PUNE BRANCH OF WIRC OF ICAIPUNE BRANCH OF WIRC OF ICAI

The Institute of Chartered Accountants of India(Set up by an Act of Parliament)

NEWSLETTERNEWSLETTERIssue No. 6 - June 2018

(Subscribers copy not for sale)

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PUNE BRANCH OF WIRC OF ICAIForthcoming Programmes

SR. NO.

DATE SEMINAR NAME VENUE TIME FEESCPEHRS.

Notes:-

1) Programme timing includes 1st half an hour Registration.

2) For online registrations & detailed programme structure visit www.puneicai.org

2.

4.

3.

1st July, 2018

1.

5.

30th June, 2018 Indirect Tax Refresher CourseMES Auditorium, Bal Shikshan,

Mayur Colony, Kothrud, Pune9.30 am To 1.30 pm Rs. 500/- Plus GST 4 Hrs.

30th June, 2018 ICAI Bhawan, Bibwewadi, PuneSeminar on “Charitable Trusts Taxation &

Taxation Recent Developments”3.00 pm To 6.00 pm Rs. 200/- Plus GST 3 Hrs.

ICAI Bhawan, Bibwewadi, PuneFlag Hoisting on the Occasion of CA Foundation Day

9.00 am N. A. N. A.

30th June, 2018 ISA PT Batch 9.00 am To 5.00 pm Rs. 20,000/- 30

Hrs.

7th July To 12th August, 2018 Certificate Course on GST Under Finalisation 9.00 am To 5.30 pm Rs. 20,000/- Plus GST

30 Hrs.

DNYAN Sagar National Residential Refresher Conference at Shegaon

11th & 12th August, 2018

12Hrs.

Seminar on RERA3rd, 4th, 17th &

18th August, 201810.00 am To 2.00 pm

4 Hrs.Per Day

Shri. Sant Gajanan Maharaj

Engineering College, Shegaon9.00 am To 5.00 pm

Early Bird Fees Rs. 2500/- Plus GST till 25 July,2018

8.

9.

6. 2 Days Seminar on Direct Taxes14th & 15th July2018

, ICAI Bhawan, Bibwewadi, Pune 9.00 am To 5.30 pmEarly Bird Fees Rs. 1200/- Plus GST till 30 June,2018

12Hrs.

Certificate Course on Indian Accounting Standards (Ind AS)

21st July To 26th August, 2018 Under Finalisation 9.00 am To 5.30 pm Visit icai.org

30 Hrs.

7.

ICAI Bhawan, Bibwewadi, Pune

Interactive Meeting with Hon. Minister of State for Finance – GOI & Tax Authorities Jointly with MCCIA, PCA & Pimpri Chinchwad Branch of WIRC of ICAI

Shri. Shiv Pratap ShuklaHon. Minister of State for Finance – GOI

Shri. Amar Sable Member of Parliament

CA. C. V. Chitale, Shri. Anil Shirole, MP, Shri. Amar Sable, MP, Shri. Pramod Chaudhari, Shri. Shiv Pratap Shukla,

Hon. Minister of State for Finance – GOI, Shri. Vinodanand Jha - CCIT (Central), Shri. A. K. Pandey - CC (GST)

Felicitation of Shri. Shiv Pratap Shukla, Hon. Minister of State for Finance – GOI by the hands of

CA. Anand R. Jakhotiya, Chairman - Pune ICAI

Interactive Meeting Audience

"We're here for a reason. I believe that reason is to throw little torches out to

lead people through the dark."

Rs. 1200/- for 4 Days & Rs. 400/- Per Day Plus GST

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Chairman CommuniqueChairman Communique

CA. Anand R Jakhotiya

Chairman

Pune Branch of WIRC of ICAI

Respected Colleagues,

On 1st July, 2018 our institute is entering into 70th Year. On this

auspicious occasion we have planned many activities like blood donation

camps at Eight locations, schedule of the same is available on next page.

We have also planned Eight 5 Days Workshop on “GST” for Girl Students as

a women empowerment initiative. These workshops are only for Girl

students pursuing Graduate/Post Graduate Studies in Commerce. We will

do these workshops at 1. MES Garware College 2. PES Modern College 3.

