KGS. Your reputation is more important than your pay check, and your integrity is worth more than your career. Ryan Freitas INTEGRITY FIRST

Transcription

1 Your reputation is more important than your pay check, and your integrity is worth more than your career. Ryan Freitas INTEGRITY FIRST

2 INDEX S. No. Topic 1. General Anti-Avoidance Rule (GAAR) 2. Private Placement Under Companies Act, Internal Audit 4. Overview to Secretarial Audit 5. IFRS 15: Revenue from contracts with customers

3 General Anti-Avoidance Rule (GAAR) This article aims to explain What is GAAR? ax Heaven GAAR & SAAR Tax Avoidance and Tax

4 General Anti-Avoidance Rule What is General Anti Avoidance Rule (GAAR)? GAAR is a concept which generally empowers the Revenue Authorities in a country to deny the tax benefits of transactions or arrangements which do not have any commercial substance or consideration other than achieving the tax benefit. Whenever revenue authorities question such transactions, there is a conflict with the tax payers. Thus, different countries started making rules so that tax cannot be avoided by such transactions. Australia introduced such rules way back in Later on countries like Germany, France, Canada, New Zealand, South Africa etc too opted for GAAR. However, countries like USA and UK have adopted a cautious approach and have not been aggressive in this regard. What are Tax Havens? Tax havens are countries which have low tax regimes which provide individuals and business opportunities of tax avoidance or tax evasion. There are roughly 45 tax havens in the world today. In Indian context, Mauritius is considered to be the most significant tax havens or tax evading route. In more precise words the Mauritius route can be described as a channel used by individuals and Multi National Companies to evade paying taxes in India. The tax evasion in India through this route is estimated to be in tune with 55 billion dollar, mostly attributed to the loopholes in a bilateral agreement on double taxation. Thus, in nutshell we can say that GAAR usually consists of a set of broad rules which are based on general principles to check the potential avoidance of the tax in general, in a form which cannot be predicted and thus cannot be provided at the time when it is legislated. The General Anti Avoidance Rule (GAAR)- proposed by the then Union Finance Minister Pranab Mukherjee during the annual budget is anti-tax avoidance rule, drafted by the Union Government of India, which prevents tax evaders, from routing investments through tax havens like Mauritius, Luxemburg, Switzerland. Background of GAAR Lord Tomlin has well said "Every man is entitled to order his affairs so that tax attaching under the appropriate Acts is less than it otherwise would be" (IRC v Duke of Westminster). People adopt various methods so that they can reduce their total tax liability. The methods adopted to reduce their tax liability can be broadly put into four categories: "Tax Evasion"; "Tax Avoidance", "Tax Mitigation" and "Tax Planning". The difference between these four methods sometimes becomes blurred owing to the perception of the tax authorities and / or tax payer.

5 Impact on taxpayers and advisors Generally speaking, should a GAAR permissibly impact the behavior of taxpayers and their advisers? The Aaronson report persuasively critiques the view that a taxpayer should be "entitled to use his wiles and skill without limit in order to secure a lower tax charge." The report goes on to state that it is the responsibility of Parliament "to introduce specific rules to block such attempts" arguing that this leads to "a sort of fiscal chess game, but with an ever increasing number of moves and pieces." The poor design of a GAAR is likely to have adverse consequences. A GAAR has the theoretical advantage of drawing a line in the sand to guide taxpayers between what is acceptable or impermissible tax behavior. However, this advantage is entirely reversed if the GAAR is ambiguous in design or administration, creating uncertainty for taxpayers. By its very nature, a GAAR may also have negative effects for taxpayers. GAARs are generally worded. Although they may help address tax avoidance that is unanticipated by revenue authorities, that same generality can lead to undesirable outcomes. GAARs can also be used by revenue authorities and governments, particularly in constrained fiscal environments, to seek restriction of what would ordinarily be considered legitimate commercial activity, having the potential to cause significant stifling of economic activity. Given that the burden of proof is usually on the taxpayer to defend against a GAAR attack, having a GAAR may also impose a significant and arguably onerous compliance burden on taxpayers. That is, as a GAAR requires an objective enquiry of a taxpayer's purpose, the importance of mastering facts and evidence becomes paramount. Difference between GAAR and SAAR Anti Avoidance Rules are broadly divided into two categories namely "General" and "Specific". Thus, legislation dealing with "General" rules are termed as GAAR, whereas legislation dealing with "Speicifc avoidance are termed as "SAAR" In India till recently SAAR was in vogue i.e. laws were amended to plug specific loopholes as and when they were noticed or were misused enmasse. However, now Indian tax authorities wants to move towards GAAR but are facing severe opposition as tax payers fear that these will be misused by tax authorities by giving arbitrary and wide interpretations. We can say SAAR being more specific provide certainty to taxpayers where as GAAR being general in nature can be misused and is subject to arbitrary interpretation by tax authorities. Tax avoidance vs Tax Evasion Tax evasion is generally the result of illegality, suppression, misrepresentation and fraud. Tax avoidance is the result of actions taken by the assessee, none of which or no combination of which is illegal or forbidden by the law itself. The GAAR provisions do not deal with cases of tax evasion. Tax evasion is clearly distinct from tax avoidance and is already prohibited under the current provisions of the Income-tax Act. Tax avoidance vs Tax mitigation Tax mitigation is a situation where the taxpayer takes advantage of a fiscal incentive afforded to him by the tax legislation by actually submitting to the conditions and economic consequences that the particular tax legislation entails. An example of tax mitigation is the setting up of a business undertaking by a taxpayer in a specified area such as a Special Economic Zone (SEZ). In such a case the taxpayer is taking advantage of a fiscal incentive offered to him by submitting to the conditions and economic consequences of the SEZ provisions in the Income-tax Act e.g., setting up the business only in the SEZ areas and export from the SEZ area. Tax mitigation, as distinct from tax avoidance, is allowed under the tax statute. The GAAR provisions also do not deal with case of tax mitigation.

