sbs interns’ digest - sbsandco€¦ · vhaving income under head “profits and gains of business...

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Interns’

An attempt to share knowledge

Interns ofSBS and Company LLP

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An attempt to share knowledge

Interns ofSBS and Company LLP

CONTENTS

AUDIT................................................................................................................................................1

STANDARDS ON INTERNAL AUDIT - AN INTRODUCTION ...............................................................................................1

DIRECT TAX........................................................................................................................................4

ICDS V TANGIBLE ASSETS ..................................................................................................................................................................................4

GST..................................................................................................................................................10

GST RATE ON OLD AND USED MOTOR VEHICLES ...............................................................................................................................................10

VALUATION IN CASE OF STOCK TRANSFER........................................................................................................................................................14

SBS Interns' Digest www.sbsandco.com/interns-digest

FEMA ..............................................................................................................................................19

FEMA UPDATES FOR THE MONTH OF NOVEMBER 2018.....................................................................................................................................19

GST .................................................................................................................................................21

GST UPDATES FOR THE MONTH OF NOVEMBER 2018........................................................................................................................................21

COMPANIES ACT, 2013......................................................................................................................23

RULES, CIRCULARS, NOTIFICATIONS AND ORDERS ISSUED DURING THE MONTH OF NOVEMBER, 2018...............................................................23

UPDATES

Contributed by & Vetted by CA BhyravSarvani. S

STANDARDS ON INTERNAL AUDIT - AN INTRODUCTION

AUDIT


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Introduction

?ICAI has issued Accounting Standards and Standards on Auditing for performance of Statutory Audit and finalization of books of Accounts. Apart from those there is a set of standards which solely deals with internal audit. These set of standards are known as “Standard on Internal Audit”

?In general terms, Standard on Internal Audit (SIA) are a set of systematic guidelines used by internal auditors to ensure the accuracy and consistency of their actions and reports;

?Like any other standard, they provide the guidance in determining the nature, timing and extent of audit procedures that should be applied to fulfill the objective of Internal Audit;

?They are the criteria or yardsticks against which the quality of the Internal Audit results are evaluated.

?The Standards on Internal Audit are issued by Institute of Chartered Accountants of India (ICAI). Apart from standards, ICAI has also issued the Guidance Notes.

Compliance with the Standards and Guidance Notes on Internal Audit

?The SIA(s) will be mandatory from the respective date(s) mentioned in the respective SIA(s);?The Guidance Notes on Internal Audit are recommendatory in nature;?As the Internal Auditor can be personnel other than Chartered Accountant, in such cases, where

internal audit is performed by personnel of any other profession, the standards issued by ICAI will not be binding on those professionals;

?If any Standard or Guidance Note on Internal Audit is in variance/conflicts with any circular/notification/any such direction issued by any regulatory authority, the latter shall prevail;

?Whenever any specific Standard on Internal Audit is issued by the ICAI for which any Guidance Note is already in existence, then the date on which the Standard comes into effect, the Guidance Note shall stand withdrawn;

?As of today, the standards are only recommendatory and none of the standards are notified.

Framework governing the SIA’S

• The overall objective of the Framework for Standards on Internal Audit is to promoteprofessionalism in the internal audit activity;

• The internal audit activity may be performed either by an entity’s employees or by some externalagency;

• The Framework for Standards on Internal Audit applies to all the Chartered Accountantsperforming internal audit activity, irrespective of whether the function is performed either by in-house personnel or by an external agency;

• The Framework for Standards on Internal Audit would cover all the aspects of an internal auditactivity, including, planning, gathering evidence, documentation, using the work of otherexperts, evaluating controls and risk management systems and reporting.

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Components of the Framework

?The Code of Conduct

ØThe Code of Conduct establishes the essential principles of conduct and prescribes ethical behavior for the professionals in internal audit activity. Every professional must make a commitment to ethical conduct, including integrity, confidentiality, etc.

?The Competence Framework

ØThe Competence Framework addresses the key characteristics that are required by the persons performing internal audit. This includes aspects, such as, objectivity, technical competence, interpersonal skills, operational efficiency and due professional care. The competence framework is a minimum expectation from the perspective of an internal auditor.

?The Body of Standards

ØThe Body of Standards ensures commitment in providing quality services and details the expectations required by the individuals engaged in internal audit in discharging their responsibilities.

ØThe Standards will specify the basic principles and processes such as:vDefining the scopevPlanning; and vCommunicating.

?The Technical Guidance

ØThese Technical Guides would, therefore, provide guidance to internal auditors in resolving professional issues arising during the course of an internal audit while discharging their duties as internal auditors.

Basic Principals of an Internal Audit

For an internal audit function to be considered effective, the basic Principles should be achieved. Failure to achieve any of the Principles would imply that an internal audit activity was not as effective. The basic principles governing internal Audit are

• Demonstrate uncompromised integrity and independence;• Display due professional care while performing Audit;• Demonstrate commitment to competence;• Maintain Confidentiality;• Assessment of Risk element and having adequate resources to address it;• Focusing on Systems and process i.e., Root Cause Analysis;• Participating in decision making, other than those subject to subsequent audit;

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• Adopting procedures to continuously improve the quality of internal audit process and auditreports;

• Align strategically with the aims and goals of the enterprise;• Achieve efficiency and effectiveness in delivery;• Communicate effectively;• Provide reliable assurance to Those Charged with Governance(TCWG);• Be insightful, proactive, and future-focused.