Ness Wadia College 4. Marathwada Mitra Mandal's College of Commerce 5.

The Brihan Maharashtra College of Commerce (BMCC) 6. SNDT Arts and

Commerce College for Women 7. MIT College 8. Maharshi Karve Stree

Shikshan Samstha, (MKSSS), Pune.

Last month we had interactive meeting with Shri. Shiv Pratap Shukla, Hon. Minister of State for

Finance – GOI, Shri. Amar Sable, Member of Parliament, Shri. Anil Shirole, Member of

Parliament, Shri. Vinodanand Jha - CCIT (Central), Shri. A. K. Pandey - CC (GST) etc. at MCCIA,

Trade Tower.

rd thWe have planned 3 National Conference for this year at Shegaon on 11 & 12th August, 2018.

Members are requested to take maximum benefit & learn from national level expert faculties. st ndAlso National Conference for Women CAs will be held on 1 & 2 September, 2018.

We hereby request all members & students to keep visiting puneicai.org for all upcoming events

to be held by Pune Branch.

As you are aware, Chartered Accountant Benevolent Fund (CABF) has been created on the

concept of 'For the Peer by the Peer' to help our members or their families at the time of need.

It is our earnest duty to augment the funds for CABF by making regular contributions. I appeal

hereby to All of You to not just become Life Members of CABF but also make voluntary

contributions on regular basis.

Kindly also take benefit of the Grievance Cell. For any query, issue, suggestion members and

students can kindly meet me at branch on every Thursday and Saturday from 3pm to 6pm.

You are cordially invited for the flag hoisting on the occasion of Chartered Accountants Day 2018 st

on 1 July, 2018 at 9.00 am and for other events planned on CA Day at ICAI Bhawan, Bibwewadi.

With Warm Regards,CA. Anand R. JakhotiyaChairman - Pune Branch of WIRC of ICAI

Sr. No.

Day & Date Location for Blood Donation Timing

1.Saturday30th June, 2018

Bizsolindia Services Pvt. Ltd. (Pune)14 -17, 2nd Floor, Suyash Commercial Mall, Survey No. 74 & 75, Above Union Bank,Baner, Pune-41104

9.00 am to 1.00 pm

2.

Sunday1st July, 2018

SPCMCentre Point, 5th Floor, Mitra Mandal Chowk, Next to Balasaheb Thackarey, Hospital, Laxmi Narayan Road, Parvati, Pune-411009

9.00 am to 4.00 pm3.

4.Sunday1st July, 2018

SKP GroupVEN Bussiness Center ,7th flr,Near HDFC Bank /3M Car Care,Banner-Pashan Link Road.

9.00 am to 1.00 pm

5.Sunday1st July, 2018

Pune Deccan CPE Study CircleBhandarkar Oriental Research Institute, TATA HALL,Shivajinagar, Chiplunkar Road,(ILS Law College Road,) Pune

8.00 am to 1.00 pm

SRPA & Associates LLP303, Pride Icon, Near Columbia Asia Hospital, Kharadi, Pune 411014

9.00 am to 4.00 pm

6.Sunday1st July, 2018

Rathi Rathi & Co.202, Kamal Kirti, Above State Bank of India Sinhagad Road Opp. Pu La Deshpande Garden, Pune- 411030

8.00 am to 1.00 pm

7.Sunday1st July, 2018

Phadke Sankul - Extension Counter1785, Near Khajina Vihir Chowk, Phadke Sankul, 4th Floor, off. Tilak Road, Pune- 411 030.

8.00 am to 1.00 pm

8.Sunday1st July, 2018

ICAI Bhawan, BibwewadiICAI Bhawan’, Near Mahavir Electronics & Furniture,Opp. Kale Hospital, Bibwewadi, Pune

8.00 am to 1.00 pm

Visit puneicai.org for more details

Pune Branch of WIRC of ICAIJointly with

Pune Branch of WICASA of ICAIOrganising

Blood Donation Camp at Various Locations on the occasion of

Chartered Accountants Day, 2018

of

Saturday30th June, 2018

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GST - FIVE KEY ASPECTS PRO-ACTIVE

TAXPAYERS SHOULD NOT MISS!Contributed by :- CA. Pritam Mahure

Email :- capritam@gmail.com

GST - FIVE KEY ASPECTS PRO-ACTIVE

TAXPAYERS SHOULD NOT MISS!