6 Private Placement Under Companies Act, 2013 This article aims to explain Concept with special conditions Relevant Forms of Private Placement Exempted Companies Penalty

7 Private Placement under Companies Act ) Concept with Special Conditions Private placement means any offer of securities or invitation to subscribe securities to a selected group of persons (not exceeding 50 or shall not be more than 200 persons in the aggregate in a financial year) by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in section 42. Other Special Conditions: The proposed offer of securities or invitation to subscribe securities has been previously approved by the shareholders of the company, by a Special Resolution. The value of such offer or invitation per person shall be with an investment not less than Rs.20,000/- of face value of the securities. Money received on application shall be kept in as separate bank account in a scheduled bank and shall not be utilised for any purpose other than (a) Adjustment against allotment of securities; or (b) Repayment of monies where the company is unable to allot securities. 2) Relevant Forms of Private Placement Form PAS-3 Form PAS-4 Form PAS-5 A return of allotment of securities containing information like full name, address, PAN & ID of such security holder, class of security held, date of allotment of security, no. of securities held, nominal value & amount paid on such securities shall be filed with the Registrar within 30 days. A company may make private placement offer letter in this form & shall be filed with the Registrar with prescribed fees. The Company shall maintain a complete record of Private placement 3) Exempted Companies NBFCs - registered with the Reserve Bank of India under Reserve Bank of India Act, 1934; and HFCs - registered with the National Housing Bank under National Housing Bank Act, 1987 complying with regulations made by Reserve Bank of India 4) Penalty Who will be held liable? Company, its promoters and directors Penalty Amount involved in the offer or invitation or Rs.2 Crores, whichever is higher Consequences Company shall also refund all monies to subscribers within a period of 30 days of the order imposing the penalty

8 Internal Audit This article aims to explain Section 138 of Companies Act 13

9 Internal Audit Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. Companies Act 2013 has an express provision about internal audit recognizing the utility of such an audit in terms of better internal control and corporate governance. Internal Audit in Companies Act 2013 As per Section 138 of the 2013 Act, such class or classes of companies as may be prescribed shall be required to appoint an internal auditor, who shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company. Further, it is also stated that Central Government may, by rules, prescribe the manner and the intervals in which the audit shall be conducted and reported to the Board. The following class of companies shall be required to appoint an internal auditor or a firm of internal auditors under Rule 13(1) of Companies (Accounts) Rules (a) Every listed company; (b) Every unlisted public company having:- Internal auditor can even be an Employee of the company. (i) Turnover of 200 crore rupees or more during the preceding financial year; or (ii) Outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore rupees or more at any point of time during the preceding financial year; or (iii)paid up share capital of 50 crore rupees or more during the preceding financial year; or (iv)outstanding deposits of 25 crore rupees or more at any point of time during the preceding financial year; and (c) Every private company having- (i) Turnover of 200 crore rupees or more during the preceding financial year; or (ii) Outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore rupees or more at any point of time during the preceding financial year. Provided that an existing company covered under any of the above criteria shall comply with the requirements of section 138 and this rule within six months of commencement of such section. Conclusion Companies Act read with relevant rules contrives the necessity of Internal Audit to act as an essential component of Internal Control and Good Governance. Statutory Provisions thus creates a responsibility on Internal Auditors to provide ethical services to fulfil the objective of specific provisions.

