q There cannot be more than one such offer of buy-back in a period of 365 days.
q The notice of the meeting at which the Special Resolution is proposed to be passed shall be
accompanied by an explanatory statement stating particulars like necessity for buy back, class of
shares, etc.
q Every buy-back should be completed within 12 months from the date of passing Special Resolution
or the Board Resolution.
q After completion of buy-back the company cannot make any further issue of same kind of shares
within a period of six months.(Exceptions: Bonus issue, discharge of subsisting obligations,
conversion of preference shares or debentures)
q As per Section 70 of the Companies Act, 2013 a company shall not buy-back its shares:
m Through any subsidiary company, including its own subsidiary company;
m Through any investment company or group of investment companies;
m If default subsists in repayment of public deposits accepted or interest payable thereon,
redemption of debentures or preference shares or payment of dividend to any shareholder or
repayment of any term loan or interest payable thereon to any financial institution or bank.
The prohibition is lifted if the default has been remedied and a period of 3 years has elapsed
after such default ceased to exist.
Procedure for Buyback of Shares under Companies (Share Capital and Debentures) Rules, 2014.
Action to be taken
2.Following information is to be provided:-
Details of shares purchased and sold by directors /KMP and Promoters during the period of twelve months preceding the date of the board meeting at which the buy-back was approved and from that date till the date of notice convening the general meeting;
q Detail to be submitted in form SH-8. Format is as under:
q Quantum and share to be tendered by Director, KMP and Promoters.
q 12 Months share holding by directors. e.g:-
Price of shares q It should be on the basis of fair market value of share as per latest balance sheet to avoid tax under section 2(22)(e) of the Income Tax Act.
Report from Auditors required to be filed
q Report of auditor to inquire state of affairs, to check permissible capital payment and to check BOD opinion
Limited review of audit report/BS
q If audited accts. are more than 6 months old.
3.Form SH-8 required to be filed – which is related to letter of offer. It is to be filed after passing of resolution by Board or by Members as the case may be.
q Documents to be attached with SH-8 a) Three years audited balance sheets b) Detail of promoters c) Declaration by Auditors d) Copy of Notice of Board
e)Copy of Board Resolution and Special Resolution(if passed)
4.SH-9 (DELARATION OF SOLVANCY): Form SH-9 along with Letter of Offer is required to be filed at the time of filing of SH-8
q Documents to be attached with SH-9 a) Copy of Board Resolution and Special Resolution(if
passed) b) Statement of Assets and Liabilities c) Audit Report/ (Limited Review) d) Affidavits by two directors as per Rule 17(3)
e)Provisional Balance sheet
5. Offer letter to share holders q After filing of SH-8 with ROC, there is a requirement of sending this letter to the shareholders within 20 days from its filing with ROC.
6. Period of offer q Open period of offer is 15 days to 30 days. In case all shareholders give their consent, company can reduce the time limit from 15 days.
7. Verification of letter of offer q It is required to be complete within 15 days by company/Shorter period as decided by the all share holders
Date Trfd. from
Price per share
Action to be taken
8. Opening of new Bank A/c q After Closer of offer there is a requirement of opening of new bank account, in which company will transfer funds. The company shall not utilize any funds borrowed from banks etc for the purpose of buy back. Also company shall not utilize the proceeds of an earlier issue of the same kind of shares for buy back. Amount lying in the bank account will be used exclusively for payment of consideration for buy back of shares.
9. Time period for payment to share holder.
q Payment is to be done within 7 days of approval of buy back. (As per IT Act , tax on buy back is to be deposited within 14 days)
10. Form SH-10 Register is required to be maintained in the format of SH-10, which contains information's relating to share bought back by the company and share certificates cancelled/destroyed after buy back.
11. Authentication of all compliances relating to buy back
SH-15 Certificate by 2 Directors (Compliance Certificate) duly signed by CS
12. Filing of Form SH-11 This form is required to be filed within 30 days of completion of all formalities. Following documents are to be filed: · Board Resolution/Special Resolution (as per Para 7) · Balance sheet with limited review (as per Para 7) · SH-15 Certificate (Compliance by Directors) duly
signed by CS · Particulars relating to holders of securities before buy-
back l Description of shares or other specified securities
bought back
General Areas
Introduction
q The Micro, Small and Medium Enterprises Development Act, 2006 was promulgated on 16th June,
2006 to provide for facilitating the promotion and development and enhancing the competitiveness
of micro, small and medium enterprises and for matters connected therewith or incidental thereto.
q The object of this enactment was to provide privileges to the industry with limited means so that they
can grow and compete in entire business gamut.
q In order to promote MSME, the government has recently come up with a number of initiatives.