The experience of more than three hundred and forty days, since introduction of Goods and Services Tax (GST) in

India, asserts that GST is constantly evolving in India. The initial days of GST are always challenging for

organizations as everyone is learning and there is no precedence for applicability of GST.

Given the aforesaid, the taxpayers constantly need to introspect and re-calibrate the approach for meeting GST

obligations as well as gear up for the future GST developments. As GST will celebrate its first anniversary in next

few days, this article discusses about five key aspects which should be on the top of the mind of pro-active

taxpayers.

Seek clarifications

GST regime, being self-assessment regimes, entails the taxpayer to take tax positions on day to day business

transactions such as whether GST is applicable on supplies, whether the transaction is intra-State or inter-State,

whether the transaction will qualify for zero rating, whether reverse charge mechanism is applicable etc.

Given the numerous business transactions, taxpayers need to take tax positions at drop of the hat. The matter

gets complicated if taxpayer needs to discuss the tax position with their customer or vendor, as in such cases, the

tax position could be adopted on commercial rational than legal rational. Over a period of time, such decisions get

accumulated and the cumulative risk of adopted tax positions may turn out to be substantial.

Fortunately, the option of seeking clarifications, through a mechanism called as 'Advance Ruling' is available.

Thus, to minimize the risk exposure, it is advisable for taxpayers to identify the big ticket items at the earliest and

seek clarifications. In the long run, this step of seeking clarifications will certainly prove to be a step in the right

direction and save the organization from penal consequence.

Optimise GST credits

Tax invoices are the documents based on which a buyer can to claim input tax credit. Tax invoices are issued by

vendors and thus, it is not uncommon to observe in-complete tax invoices or tax invoices with incorrect details

(such as missing name or registration number, incorrect address etc). Credit availability on invoices with

incomplete contents is always disputable. Further, in case the vendors are not uploading the invoices then without

invoice matching the credit is likely to be denied.

Additionally, credit availability on employee-related expenses such as car for employees, foreign trips, and

medical insurance could be subject matter of scrutiny by authorities. Alternatively, taxpayer may inadvertently

sometimes miss on claiming eligible GST credit.

Claiming ineligible credits leads to risk of denial of credit along with imposition of interest and penalty whereas not

claiming eligible credit leads to unnecessary cost for the organization. Thus, it is important for taxpayers to run a

sanity check for GST credit to ensure that in-eligible credits are not claimed and eligible credits are not missed.

Review ERP systems

The data for preparing GST returns are expected to be generated from the ERP or accounting system. If the ERP

system is able to generate the requisite details for GST returns, then the risk of incorrect GST returns reduces.

However, though it has been eleven months since GST has been implemented, still quite a few organisation's ERP

or accounting systems are yet to be configured and thus, requisite GST reports or details are not available easily.

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In many instances, taxpayers compile the details for GST returns on manual basis in-spite of having an ERP

system. However, the risk of missing crucial ledgers or numbers is high in case of manual preparation of details for

GST returns. Therefore, it is crucial to assess the current ERP system to evaluate and ensure that the requisite

reports, as required for preparation of GST returns are generated from the ERP system itself.

Gear up for GST audits

Taxpayers in India have moved from Phase I (pre-GST) to Phase II (GST initial returns), to now, Phase III i.e.

regular GST compliance and GST return filing. It is pertinent to note that the thrust of this Phase III should be on

documentation and maintaining prescribed GST records.

Documentation and maintaining prescribed GST records is critical as in days to come, taxpayers may face GST

audits. Similar to the erstwhile VAT / tax audits, GST regime also prescribes audit by professionals. Thus, going a

step ahead of audit and documentation, taxpayers could consider preparing customized GST manual for their own

business which should contain all the tax positions adopted, processes followed and the basis of preparation for

GST returns. This GST manual will be handy during audit and could also be used for GST training for new

employees in the organization.

Track GST developments

GST is constantly evolving. Further, with an endeavor to simplify GST and address specific issues, Central Board of

Indirect Taxes (CBIC) as well as State Governments have issued numerous notifications, press releases, FAQs,

guides and flyers.