SIA no. Name of SIA

SIA’s Issued by ICAI

210 Managing the internal Audit function

220 Conducting overall internal Audit planning

310 Planning the internal Audit Assignment

320 Internal Audit evidence

330 Internal Audit Documentation

4 Reporting

5 Sampling

6 Analytical Procedures

7 Quality Assurance in Internal Audit

8 Terms of Internal Audit Engagement

9 Communication with Management

11 Consideration of Fraud in an Internal Audit

12 Internal Control Evaluation

13 Enterprise Risk Management

14 Internal Audit in an Information Technology Environment

16 Using the work of an Expert

17 Consideration of Laws and Regulations in an Internal Audit

18 Related Party

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This article is contributed by Sarvani.S, Intern of SBS and Company LLP. The author can be reached at [email protected]

Contributed by P. Sai Varun & Vetted by CA Madhusudhan & CA Ramprasad

ICDS V TANGIBLE ASSETS

DIRECT TAX


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Introduction:

üSection 145(2) of the Income Tax Act,1961(“the Act”) grants power to Central Government to notify Income Computation Disclosure Standards.

ü10 ICDS were notified by Central Government on 31stMarch,2015. However, they are made applicable from the Assessment Year 2017 -18 with a specified deferment period of one year from date of its implementation.

üICDS are NOT for maintenance of books of accounts, they are only for purpose of income • Computation &• Disclosure (Notification S.O.892(E) dated 31.03.2015)

Note: In the case of conflict between the provisions of the Act and the ICDS, the provisions of the Act shall prevail to that extent.

Applicability:

ICDS is applicable to assessees

vHaving income under head “Profits and gains of business or profession” or “Income from other sources”AND

vFollowing mercantile system of accounting.

But it is not applicable to assessees

vWho is Individual or HUF and who are not required to get their books get audited u/s 44AB of the Act.

vFollowing cash system of accounting.

ICDS V: Tangible Fixed Assets

vThe main object of this ICDS is an expenditure incurred in connection with a Tangible Fixed Asset is to be capitalised or to be treated as a revenue expenditure.

vIt covers assets being Land, Building, Plant and Machinery and Furniture held with the intention of being used for the purpose of producing or providing goods/services and not held for sale in the normal course of business.

vIntangible Assets are not covered under this ICDS, normal provisions of the Act and accounting principles to be applied for treatment of Intangible assets for determining actual cost.

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vAssets for the purpose of administrative purposes and rental purposes are NOT explicitly covered under this ICDS, however we can consider that asset used for administrative purposes are held with the intention of being used for the purpose of producing or providing goods /services, hence covered under the ICDS.

vWhereas asset for rental purposes are covered if income of rent is taxable under head Income from Business or Income from other sources.

Example:

Shopping malls- covered under this ICDS as rental income is taxable under head income from Business.

Residential building- Not covered under ICDS when rental income is taxable under head Income from house property.

Identification of Tangible fixed assets:

vNo monetary threshold is prescribed for an asset to be recognised as tangible fixed asset. Unlike AS-10 and Ind AS-16 an item can be recognised as a tangible fixed asset if it is beneficial for an enterprise for a long period.

vUnlike AS-10 and Ind AS-16 , Stand-by equipment and servicing equipment are to be capitalised and spares are to be capitalised if they are expected to used for a long period.

Components of Actual costThe actual cost of acquisition of tangible Fixed Asset shall comprise of

vPurchase pricevImport duties and other taxes (which are not subsequently recoverd) andvAny other expense which is directly attributable for making asset ready to use.vBorrowing cost which is recognised as per ICDS- IX.vActual cost in case of certain circumstances like merger, amalgamation, re-acquisition , gift etc

need to be recognised as per section 43(1) of the Act.

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Inclusions and Exclusions from Actual cost:

ExclusionsS No. Particulars Inclusion

Initial estimate of dismantling cost and cost for removing the item and restoring the site

This cost need to be included in actual cost.

Interest need to be included in the actual cost of such asset.

Subsidy Received from Central Government

To the extent of amount received should be reduced from WDV in accordance with ICDS-VII Government grants.

Any foreign exchange gain need to be excluded from actual cost.

Payment beyond the normal credit terms for the asset acquired.

Any foreign exchange loss need to be included in actual cost

Exchange fluctuation in case asset acquired outside India

This need to be included if such e x p e n d i t u r e i s d i r e c t l y attributable to asset or bringing it to its working condition

Administrative and general overhead

This need to be included such asset till the asset has been ready for commercial production or captive consumption.

Expenditure on test runs, experimental production

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Other Important aspects of ICDS-V

Self-constructed tangible fixed asset:

• Expenditure directly attributable for construction of such fixed asset need to be capitalised.• Any inter department or inter branch profits need to be eliminated from cost of such asset.

If an asset is acquired in exchange of other asset

If asset belonging to one block of asset is exchanged with an asset belonging to another block

Non-monetary consideration:

Fair value of asset so acquired shall be actual cost of asset

acquired

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Joint ownership:• In case asset is owned by two or more persons then its actual cost, depreciation and written

down value need to be bifurcated to persons based on proportion of ownershipJoint cost:

• When several assets are acquired for a consolidated price then cost need to be proportionedto all assets on fair basis.