10 Overview to Secretarial Audit This article aims to explain Meaning and Applicability of Secretarial Audit Benefits of Secretarial Audit Qualification and Disqualification of Secretarial Auditor Other General but Important Aspects

11 Overview to Secretarial Audit Secretarial Audit is a process to check compliance with the provisions of various laws and rules/regulations/procedures, maintenance of books, records etc., by an independent professional to ensure that the company has complied with the legal and procedural requirements and also followed due processes. Every company needs to comply hundreds of Laws, rules, regulations. These laws are complex and non-compliances would attract major risk to company. Only a member of Institute of Company Secretaries of India holding Certificate of Practice can conduct Secretarial Audit and furnish the Secretarial Audit Report to the company. Applicability of Secretarial Audit Companies Every Listed Company (includes Companies whose debentures, warrants are listed) Other Companies Every Public Company having a paid up share capital of 50 crore rupees or more Every public company having a turnover of 250 crore rupees or more Objectives of Secretarial Audit To check & Report on Compliances To Point out Non-Compliances and Inadequate Compliances To protect the interest of the customers, employees, society etc. To avoid any unwarranted legal actions by law enforcing agencies and other persons as well. Benefits of Secretarial Audit It can be an effective due diligence exercise for the prospective acquirer of a company or controlling interest or a joint venture partner. It assures the owners that management and affairs of the company are being conducted in accordance with requirements of laws, and that the owners stake is not being exposed to undue risk. It ensures the Management of a company that those who are charged with the duty and responsibility of compliance with the requirements of law are performing their duties competently, effectively and efficiently. The secretarial audit can assist bodies like SEBI, Stock Exchanges, Financial Institutions, Banks, etc. to gauge or measure the levels of compliance and non-compliance by the companies with whom they are concerned.

12 Beneficiaries of Secretarial Audit Beneficiaries of Secretarial Audit Promoters Management Non-Executive Directors Government Investors Other Stakeholders Format of Secretarial Audit Report The format of the Secretarial Audit Report shall be in Form No.MR.3. Disqualifications of Secretarial Auditor None of the following shall be qualified for appointment as secretarial auditor. o body corporate, o An officer or employee of the company, o A person who is a partner, or who is in the employment of an officer or employee of the company o A person who is indebted to the company for an amount exceeding two thousand rupees, or who has given any guarantee or provided any security in connection with the indebtness of any third person to the company for an amount exceeding ten thousand rupees, o Any person who ceases to be a company secretary in practice before submitting his Secretarial Report. A person shall also not be qualified for appointment as Secretarial Auditor of a company if he is, by virtue of above provisions, disqualified for secretarial auditor of any other body corporate which is that company s subsidiary or holding company or a subsidiary of that company s holding company, or would be so disqualified if the body corporate were a company. If a secretarial auditor becomes subject, after his appointment, to any of the disqualifications specified hereinabove he shall be deemed to have vacated his office as such. Punishment for Default If a company or any officer of the company or the company secretary in practice, contravenes the provisions of this section, the company, every officer of the company or the company secretary in practice, who is in default, shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

13 Documents to be verified for Secretarial Audit Periodical Returns Annual Returns Annual Accounts/Report All other required returns & orders Relates to Meetings & Committee Minutes book of meetings of directors/committee members/agm/egm etc. Proof of dispatch of notices to members Verification of Transmission & Transfer of shares Contracts Copies of Endorsed shares certificates and other securities Transfer Deeds and transmission request letters etc. Declaration, payment and transfer of dividend Board's report Details of related parties Copies of Disclosure forms under section 299(3)(b) Details of transactions/contracts entered into Entries made in Register of contracts Compliance with SEBI for submitting returns & intimations Statements for borrowings and investments All Statutory Registers Conclusion Secretarial audit is an effective mechanism to ensure the compliance of the multifarious requirements by the corporate enterprises under a host of legislations. Secretarial Audit gives comfort to the regulators, stakeholders and management that company has disciplined approach to evaluate and improve effectiveness of risk management, control, and governance processes.