These legal documents are quite detailed and thus, taxpayers need to peruse the same to decode whether the

same are relevant for their business operations and if yes, then what are the appropriate steps to be taken. For

instance, recently a detailed FAQ was made available, on CBIC official website, which shed light on GST impact on

banking, insurance and stock broker services and thus, the taxpayers should ideally review their tax position

based on the FAQs.

Similarly, from April 2018, the nationwide e-way bill process is launched. Thus, now the taxpayers should ensure

that their supplies and procurements are in accordance with the e-way bill process. Given this, the taxpayers

should pro-actively track GST legal updates, decode them and take requisite actions.

Way forward

Change is a constant for GST, as the in the time to come, we may witness developments in GST rates, introduction

of invoice matching, reverse charge mechanism, further simplification (!) etc.stFurther, India shares very strong trade ties with the Gulf region. From 1 January 2018, United Arab Emirates

(UAE) and Kingdom of Saudi Arabia (KSA) have introduced Value Added Tax (VAT) and other Gulf countries (i.e.

Oman, Bahrain, Qatar and Kuwait) are expected to bring VAT in the coming years. Thus, VAT introduction in these

neighboring countries may also impact Indian businesses. Given this, at least for next few years, GST needs to

remain a key topic of debate and discussion in the boardrooms.

(The Author is a Chartered Accountant and has written five books on VAT and GST)

-----*****-----

“Don't worry about failures, worry about the chances you miss when you don't even try."

6

2 Days Training Programme on "Basic & Advance Excel Skills”

CA. Umakant KhadkeSpeaker

Participants Participants

Workshop on IT Security in CAs Office, Bitcoins, Crypto Currencies, Blockchain & Digital Forensics

Mr. Sachin DhediaSpeaker

Participants Participants

Seminar on "UAE VAT and GST Audit”

CMA. Ashok NawalSpeaker

ParticipantsCA. Pritam MahureSpeaker

Industrial Visit to Mercedes Benz India Pvt. Ltd., Chakan, Pune

“The limits of the possible can only be defined by going beyond them into the impossible."

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RELATED PARTY TRANSACTIONS UNDER COMPANIES ACT, 2013

Contributed by :- Email :-

CS Dhaval Gusani dvg.pcs@gmail.com

RELATED PARTY TRANSACTIONS UNDER COMPANIES ACT, 2013

Related party transactions are a common occurrence in the business marketplace. Companies often seek business deals with entities to which they are familiar with or have been connected with their directors and KMPs. While these types of transactions are legal and ethical, the special relationship inherent between the involved parties creates potential conflicts of interest, which must be regulated because they can result in actions that benefit the people involved as opposed to the shareholders.

Related party transactions have been an area that has received considerable attention in India and across the globe. Significant corporate frauds have happened connected to related party transactions or similar arrangements. Earlier, in the Companies Act, 1956, contracts or transactions in which directors or their relatives were interested, had been regulated through a “Government approval-based regime”. Now as per the Companies Act, 2013, this has been shifted to “Shareholder approval and disclosure-based regime”.

Handling related party transactions can be divided into following 4 key parts:

1. Identification of related parties;

2. Identification of related party transactions;

3. Approval process; and

4. Disclosure requirements.

1) Related Party [Section 2(76)]

Companies (Amendment) Act, 2017 covered following parties in the definition of related party:?Any body corporate (Body Corporate includes LLP, Foreign Co. Earlier, it was written as 'Company' So, F.C. and LLPs were out of its purview) which is holding, subsidiary or an associate company of such company or a subsidiary of a holding company to which it is also a subsidiary or an investing company or venturer of the company, shall be considered as a related party.

· An “investing company or the venturer of the company” will mean a body corporate whose

investment in the company would result in the company becoming an associate company of the body

corporate.

As per Listing Obligations and Disclosure Requirements, 2015 (LODR) ? Related Party means a related party as defined under section 2 (76) of the Companies Act, 2013 or under the applicable accounting standards.