Improvements and Repairs:

• An Expenditure that increases the future benefits from the existing asset beyond itspreviously assessed standard of performance is added to the actual cost.

• *Current repairs are need be allowed as expenditure and not added to the cost of asset.• An addition or extension which becomes integral part of asset is added to its actual cost and if

it capable of being used even after such asset is disposed off and has separate identity thensuch addition need be recognised as a separate asset.*Current repairs mean the repairs that have been incurred to preserve and maintain analready existing asset.

Transitional provisions:

For an asset • which is purchased or constructed after 01-04-2016 and• the acquisition or construction of which commenced on or before the 31-03-2016 but not

completed even after 01-04-2016 should be recognised as per this ICDS.Note: In recognition of actual cost of an asset which is acquired before 01-04-2016, actual cost

considered in the earlier years is to be taken into account.

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ICDS-V Tangible Fixed Assets

AS- 10 Ind AS-16

1 Stand-by equipment

and servicingequipment

Directly to be

recognised as asset

They are recognised

only if they meet recognition criteria.

They are recognised

only if they meet recognition criteria.

2 initial estimate of the costs of

dismantling and removing the item

Doesn’t contain any such requirement

Need to berecognised as the

cost of asset

Need to berecognised as the

cost of asset

3 Payment of interest

due to payment beyond normalcredit terms

Interest need to be

recognised as cost

Interest shall be

capitalised only if it satisfies AS-16

Interest shall be

capitalised only if it satisfies Ind AS-23

4 Government grant Grant received shall be directly reduced from actual cost of

asset in accordance with ICDS VII

Same as ICDS grant shall be reduced from cost of asset.

Ind AS -16 doesn’t permits grant to be directly reduced

from cost of asset.

5 Revaluation oftangible fixed assets

and change in method of

depreciation

There is no such provision

Deals withrevaluation and

change in method of depreciation in

detail

Deals withrevaluation and

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detail

6 Non-monetary

consideration

the fair value of the

asset so acquired, shall be its actual

cost.

FMV of the asset

given or FMV of asset acquired

which is clearly evident

the fair value of the

asset so acquired and if fair value is

not measurablethen carryingamount of asset

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7 Subsequent

expenditure

Recognised if

increases futurebenefits beyond its previously assessed

standard ofperformance

Recognised if meets

recognition criteria

Recognised if meets

recognition criteria

Example:

An assessee(company) has Business income of Rs.90,00,000, during the year assessee purchased a machinery worth Rs.15,00,000 and its estimated cost of dismantling in future is Rs.2,00,000.

Explanation:

vCost of asset recognised as per Accounting standards : Rs.17,00,000vDepreciation accounted :Rs.1,13,333(Life is 15 years)vDepreciation as per Income tax act @ 15% : Rs.2,55,000

vAs per ICDS cost of asset is Rs.15,00,000 and accordingly depreciation is Rs.2,25,000

Increase in profit is Rs.30,000

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Particulars Amount in Rs

Profits from Business 90,00,000

Gross Total Income 90,00,000

Tax on Total income @ 25% 22,50,000

Particulars Amount in Rs

Profit 90,00,000

Increase in profit due to ICDS 30,000

Gross Total Income 90,30,000

Tax on Total income @ 25% 22,57,500

Tax as per Normal calculations:

Tax as per ICDS:

Dismantling cost is treated as expenditure only when it expended.

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This article is contributed by P. Sai Varun, Intern of SBS and Company LLP. The author can be reached at [email protected]

Contributed by B. Sukanya & Vetted by CA Manindar

GST RATE ON OLD AND USED MOTOR VEHICLES

GST


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This article is written to clear the confusion established in the industry as to what rate of tax is to be applied on the supply of old and used motor vehicles which are purchased pre and post GST regime.

Introduction

When the Goods and Services Tax has rolled out, the entire nation was expecting a single rate of tax across the country as campaigned by the Government with the slogan “Good and Simple Tax” but the Government came up with 4 slab rates by breaking this expectation. The four slab rates have been set at 5%, 12%, 18%, 28% for different goods and services.

The rate applicable for the Motor Vehicles is at 28%.Further in case of luxury vehicles, where there is an additional Compensation Cess at varied rates of 15%, 3% and 1% depending upon the make specifications. The rates of excise duty and VAT on Motor Vehicles were also on a higher side under the pre-GST regime. In addition to these high rates, input tax credit is also not allowed both in pre and post GST regime except in certain specified cases.

Upon sale of old and used motor vehicles (which were subjected to high rates upon their initial purchase), they are again subjected to above specified high rate of GST and compensation CESS. At the time of implementation of GST, Government has not taken cognizance of this hardship of subjecting the same goods to tax on more than one occasion even in the absence of any value addition.

Many representations were made from the industry to reduce the rate of tax on old and used motor vehicles on which no Input tax credit is claimed. Taking the hardship into consideration, Government has issued two notifications to reduce the rates. With the above backdrop, we are dealing with these notifications to clarify the GST rate applicability for various circumstances.