Applicability of the Act
q The Act applies to any class or classes of enterprises whether proprietorship, Hindu undivided
family, association of persons, co-operative society, partnership firm, company or undertaking, by
whatever name called.
q The enterprises should be engaged in
A) The manufacture or production of goods pertaining to any industry specified in the First
Schedule to the Industries (Development and Regulation) Act, 1951 (65 of 1951) (The
schedule can be referred from the following Link
https://upload.indiacode.nic.in/schedulefile?aid=AC_CEN_11_61_00006_195165_1517
Criteria for classification of MSME
A) Upto 30th June 2020
q Upto 30th June 2020, the classification of Micro, Small and Medium Enterprises was based on
investment criteria. Also, there were two separate categories of investment limits in case of
manufacturing units and service provider.
q The limits set were very low and to enjoy the benefits under MSME, the entrepreneurs had to keep
their investment below the limit prescribed under the Act. The limits were as below:
CA Ashutosh Goyal ACA, M.Com
CA Uma Garg FCA, IP, DISA, CCA
A)With effect from 1st July 2020
q The criteria for classification of Micro, Small and Medium Enterprises has been amended vide
Notification dated 26th June, 2020 bearing No. S.O. 2119(E).
q The criteria for classification of MSME is now equal for manufacturing units and service providers
as there is no specific mention of manufacturing units and service providers.
q Now, a composite criteria of turnover and investment shall apply for classification of micro, small
or medium enterprise. The Investment and turnover limit has been changed. This is for the first time
in history of this Act, the limit has been revised with a view to boost life in small business which are
in distressed position due to drastic effect of COVID-19 pandemic. Now with the enhanced limit a
large section of business will get benefitted under the act. The revised coverage limits after
composition can be understood as tabled below:
q As now a composite criteria of turnover and investment is there. If an enterprise crosses the ceiling
limits specified for its present category in either of the two criteria of investment or turnover, it will
cease to exist in that category and be placed in the next higher category but no enterprise shall be
placed in the lower category unless it goes below the ceiling limits specified for its present category
in both the criteria of investment as well as turnover.
q All units with Goods and Services Tax Identification Number (GSTIN) listed against the same
Permanent Account Number (PAN) shall be collectively treated as one enterprise and the turnover
and investment figures for all of such entities shall be seen together and only the aggregate values
will be considered for deciding the category as micro, small or medium enterprise.
How to calculate Turnover
While calculating the turnover limit following points would be considered:
q Exports of goods or services or both, shall be excluded while calculating the turnover of any
enterprise whether micro, small or medium, for the purposes of classification.
Existing MSME Classification valid till 30th June 2020
Sector Criteria Micro Small Medium
Manufacturing Investment < Rs.25 lakh < Rs.5 crore < Rs.10 crore
Services Investment < Rs.10 lakh < Rs.2 crore < Rs.5 crore
Revised MSME Classification w. e. f 01.07.2020
Criteria Micro Small Medium
q Information as regards turnover and exports turnover for an enterprise shall be linked to the Income
Tax Act or the Central Goods and Services Act (CGST Act) and the GSTIN.
q The turnover related figures of such enterprise which do not have PAN will be considered on 1st self-
declaration basis for a period up to 31 March, 2021 and thereafter, PAN and GSTIN shall be
mandatory.
How to calculate investment in Plant and Machinery
q The calculation of investment in plant and machinery or equipment will be linked to the Income Tax
Return (ITR) of the previous yearfiled under the Income Tax Act, 1961
q In case of a new enterprise, where no prior ITR is available, the investment will be based on self-
declaration of the promoter of the enterprise and such relaxation shall end after the1st31st March of
the financial year in which it files its first ITR.
q The value of plant and machinery or equipment of the enterprise, shall have the same meaning as
assigned to the plant and machinery in the Income Tax Rules, 1962 framed under the Income Tax
Act, 1961 and shall include all tangible assets (other than land and building, furniture and fittings).
The GST paid on purchase of plant and machinery will not form part of cost of such assets.
How to register as MSME
Now there is new portal Udyamregistration.gov.in for registration which is free and without much
documentation.
q The Aadhar number of the applicant is must for registration.
q Aadhar number need to be validated through Aadhar OTP therefore, it is necessary the there should
be a valid contact number seeded in Aadhar detail.
q The Aadhar number shall be of the proprietor in the case of a proprietorship firm, of the Managing
partner in the case of a partnership firm and of a Karta in the case of a Hindu Undivided Family
(HUF).
q In case of a Company or a Limited Liability Partnership or a Cooperative Society or a Society or a
Trust, the organisation or its authorised signatory shall provide its GSTIN and PAN along with its
Aadhaar number.
q In case of the enterprises registered prior to 1st July, 2020 will have to get themselves re- register so
as to classify them on the basis of new limits and they will be assigned new category. The existing
enterprises registered prior to 30th June, 2020, shall continue to be valid only for a period up to the
31st day of March, 2021. There is separate Tab for fresh registration and re registration of existing
MSMEs
Updation of information and transition period in Classification:
q Any kind of change in the particulars of enterprise required to be updated on Udyam Registration
portal, including the details of ITR and GST return for the previous financial year and other
additional information as may be required, on self-declaration basis.
q In case existing enterprises do not update the registration on new portal then it will deemed to be
suspended. The classification status will be changed on the basis of information updated on the
portal.
q In case of Upward reclassification on the basis of investment in Plant and machinery or equipment
and consequent reclassification will take effect from expiry of one year from the close of the year of
registration.
q In case of Downward Reclassification, the enterprise will continue in its present classification till the
closure of financial year and it will be given the benefit of changed status only will effect from 1st
April of the financial year following the year in which such change has taken place.