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party, directly or indirectly, in making financial and/or operating decisions and includes the following:

?· A person or a close member of that person's family is related to a company if that person is / has:

? A related party under section 2(76) of the 2013 Act.?Control or joint control or significant influence over the company, or?KMP of the company or of a parent company.

Director

/ KMP or

his

relative

A firm in which Director/ Manager or his relative is a partner

A Pvt. Co. in which a Director / Manager is a Member or Director

A Pub. Co. in which Director/Manager is a Director OR holds along with their relatives more than 2% of its Paid Up Capital

Any body corporate whose Board is accustomed to act in accordance with the advice of Director/Manag-er

Any Person on whose advice, a Director or Manager is accustomed to act

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· An entity is related to a company if any of the following conditions apply:· The entity is a related party under section 2(76) of the Companies Act, 2013.· The entity and the company are members of the same group (which means that each parent, subsidiary

and fellow subsidiary is related to the others).· One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member

of a group of which the other entity is a member).· Both entities are joint ventures of the same third party.· One entity is a joint venture of a third entity and the other entity is an associate of the third entity.· The entity is a post-employment benefit plan for the benefit of employees of either the company or an

entity related to the company. If the company is itself such a plan, the sponsoring employers are also related to the company, or

· The entity is controlled or jointly controlled by a person identified in (1).

2) Related Party Transactions (Section 188)

Section 188 of the Companies Act covers only above specified transaction as related party transactions whereas

according to LODR, related party transactions means a transfer of resources, services or obligations

between a listed entity and a related party, regardless of whether a price is charged and a transaction with

a related party shall be construed to include a single transaction or a group of transactions in a contract.

1) Approvals required for carrying out Related Party Transactions

1) Board Approval

· No company shall enter into any contract or arrangement with a related party with respect to above mentioned transactions except with the approval of the Board by way of resolution (Not by Circular Resolution).

· Approval of Board of Directors is required for each and every related party transaction irrespective of capital of the company and the value of the transactions.

· If a director is interested in any contract or arrangement with a related party he shall not be present at the meeting during discussions on such resolution. Moreover, he shall neither discuss nor vote and also not be counted for quorum in respect of such transaction. Provided this is not applicable to a company in which 90 % or more members, in number, are relatives of promoters or are related parties. (Companies Amendment Act, 2017)

2) Audit Committee Approval

All related party transactions shall require approval of the audit committee and the audit committee may grant 'Omnibus Approval' for related party transactions proposed to be entered into by the company subject to the certain conditions like:

·Omnibus approval shall be valid for a period not exceeding 1 financial year and for transaction up to Rs. 1 Crore and shall require fresh approval after the expiry of such financial year;

· the Audit Committee shall, after obtaining approval of the board, specify the criteria for making the omnibus approval which shall include the following, namely:-

Sale, purchase

or supply of

any Goods or

Materials

Avail or render any Services

Sale, buy, lease or dispose of any property

Underwriting the subscription of any securities or derivatives

Such related party's appointment to any office or place of profit in co. /subsidiary Co./Associate Co.

Appointment

of any Agent

for purchase

/sale of any

Goods,

Materials or

Services

“Time is the coin of your life. It is the only coin you have, and only you can determine how it will be

spent. Be careful lest you let other people spend it for you."

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·Name of the related parties, Nature of transactions, Period of transactions;

·Maximum value of the transactions, in aggregate, which can be allowed under the omnibus route in a year;

·Maximum value per transaction which can be allowed;

·Extent and manner of disclosures to be made to the Audit Committee at the time of seeking omnibus

approval;

·Review, at such intervals as the Audit Committee may deem fit, related party transaction entered into by the

company pursuant to each of the omnibus approval made;

·Transactions which cannot be subject to the omnibus approval by the Audit Committee.

However, Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company.

Whether Related Party Transactions should be first approved by the Board or Audit Committee?

In case of listed companies, Clause 23 of LODR specifically requires all related party transactions to be pre-approved by the audit committee. But, the Companies Act doesn't specify whether any related party transactions should be first approved by board or audit committee. In bigger transactions, the board may first refer proposed related party transactions to the audit committee and upon receiving the audit committee approval, the board will make its decision and approve the transactions. It would not be appropriate if the audit committee rejects a transaction, which has already been approved by the board. Hence, all matters relating to related party transactions and other matters involving conflicts of interest should be first referred to the audit committee.