About the Applicable Chapter and Chapter Heading

Chapter 87 of Customs Tariff Act, 1975 deals with various types of Motor Vehicles viz., Tractors, Dumpers, Lorries, Trucks and Passenger transportation related motor vehicles.

Chapter heading 8702 deals with Motor vehicles which are meant for transport of ten or more persons, including the driver (Example: Bus). Chapter heading 8703 deals with other types of motor vehicles which are meant for transportation of less than ten passengers including driver(Example: Car).

Notification No. 37/2017- Central Tax (Rate) dated 13.10.2017,&Telangana State Notification No.37/2017- State Tax (Rate) [g.o.ms no.253], dated 23-11-2017

As per notification No. 11/2017-Central Tax(Rate) dated 28.06.2017 vide serial No. 17(vi), the rate applicable for leasing of any good is same as if it is supplied. In case of motor vehicles which are supplied on lease during pre-GST regime, no concessional rate was notified earlier, hence the rate applicable is at high as discussed in the introduction.

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The above-mentioned notification was issued to reduce the rate of tax applicable on sale of all old and used motor vehicles including the vehicles which are given on lease, which fall under chapter 87 which are purchased pre-GSTand no Input tax credit was availed on such purchase and sold in GST regime. The rate applicable shall be 65% of actual rate i.e., the effective tax rate shall be 18.2% (65% of actual rate of tax of 28%). The Compensation CESS applicable is reduced by 65% of CESS originally applicable by way of issue of Notification No. 6/2017- Compensation Cess (Rate) dated13.10.2017.

The only two conditions to be satisfied to apply the said notification are:ØThe Motor vehicles should have been purchased by the lesser prior to 1st July 2017 and supplied on

lease before 1st July 2017ØSupplier of motor vehicles is a registered under the act and had purchased the motor vehicle prior

to 1st July 2017 and has not availed input tax credit on such vehicles.

To sum-up the entire notification, when the old and used motor vehicle is purchased during pre-GST regime and no credit has been availed, then the sale or lease of such vehicle during post GST regime shall be subjected to GST at the rate of 18.2%.

Subsequently on 25.01.2018, another notification was issued by prescribing the rate of tax applicable on sale of old and used motor vehicles which fall under chapter heading 8703 and 87 respectively. The same is discussed in the below heading.

Note: This notification shall not apply after 01.07.2020.

Notification No. 9/2018 – Integrated Tax (Rate) dated 25.01.2018

The above-mentioned notification was issued to reduce the applicable rate of tax on old and used motor vehicles which fall under chapter heading 8703 (Ex: Cars) to 18% and on all other motor vehicles which fall under chapter 87 to 12%.

This notification unlike the earlier notification shall be applied not only to motor vehicles purchased in pre-GST regime but also to the motor vehicles purchased in GST regime. The Compensation CESS has also been waived by way of notification No. 1/2018- Compensation CESS(Rate) dated 25.01.2018 for both motor vehicles purchased in pre-GST and post GST regime. The only condition to be satisfied to apply this notification is that, the input tax credit should not have been availed under CGST Act,2017 or under CENVAT Credit Rules,2004 or VAT laws on such motor vehicle at the time of their purchase by supplier.

In case, if depreciation is claimed as per Income Tax Act, 1961 the tax shall be applied on the margin, which is the difference between consideration received and depreciated value or actual purchase price in case no depreciation is charged. If margin is negative no tax shall be implied.

This notification shall not apply in case of motor vehicles given on lease. Hence the rate applicable on such lease of motor vehicle which is purchased and supplied on lease pre-GST shall be 18.2% (65% of 28) as per Notification No. 37/2017- dated 13.10.2017.

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Comparative analysis of two notifications

Scenario Rate upto 12.10.2017Rate between 13.10.2017to 24.01.2018

Rate after 24.01.2018

Car purchased in pre-GST regime and supplied in post GST regime (No credit availed)

1 8 . 2 % + 6 5 % o f applicable CESS

1 8 . 2 % + 6 5 % o f applicable CESS

1 8 . 2 % + 6 5 % o fapplicable CESS

18%28%+ applicable CESS

28%+ applicable CESS

Car purchased in pre-GST regime and lease continued in post GST regime also (No credit availed

28%+ applicable CESS 28%+ applicable CESS 28%+ applicable CESS

Car purchased in pre-GST regime and supplied in post GST regime (credit availed)

28%+ applicable CESS 28%+ applicable CESS 28%+ applicable CESS

28%+ applicable CESS

Car purchased in pre-GST regime and lease continued in post GST regime also (credit availed)

28%+ applicable CESS 28%+ applicable CESS 18%

Car purchased and supplied in post GST regime, but no ITC availed

28%+ applicable CESS 28%+ applicable CESS

Car purchased and leased in post-GST regime, but no credit availed

Car purchased and supplied in post GST regime, ITC availed

Determine as per Sec 18 of the CGST Act and Rule 44 of CGST Rules



28%+ applicable CESS28%+ applicable CESS 28%+ applicable CESS

Car purchased and leased in post-GST regime, ITC availed

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Note: In the above cases, it is assumed that supply doesn’t include lease.