Facilitation and Grievance redressal of Enterprises
q This is a welcome step where government has announced for establishment of mechanism for
grievance redressal of enterprises.
q This platform will work district wise and the District Industry Centre will work as single window
system to entertain the difficulties being faced in registration and other process.
Benefits available to MSME
In recent development every enterprise who satisfy the eligibility criteria want to get registered under the
Act because of the sizable benefits available to registered MSMEs. The major benefit that is available is
extended credit facilities announced under Atmanirbhar Bharat Abhiyan by Government of India. The
shining features of these announcements are following:
q Collateral free loans
The Government has introduced various initiatives for MSME/SSI that allow them to avail credit
without collateral. One of the best MSME registration benefits, the initiative to provide collateral-free
loan is undertaken by GOI (Government of India), SIDBI (Small Industries Development Bank of India)
and the Ministry of Micro, Small and Medium Enterprise under the name The Credit Guarantee Trust
Fund Scheme.
This is by far the best MSME registration benefits for small business owners. An emergency credit line
has been allowed to business/MSMEs from banks and NBFCs up to 20% of their entire outstanding
credit as on 29.2.2020.
Eligibility: Borrowers having outstanding up to Rs. 25 Crores and turnover of Rs. 100 crores are eligible
to take benefit.
Tenure: The tenure of the loan would be 4 years with moratorium of 12 months on Principal repayment.
100% credit guarantee: There will be 100% credit guarantee cover to Banks and NBFCs on principal and
interest.
Validity: This scheme can be availed till Oct 31, 2020 ·
No fresh collateral: It has been clearly specified that there would be no fresh collateral or guarantee fee
for availing benefits under the scheme
q Distressed Asset Fund-Subordinate Debt for Stressed MSMEs
The RBI vide circular No. RBI/2020-21/09 dated 1st July, 2020 has issued instruction to banks to treat
the funds infused by the promoters out of credit facility received under CGTMSE in stressed and NPA
MSMEs will be treated as Quasi Equity/Equity while considering the eligibility for computation of debt
equity computation.
It is pertinent to mention here that these extended credit facilities are available to units who have already
availed credit facility as the loan amount has been capped at 20% of existing outstanding amount. It is
silent about the units which are new or where there is no outstanding loan amount as on 29.02.2020.
q Restructuring of MSME loans
The Reserve Bank of India (RBI), in its second bi-monthly monetary meet held on August 6 provided a
fresh lifeline to millions of stressed small businesses by extending the provision of restructuring of
loans.
The RBI has decided that stressed MSME borrowers will be made eligible for restructuring their debt
under the existing framework, provided their accounts with the lenders were classified as standard as on
March 1, 2020. This is one time facility and has to be completed by 31st March, 2021. The Total
exposure to borrower should not exceed 25 crores which is including fund based and non fund based
facilities.
Apart from the credit facility there are various advantages available detailed below:
q 50% subsidy is given by Government of India on patent registration by MSMEs having registration
certificate under the Act. This subsidy can be availed by making a separate application in this regard.
q Concessional rate of Interest is available to overdraft facility taken by MSME. The rate of interest is
1% lower than normal rate of interest.
q Early payment facility is available to MSMEs. They are entitled to charge interest on delayed
payment from buyer side in case payment is not made by buyer within 15 days. If the buyer delays
the payment for more than 45 days after accepting the products or services then the buyer has to pay
compound interest along with interests (monthly) on the amount that was agreed to be paid. The
interest rate is three times the rate that is notified by the Reserve Bank of India.
Further there are reporting requirements in tax audit form 3CD regarding interest payable to
MSMEs and under Companies Act, 2013 in case payment is delayed by buyer of goods and services
from MSMEs, the companies are separately required to classify trade payable to MSME and other
trade payables in financial statements.
q Subsidized power rate are available registered MSMEs in case they submit an application with the
department with registration certificate.
q ISO certificate registration charges are reimbursed to registered MSMEs, but have to claim it by
submitting required documents.
q Trademark Application fees reduced to Rs. 4500 (50% reduction) in case of Partnership, LLP,
Companies etc.
Conclusion
The Government policies have always been in favor to MSMEs extending them facilities at large. These
policies are also paving a way to make ourselves a Self Reliant country Therefore it is the need of the
hour to take maximum advantage of benefits available and harness them.
Webinar on Benami Prohibition Amendmend Act 2016 and Section 68 to Section 69C of the IT Act
Webinar on Women Empowerment
Webinar on Simplied Approach to Accounting Standards IND AS and Reporting Regarding COVID-19 in Accounts
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The Inspiring Professional’s | August 2020The Inspiring Professional’s | August 2020 31
Just JokingJust JokingJust Joking
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