3) Members (Shareholders) Approval

· Approval of members by way of Ordinary Resolution (Earlier, it was 'Special Resolution') required if the

transactions value increased from the above threshold.

· In case of listed company, all material related party transactions shall require approval of the shareholders

through Ordinary Resolution even if the transactions are in the ordinary course of business and on arm's length

basis and the related parties shall abstain from voting on such resolutions whether the entity is a related party

to the particular transaction or not. A transaction with a related party shall be considered material if the

transactions to be entered into individually or taken together with previous transactions during a financial year

exceed 10% of the annual consolidated turnover of the listed entity as per the last audited financial statements

of the listed entity.

· The transactions between holding company and its wholly owned subsidiary are exempted from

taking member approval.

Sale, purchase

or supply of

any Goods or

Materials

Sale, buy, lease or dispose of any property

Avail or render any Services

Appointment

of any Agent

for purchase

/sale of any

Goods,

Materials or

Services

Such related party's appointment to any office or place of profit in co./subsidiary Co./Associate Co.

Underwriting the subscription of any securities or derivatives

For Goods/Materials Exceeds 10 % of Turnover or Rs. 100 crore whichever is LOWER For Services: Exceeds 10 % of Turnover or Rs. 50 crore whichever is LOWER

Exceeds 10 % of Networth or Rs. 100 crore whichever is LOWER

Exceeds 1 % of Networth

Exceeds Rs. 2,50,000/- P.M

“The secret of getting ahead is getting started. The secret of getting started is breaking your complex,

overwhelming tasks into smaller manageable tasks, and then starting on the first one."

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What if related party transaction entered into without approval?

As per Section 188(3) of the Companies Act, where any related party transactions entered into without obtaining the consent of the board or approval by members, the board or members may ratify the transaction within 3 months from the date on which such contract or arrangement was entered into.

Such contract or arrangement shall also be voidable at the option of the Board or members and if the contract or arrangement is with a related party to any director, or is authorized by any other director, the directors concerned shall indemnify the company against any loss incurred by it. Earlier, the contract was voidable at the option of the Board only but now, after Companies (Amendment) Act, 2017, the contract/arrangement would also be voidable at the option of the shareholders.

Duties of Directors with regard to any transactions

The act imposes a duty on every director to disclose the contracts or arrangements with the company, whether existing or proposed or acquired subsequently, in which he, directly or indirectly, has any interest or concern.

The notice for relevant disclosure should be made by the interested director to the board of directors at a meeting of the board in which the transaction is to be discussed, so that information is available to the board in a timely manner.

Failure to make disclosure should be treated as a default. Director concerned should be held liable to penalties and he should be deemed to have vacated his office. This should also be a condition of disqualification to hold office of director of that company for a prescribed period.

Maintenance of a Register

The company should maintain a register, in which all transactions above a prescribed threshold value in respect of contracts/arrangements, in which directors are interested, should be entered. The register should be kept at registered office of the company and should be open to inspection to all members.

4) Reporting of Related Party Transactions in Board Report

This disclosure regarding related party transactions in the board report is applicable to both the listed and unlisted companies. Form AOC-2 is specified for disclosure of related party transactions in the board report. The form includes disclosure for:

I. All (both material and immaterial) related party transactions which are not on arm's length basis, and

II. Material related party transactions which are on an arm's length basis.

Transactions covered under the section 188(1) require disclosure in the board report. Transactions meeting the exemption criteria, viz., transactions entered into by a company in its ordinary course of business and at arm's length price, are completely outside the scope of section 188(1). Hence, the 2013 Act does not require disclosure of such transactions in the board report. However, for listed companies, material related party transaction even if in the ordinary course of business and at arm's length basis needs to be disclosed in the board report.

Complete Exemption from Section 188

The provisions of this section are not applicable if the transactions are in Ordinary Course of Business and at Arm's Length Basis. However, for listed company, all material related party transaction even if in the ordinary course of business and at arm's length basis to be approved by shareholders and the related parties shall abstain from voting on such resolutions as per LODR.