Conclusion:

Initially, before issue Notification 37/2017-Central Tax (Rate), second hand cars were subjected to high rate of tax at 28%+applicable CESS and even after the issue of the said notification, tax is payable on the transaction value and not on the margin (difference between sale price and book value). This will lead to taxing the same motor vehicle on more than one occasion though there was no value addition thereby paving way to double taxation and cascading effect. Because of these reasons, Notification 9/2018- Central Tax (Rate) has been issued to provide that the value of second-hand motor vehicles shall be the margin and the rate of tax also reduced. However, there was no mention in the notification whether the amendment is retrospective or prospective alone. In view of this reason, the issue whether the tax is payable on the gross amount received for supply of second-hand motor vehicle or on the margin during the period 01.07.2017 to 24.01.2018 is still left to one’s own interpretation and is prone to litigation.

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This article is contributed by B. Sukanya, Intern of SBS and Company LLP. The author can be reached at [email protected]

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Contributed by S. Bharadwaja & Vetted by CA Manindar

VALUATION IN CASE OF STOCK TRANSFER

GST


Introduction:

It has been a year since GST has rolled out. Though the trade is familiar with the concept of supply and valuation under GST law, yet few of them are facing certain practical difficulties in aligning their business to GST. In this article, we are going to touch up on the GST aspects relating to establishment of a branch, agent or any other related entity.

The Concept of Related Persons, Distinct Persons & Agents under GST Law:

ØRelated persons mean a person who is a member of family, officer, director of another business, partners, employer and employee, a person or an entity who holds 25% or more voting stocks or shares in a company and they can either directly or indirectly controls the others. Related persons also include legal persons, and sole agent or sole distributor or sole concessionaire.

ØDistinct persons are the offices or establishments of a single entity which are located in different states for which more than one registration under GST is required to be obtained in each of the states in which such offices or establishments are located. Each such offices or establishments located in different states having separate registration shall be treated as distinct persons for GST law.

ØAgent means a person who acts in a way of representative character to supply or to receive goods or services or both on behalf of principal. Agent includes a factor, broker, commission agent and del credere agent etc.,

Schedule I of CGST Law:

To become a supply, presence of consideration is a pre-requisite. However, certain activities are listed under Schedule I of Central Goods and Services Tax Act, 2017, are deemed to be supply even if they are undertaken without consideration. These include;

• Permanent transfer or disposal of business assets where input tax credit has been availed on suchassets;

• Supply of goods or services or both between the related persons and distinct persons made in thecourse or furtherance of business and

• Supply of goods by a principal to his agent or an agent to a principal, where agent shouldundertake to supply or receive the goods on behalf of principal and where the condition ofundertakes and further supply should satisfy to become a supply.

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Destination Based Consumption Tax:

GST is called a consumption-based tax as it was payable to a state in which goods or services are actually consumed. Here the tax is levied, and revenue is collected by the consuming state where the goods or services or both are actually consumed. In a case where the goods or services or both procured and consumed in a same state then tax is levied (i.e., Intra-state supply) by the same state and revenue is also called by the same state. In order to satisfy this principle of destination-based consumption tax, whenever goods are moved to branches or agents located in other states, such movement is considered as supply in order to move the taxes involved in the said goods from origin state to destination state as origin state losses the right to retain or recover any taxes on the goods that are transferred to other states for consumption in those states.

Valuation in Case of Related Persons and Distinct Persons:

Rule 28 of the Central Goods and Service Tax Rules, 2017 provide for valuation with respect to a supply which takes place between the distinct persons and related persons. Accordingly, the value of supply shall be the open market value or price charged for goods or services of like kind and quality, if the open market value is not available. If value of the supply cannot be determined in terms of open market value or on the basis of price charged for goods or services of like kind and quality, then it should be determined by applying cost plus 10% mark-up or by residual method as prescribed in Rule 30 and Rule 31 respectively. The residual method means applying the valuation by reasonable means consistent with general provisions relating to valuation of supply.

Two provisos are provided for the Rule 28, whereas the first proviso provides an option to the supplier either valuing the supply at open market value or ninety percent of the price charged for goods or services of like kind and quality. This option is available only in case of stock transfer of those goods which the recipient is intended for further supply to an unrelated customer.

Whereas second proviso provides that in cases where recipient of goods is eligible to take full input credit of those goods that are stock transferred, then whatever the value adopted by the supplier shall be deemed to be the open market value.

Both the conditions laid down in the above discussed provisos, do not restrict the recipient of supply to claim ITC but the first proviso requires the recipient to further supply such goods to an unrelated supplier while the second proviso does not require so. Therefore, stock transfers for further supply can be valued on the basis of open market value which could be any value as declared by supplier in the invoice (second proviso) or on the basis of 90% of the price charged for goods of like kind and quality (first proviso).

For example, ABC Ltd. is incorporated in Telangana with their Head Office(HO) also in same State. ABC Ltd. has branches in different states like Karnataka, Tamil Nadu and Kerala. Here HO has transferred the goods at a cost of Rs. 2,00,000 to its branch located in Karnataka for further supply and it also transferred the capital goods costing 2,00,000 (as available in the open market) to a branch located in Kerala.

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In the first instance, where the goods are transferred for the further supply then HO has an option of valuing the goods at a cost of Rs. 2,00,000 or 1,80,000 (90% of OMV). Since, the receiving branch is entitled to full ITC, HO can even transfer the goods at a value less than Rs. 1,80,000/- to their liking by mentioning the same in the invoice issued for this purpose.