14 IFRS 15: Revenue from contracts with customers This article aims to explain Need for IFRS 15 Disclosure in Financial Statements Existing provision of standards under Indian Laws

15 IFRS 15: Revenue from contracts with customers Background: International Accounting Standards Board (IASB), issued IFRS 15 Revenue from Contracts with Customers in May IFRS 15 sets out the requirements for recognising revenue that apply to all contracts with customers (except for contracts that are within the scope of the Standards on leases, insurance contracts and financial instruments). IFRS 15 is effective from 1 January Earlier application is permitted. IFRS 15 replaces the previous revenue Standards: IAS 18 Revenue and IAS 11 Construction Contracts, and the related Interpretations on revenue recognition. Need for the change for recognizing revenue: Information about revenue is used to assess a company s financial performance and position and to compare that company with other companies. However, previous revenue requirements in IFRS and US GAAP made it difficult for investors and analysts ( investors ) to understand and compare a company s revenue. IFRS 15 addresses those deficiencies by specifying a comprehensive and robust framework for the recognition, measurement and disclosure of revenue. In particular, IFRS 15: improves the comparability of revenue from contracts with customers; reduces the need for interpretive guidance to be developed on a case-by-case basis to address emerging revenue recognition issues; and provides more useful information through improved disclosure requirements. Disclosure in Financial Statements: IFRS 15 includes a cohesive set of disclosure requirements that would result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity s contracts with customers. Specifically, IFRS 15 requires an entity to provide information about: a. revenue recognised from contracts with customers, including the disaggregation of revenue into appropriate categories; b. contract balances, including the opening and closing balances of receivables, contract assets and contract liabilities; c. performance obligations, including when the entity typically satisfies its performance obligations and the transaction price that is allocated to the remaining performance obligations in a contract; d. significant judgements, and changes in judgements, made in applying the requirements to those contracts; and e. assets recognised from the costs to obtain or fulfill a contract with a customer In addition, presentation in financial statements would be at contract level resulting in recognition of contract assets and contract liabilities. Existing provision of standards under Indian Laws: Ind AS would require revision to come to speed with changes in IFRS, new IND AS would be required to be prepared in relation to IFRS 9 and IFRS 15. For countries which are yet to adopt IFRS, like India, adoption/convergence would be necessary.

16 As the related IndAS is announced, not only the current IFRS or USGAAP reporting entities from India but also the companies reporting in India would need to assess the impact of this new standard. Whilst this standard would impact companies in all industries, it is likely to have more significant impact in those industries which usually deal in bundled contracts like software, technology, media & entertainment etc. An overview of IFRS 15 a framework for recognising revenue IFRS 15 establishes a comprehensive framework for determining when to recognise revenue and how much revenue to recognise. The core principle in that framework is that a company should recognise revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard prescribes a five step approach to revenue recognition and also adds significant disclosures in relation to revenue model of the enterprise. Step 1: Identify the contract with the customer (Oral, implicit, written)- typically all contracts having commercial substance would require careful evaluation. Step 2: Identify the performance obligations in the contract (explicit or implicit; contractual terms or customary business practices) Step 3: Determine the transaction price (giving consideration to fixed v/s variable; financing; transaction costs with customers; any non-cash consideration) Step 4: Allocate the transaction price to performance obligations (relative to standalone selling price of these obligations) Step 5: Recognize revenue as performance obligations are satisfied (concept of recognition moved from risk & rewards to transfer of control ) Contract costs IFRS 15 also includes requirements for accounting for some costs that are related to a contract with a customer. For costs to fulfill a contract that are not within the scope of other Standards, a company would recognise an asset for those costs if the following criteria are met: the costs relate directly to a contract (or a specific anticipated contract); the costs generate or enhance resources of the company that will be used in satisfying performance obligations in the future; and the costs are expected to be recovered. For many contracts, such as many straightforward retail transactions, IFRS 15 will have little, if any, effect on the amount and timing of revenue recognition. For other contracts, such as long-term service contracts and multiple-element arrangements, IFRS 15 could result in some changes either to the amount or timing of the revenue recognised by a company.

17 Contact Us Contact Name Mobile Mr. Anuj Somani Mr. Bhuvnesh Maheshwari Head office: Branch Offices: Network Offices: DELHI MUMBAI BANGALORE Delite Cinema Hall GHAZIABAD BHOPAL 3 rd Floor, Gate No. 2, New Delhi, India GURGAON BUBNESHWAR SILIGURI CHENNAI CHENNAI KOLKATA 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. 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.