?Ordinary Course of Business

The phrase “ordinary course of business” is not defined under the Companies Act, 2013 or rules made thereunder. It seems that the ordinary course of business will cover the usual transactions, customs and practices of a business and of a company.

The Allahabad H.C has observed that for a transaction to be construed to have occurred in the ordinary course of business there must be “an element of continuity and habit for it to constitute the exercise of a profession and business.”

“Life is a gift, and it offers us the privilege, opportunity, and responsibility

to give something back by becoming more."

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The frequency of transactions over a period of time should not be the only criterion and it can't be restricted to the core business activities of a company alone. Support services that do not form part of the main core activity of a business, but are necessary and ancillary for running the core business, can also be considered as transactions that happen during the ordinary course of business.

The assessment of whether a transaction is in ordinary course of business is very subjective, judgmental and can vary on case-to-case basis giving consideration to nature of business and objects of the entity. Companies should consider variety of factors like size and volume of transactions, arm's-length, frequency, purpose, etc., to make this assessment. In addition, guidance for evaluation of the transactions can also be drawn from the objects clause in the MOA.

The Institute of Chartered Accountants of India (ICAI) in its Standard of Auditing provided few examples as guidance to auditors in respect of transactions outside the entity's “ordinary course of business”. These are as follows:

· Complex equity transactions, such as corporate restructurings or acquisitions.

· Transactions with offshore entities in jurisdictions with weak corporate laws.

· The leasing of premises or the rendering of management services by the entity to another party if no

consideration is exchanged.

· Sales transactions with unusually large discounts or returns.

· Transactions with circular arrangements like sales with a commitment to repurchase.

· Transactions under contracts whose terms are changed before expiry.

?Arm's Length Basis

Arm's length transaction means a transaction between two related parties which is conducted as if they were unrelated, so that there is no conflict of interest. For e.g., let's assume a bank whose normal course of business provides 9% rate to its customers for placing fixed deposit for 2 year tenure. It offers 9.25%, higher rate, to all its group employees. One may argue that the same is not at arm's length. The arm's length assessment is subjective exercise and requires judgment after considering various parameters.

The term “arm's-length price” is defined by section 92F of the Income Tax Act to mean a price that is applied or is proposed to be applied to transactions in uncontrolled conditions between persons other than associated enterprises.

The following methods have been prescribed by section 92C of the IT Act for the determination of the arm's-length price:

· Comparable uncontrolled price (CUP) method;

· Resale price method (RPM);

· Cost plus method (CPM);

· Profit split method (PSM);

· Transactional net margin method (TNMM); and

· Such other methods as may be prescribed.

As the provisions of the Companies Act do not provide a specific method to determine whether a transaction is at “arm's length” or not, company may have flexibility in applying well-established principles in determining whether a transaction is at “arm's length basis or not”. However, it is advisable to establish and formulate an internal policy which is used uniformly to determine whether a transaction is at arm's length basis or not.

Offence & Penalty for Non-Compliance of Section 188

Any director or other employee of a company, who had entered into or authorized the contract or arrangement in violation of the provisions of this section shall, in case of listed company, be punishable with imprisonment for a term which may be extended to 1 year or fine which shall not be less than Rs. 25,000/- but which may be extended to Rs. 5,00,000/- or with both; and in case of any other company, be punishable with fine which shall not be less than Rs. 25,000/- and may be extended to Rs. 5,00,000/-.

-----*****-----

“You have to set goals that are almost out of reach. If you set a goal that is attainable without

much work or thought, you are stuck with something below your true talent and potential.”

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CA. Amruta Kulkarni, Speaker (For Centre - Varje) CA. Prajakta Jagtap, Speaker (For Centre - Hadapsar)

CA. Prajakta Sangoram, Speaker (For Centre - Yerawada) CA. Sanket Shah, Speaker (For Centre - Aundh)

Career Counselling Programme/CA Course Awareness Programme to Promote CA Course Held at Centre of Lighthouses of Pune

2 Days Company Law Refresher Course

CS Shilpa DixitWIRC Member - ICSI

CS Anoop DeshpandeSpeaker

CS Pawan ChandakSpeaker

CS Gaurav PingleSpeaker

CS Nishad UmranikarSpeaker

CA Pramod JainSpeaker

CS Mahesh AthavaleSpeaker

CS Milind KasodekarSpeaker

Participants

“Success is walking from failure to failure with no loss of enthusiasm."