For the second instance, he can transfer the goods at Rs 2,00,000(OMV) or any value less than Rs.2,00,000 (as he can declare the same in the invoice), as second proviso provides for an option of valuing the goods at whatever price if the recipient is entitled to full ITC. This rule is not applicable for valuing stock transfers to agents as separate rule by way of Rule 29 has been prescribed for this purpose.

Valuation in Case of Stock Transfers between Principal and Agent:

By virtue of Rule 29, principal or agent has an option of valuing the goods for supply either at open market value of the goods or at ninety percent of the price charged for the supply of goods of like kind and quality by recipient to his customer not being a related person. Whereas, the option of ninety percent. of price charged for like kind and quality can only be applied when the principal or agents intended it to further supply. Where the value of a supply is not determinable under OMV or 90% of price charged for like kind and quality, then the value of supply shall be determined by the application of cost plus 10% mark-up or residual method under rule 31. (determining by way of reasonable mean).

For example,

1. The principal supplies tyres and tubes to his agent. Agent, supplies tyres and tubes of similar type and quality in consequent supplies at a price of Rs 3,500 per set on the day of supply. Another independent agent is also supplying tyres and tubes of similar type and quality to the said agent at the price of Rs 3,000 per set. Hence, the value of the supply made by the principal can be valued either at Rs 3,000 per set (the open market value of tyres and tube) or he can exercise the option of valuing the tyres and tubes at 90% of INR 3,500 (goods like kind and quality) per set i.e. INR 3,150.

Comparative Analysis of Tax Implications on Supplies between Related person, Distinct person and Agent

Let us understand the comparative analysis of tax implications on supplies between related persons, distinct persons and agents with an illustration.

Example

Prefix Limited manufactures a chipset at cost of Rs.100 and it distribute the same to their branches and agents located within the states and other states. Prefix has a distributor, which is a partnership firm and the partners in the partnership firm are the directors of the Prefix. Here, Prefix transfer the chipset to their distributors at a cost of Rs. 70. Where a cost of similar chipset which manufactures by the others cost Rs. 90 (OMV). Can Prefix transfer the chipset at a cost of Rs. 70 or not to the distributors?

We will analyse the example by case to case, in case where –

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Stock Transfers Takes Place Between Branches

Prefix has an option of valuing the goods by applying the first proviso (i.e. 90% of the price charged for the goods of like kind and quality) or Second proviso (i.e. value declared in the invoice shall be the open market value). In this case Prefix can apply second proviso for valuing the same at Rs. 70/- while it is distributing the same to their branches.

Here, Prefix has a branches within the state and another states. It has benefit of supplying the goods without payment of tax while supplying to branch located in the same state as it is does not become a separate distinct person unless the same obtains separate registrations in the same State.

Stock Transfers Takes Place Between Related Persons

By applying the second proviso, Prefix can value the goods at cost of Rs. 70, where it is supplying the goods to their Related persons i.e. Partnership firm. In case of Related Person, the benefit of supplying the goods without payment of tax even if the related persons are located in the same state is not available as supplies between related persons located in same state also amounts to deemed supply under schedule I.

Stock Transfers Takes Place Between Principal and Agent

Prefix cannot value the goods at a cost of Rs. 70, when the transfers takes place between the agent. In this case, Rule 28 does not apply in case of agents where a separate rule (Rule 29) has been prescribed for valuing the goods when supply takes place between the Principal and Agent. Prefix has to value the goods at Rs. 100 or 81 (90*90/100=81) by applying the rule 29. There is no such benefit available like branches, even though the agents are located within the state or another state.

For easy comprehensive of rules, we will understand the same by below table.

Benefit of Second ProvisoStock Transfers to Taxability of Supply within the

State

Distinct person No Yes

Related Person Yes Yes

Agent Yes No

In view of the valuation problems between related persons, distinct persons or agents. In cases where there is a time lag between the manufacturing and supply of goods to customers, it is advisable for manufacturing entity to have a branch office i.e. Distinct Persons as it has a liberty of valuing the goods at their choice by applying the second proviso to rule 28. In cases where there is no such time lag between manufacturing and supply of such goods to customers, then they can choose to set up either a branch or appoint an agent or a related distributor considering other business factors.

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This article is contributed by Bharadwaja. S, Intern of SBS and Company LLP. The author can be reached at [email protected]

In case of principal and agent, majority of a transactions takes place without consideration. By considering the term supply and valuation mechanism specified in valuing such supply, principal supplier may require with additional tax compliance and requirement of additional working capital for paying such taxes even for agents located in same state as that of principal. Hence, this rule may have serious implications on the principal-agent relationship.

Conclusion:

Summing up, GST implications will vary depending upon the type of supply chain that a particular entity wishes to establish. If the time lag for supply to ultimate customer is more, it is advisable to set-up a branch as this will have less tax impact compared to setting up of consignment agent or a related distributor. This is purely from GST perspective. If the other factors relating to business demand for set up of consignment agent or distributor, one should take into consideration the GST tax proposition also into consideration and accordingly take the decision.

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External Commercial Borrowings (ECB) Policy:

I. Review of Minimum Average Maturity and Hedging Provisions:

Master Direction No.5 dated 1st January, 2016 on “External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers”, has been amended from time to time, in terms of which certain eligible borrowers raising foreign currency denominated ECBs under Track I, having a minimum average maturity requirement of 5 years, are mandatorily required to hedge their ECB exposure fully.

The extant provisions of Minimum Average Maturity Period, Eligible Borrowers and Hedging requirements provisions have been reviewed and it has been decided in consultation with the Government of India, to amend the above referred provisions of the ECB framework.

i. Minimum average maturity: Reduce the minimum average maturity requirement for ECBs in the infrastructure space raised by eligible borrowers from 5 years to 3 years.

ii. Hedging requirements: Reduce the average maturity requirement from extant 10 years to 5 years for exemption from mandatory hedging provision applicable to ECBs raised by above referred eligible borrowers. Accordingly, the ECBs with minimum average maturity period of 3 to 5 years in the infrastructure space will have to meet 100% mandatory hedging requirement. Further, it is also clarified that ECBs falling under the aforesaid revised provision but raised prior to the date of this circular will not be required to mandatorily roll-over their existing hedges.

For more details, refer Notification No.RBI/2018-19/71, A.P. (DIR Series) Circular No.11 dated 6thNovember, 2018.

II. Foreign Exchange Management (Deposit) (Amendment) Regulations, 2018:

RBI vide Notification No. FEMA 5 (R)(1)/2018-RB dated 9thNovember, 2018 has notified the amended Deposit Regulations named as “Foreign Exchange Management (Deposit) (Amendment) Regulations, 2018” by making an amendment to “Foreign Exchange Management (Deposit) Regulations, 2016, Notification No. FEMA 5(R)/2016-RB dated 1stApril, 2016.”

The major amendments are related to Regulation-7, Schedule-3, 4 and 5.

Contributed by Sunil .S & Vetted by CA Murali krishna

FEMA UPDATES FOR THE MONTH OF NOVEMBER 2018

FEMA


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SBS Interns' Digest

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This article is contributed by S. Sunil Reddy, Intern of SBS and Company LLP. The author can be reached at [email protected]

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Markable amendments with regard to FDI:

1. An Authorized Dealer in India may allow a Foreign Portfolio Investor (FPI) and a Foreign Venture Capital Investor (FVCI), both registered with the Securities and Exchange Board of India (SEBI) under the relevant SEBI regulations to open and maintain a non-interest bearing foreign currency account for the purpose of making investment in accordance with FEMA (Transfer or issue of security by a person resident outside India) Regulations, 2017, as amended from time to time.

2. For the purposes of reporting of FDI, date of transfer of funds into the bank account of the issuer or transferor of capital instruments/convertible notes, as the case may be, shall be the relevant “date of remittance”.

For more details, refer gazette notification dated 9th November, 2018.

Compiled by Indirect Tax Division

GST


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1. CLARIFICATIONS ON GST APPLICABILITY FOR DELCREDERE AGENT:

Circular No. 57/3/2018-GST dated 04.09.2018 has been issued to provide that the movement of goods between Principal and Agent would be considered as deemed supply under Schedule I of CGST Act, 2017 to attract GST, only when Agent undertakes to issue invoice in his own name. In cases, where Principal undertakes to issue invoice to customer, then supply of goods by Principal to Agent will not be considered as deemed supply and accordingly, no GST is payable.

In view of this clarification, certain representations were made with respect to GST implications in case of Del-Credere Agent (DCA)who guarantees the payment to Principal even if there is a default by Customer. DCA effectively extends loan to Customer or charges interest for delay in payment for the goods supplied to him.

It is clarified that in cases where the Principal undertakes to issue invoice in his own name, then the movement of goods by Principal to DCA will not be a deemed supply and no GST is applicable. GST is applicable on the value at which goods are sold by Principal to Customer using the services of DCA. With respect to loan extended by DCA to Customer, it shall be treated as a separate supply of service by DCA to Customer. The interest charged by DCA for delay in payment by Customer will be exempt under Sl.No 27 of Notification 12/2017-Central Tax(Rate) dated 28.06.2018.

In is also clarified that in cases where DCA undertakes to issue invoice in his own name, then the movement of goods from Principal to DCA will be deemed to be a supply and GST is payable by Principal. The subsequent movement of goods from DCA to Customer will also be deemed to be a supply and DCA is required to collect and pay GST on the value of such goods supplied to Customer. In such cases, the interest charged by DCA towards the loan extended to Customer shall be includable in the value of goods supplied in terms of Section 15(2)(d) of CGST Act, 2017.

{CIRCULAR NO. 73/47/2018 – GST DATED 05.11.2018}

2. PROCEDURE PRESCRIBED FOR RECOVERY OF DUES UNDER EXISTING LAWS:

A new rule 142A has been inserted to prescribe the procedure for recovery of dues under the existing laws. Any dues towards the demand of tax, interest, penalty, fee or any other dues which becomes recoverable consequent to proceedings launched under the existing law before, on or after the appointed day shall be recovered under GST Law by way of upload of said details in Form GST DRC-07A electronically on the common portal. Further, the amounts demanded shall be posted in Part II of Electronic Liability Register in Form GST PMT-01.

GST UPDATES FOR THE MONTH OF NOVEMBER 2018

SBS Interns' Digest

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This article is contributed by Indirect Tax Division, Intern of SBS and Company LLP. The author can be reached at [email protected]

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Where the demand of an order uploaded under GST DRC-07A is rectified or modified or quashed in any proceedings, including in appeal, review or revision, or the recovery is made under the existing laws, a summary thereof shall be uploaded on the common portal in FORM GST DRC-08A and Part II of Electronic Liability Register in FORM GST PMT-01 shall be updated accordingly

{NOTIFICATION NO. 60/2018 – CENTRAL TAX DATED 30.10. 2018}

3. TEA BOARD SHALL BE REQUIRED TO COLLECT TAX FROM SELLERS AND AUCTIONEERS

Sec 52 of the CGST Act, 2017 provides for obligation to collect tax at source by the e-commerce operators from the tax payment made by the customers to the sellers registered on their e-commerce portal. Tea Board of India carry out e-auction for trading in tea across India wherein the buyers participated in auction make payment to an escrow account maintained by Tea Board. The said consolidated amount is subsequently disbursed to sellers (tea producers) towards the value of tea supplied by them and to auctioneers towards their brokerage for conduct of auction. It is clarified that the Tea Board shall be required to collect tax on the net value of supply payable to sellers (tea producers) and on the brokerage paid to auctioneers.

{CIRCULAR NO. 74/48/2018 – GST DATED 05.11.2018}

4. RELAXATION FROM THE REQUIREMENT OF TDS WHEN SUPPLY IS FROM ONE PSU TO ANOTHER:

Sec 51 of the CGST Act, 2017 provides for obligation to deduct tax at source by Government Departments and Agencies including Public Sector Undertakings (PSU) and the said requirement was brought into force w.e.f 1st October 2018. The present notification is issued to grant relaxation from the requirement of tax deduction in cases where the goods or services are supplied from a PSU to another PSU. The said relaxation is retrospective and is effective from 01st October 2018.

{NOTIFICATION NO. 61/2018 – CENTRAL TAX DATED 05.11.2018}

RULES, CIRCULARS, NOTIFICATIONS AND ORDERS ISSUED DURING THE MONTH OF NOVEMBER, 2018

COMPANIES ACT, 2013


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RULES

vCompanies (Registered Valuers and Valuation) Fourth Amendment Rules, 2018, Dated: 13.11.2018.

Vide the said amendment rules, the Central Government has made some amendments/insertions to the Principal rules, in relation to the applicability of the valuation rules in relation to the types of valuations; giving relaxation to the qualifications for a person to become a Registered valuer, and the experience/qualification required for undertaking valuation in respect of the various asset classes.

http://www.mca.gov.in/Ministry/pdf/CompaniesRegisteredValuers4AmdtRules_13112018.pdf

vNational Financial Reporting Authority Rules, 2018, Dt: 13.11.2018:

Consequent upon constitution of the National Financial Reporting Authority, effective from 01.10.2018, the Central Government vide the National Financial Reporting Authority Rules, 2018, has framed the guidelines, for operations of the Authority and procedural compliances by a Company/Body Corporate to which the Rules will apply.

http://www.mca.gov.in/Ministry/pdf/NFRARules2018_13112018.pdf

NOTIFICATIONS

vThe Companies (Amendment) Ordinance, Dt: 02.11.2018:

The Central Government was of the opinion that the Companies Act, 2013 requires some amendments, and as the Parliament is not in session, in exercise of the powers conferred by Clause (1) of Article 123 of the Constitution, the Hon’ble President had promulgated the Ordinance, amending/inserting (as may be applicable) 31 Sections in the Companies Act, 2013.The Ordinance is in effect from 02.11.2018.

http://www.mca.gov.in/Ministry/pdf/NotificationCompanies(Amendment)Ordinance_05112018.pdf

CIRCULARS

No Circulars were issued during the month.

ORDERS

No Orders were issued during the month.

These updates are contributed by CS D V K Phanindra of SBS and Company LLP, Chartered Accountants. For any queries, please reach at [email protected]

SBS Interns' Digest www.sbsandco.com/digest

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SATURDAY SESSIONS

SESSION TIMINGS: 2:30 to 4:30 PM


Prudhvi

Varshita

SBS - Hyd

SBS - Hyd

VenueSpeakerDateEventS.No.

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SATURDAY SESSIONS

05/01/2019GSA 520 - Analytical Procedures

Overview of Section 78 & 79 of Income Tax Act,1961

Sai Laasya

Divyasree

SBS - Hyd

SBS - Hyd

3

412/01/2019

Premanent Establishment

Taxability of High Sea Sales

Adithya

Sai Varun

SBS - Hyd

SBS - Hyd

5

619/01/2019

Outsourcing in a Manufacturing company - Risks and controls associated with it

Section 13A - Special provisions relating to Incomes

of Political parties

Monika

Sukanya

SBS - Hyd

SBS - Hyd

7

802/02/2019

Audit of Bank Guarantees

Advance Ruling under GST

“ICDS VI- Effects of changes in foreign exchange rates” - Indu

ICDS V - Tangible fixed assets - Sai Varun

Introduction to Standards on Internal Audit and SIA 220 - Sarvani


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