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GST IMPLICATIONS ON FINANCIAL STATEMENTS AND AUDIT METHODOLOGY

Contributed by :- CA. Bhagyashri KadganchiEmail :- bhagyashrika@gmail.com

GST IMPLICATIONS ON FINANCIAL STATEMENTS AND AUDIT METHODOLOGY

On July, 01, 2017, Indian Government implemented one of the biggest post independence tax reforms, through

Goods and Service Tax (i. e. GST Law). The introduction of GST is a very important step in indirect tax reforms

in India. GST has impacted not only the tax structure but it also has significant accounting implications. Needless

to say that these changes in accounting model have also impacted the way in which the audit of financial

statements is carried out. In this article, we will make an attempt to discuss about the GST implications on the

financial statements and will also discuss the approach and methodology for audit of these financial statements

prepared under GST era.

Internal control over financial reporting: (IFC)

Auditors are required to issue a report on Internal Financial Controls under clause (i) of sub section 3 of Section

143 of the Companies Act, 2013 that whether the auditee entity has established and maintained proper internal

controls over financial reporting. For the purpose of the said reporting, auditor needs to obtain an overall

understanding of the changes due to GST implementation. Further, he needs to understand the overall changes

made by the entity in its business model. Due to updation in business model, new controls introduced over GST

need to be identified and tested for their effectiveness. Further it is also important to understand the changes

made in the Information Technology (IT) system. Any changes/ updations in IT related Standard Operating

Procedures (SOPs) needs to be understood thoroughly, since IT infrastructure is one of the basic requirement for

successful implementation of Goods and Service tax. The auditee entity will also have to update its chart of

accounts for incorporating requirements of GST law.

Reporting under Form 3CD

Clause 4 of Form 3CD- Clause 4 of Form 3CD requires the tax auditor to comment on whether the assessee is

liable to pay any indirect taxes.

In order to comment on this reporting requirement, the auditor needs to check the compliances with registration

provisions of GST Act, by obtaining the list of registrations & certificates. The same needs to be reconciled with the

erstwhile excise and VAT registrations.

Classification of Goods under GST regime:

Under indirect taxes, classification of goods plays a very important role. The same has very wide implications

particularly in case of multi rate tax structure like GST as we are aware that classification of goods under CGST Act,

IGST Act and respective SGST Acts has to be done in accordance with harmonized System of Nomenclature (HSN).

For verification & ensuring that compliance with HSN based classification, auditor can obtain the item master

mapped to HSNs for classification. This HSN mapping can be tested on sample basis. Further review of the rates

used against each HSN with the rates published by the department can also be done. This can also be done for the

cases for which classification is disputed.

On above verification, if it is found that there a wrong/ incorrect classification of goods, then a re-computation GST

liability based on applying correct GST rates from HSN code master on the Sales register can be done.

Transitional Issues:

The transitional provisions play a vital role in transiting from the erstwhile VAT/Excise/Service Tax laws to the GST

regime.These provisions have been prescribed to enable tax payers in transferring the closing balances of credit in

respect of Central Excise duty, Service Tax, Local VAT etc.

For verifying the compliance with these transitional provisions, the auditor can check the credit taken in Form

Trans 1 and can also check the recoverability of those taxes which are not taken in Form trans 1.

In cases where the credit of certain balances of erstwhile taxes is disputed under GST, auditor can check that

whether suitable provisions have been created in books of accounts. For example - Credit balances of Education

Cess and Krishi Kalyan Cess for which credit availability is disputed, as per Section 140 of the GST Act, verify that

adequate provisioning is made in the books.

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Also it is pertinent to verify the mechanism of credit under GST adopted by the auditee entity. The Input tax credit

taken in the return can be carried forward only if such input credit is allowed under GST Act. For this, verification of

the client's assessment and working can be done.

Further the auditor can discuss and validate the positions taken by the entity in application for GST. In this regard,

copies of any legal opinions taken by the client, if any, can also be obtained.

Input tax Credit:

The term 'input tax credit' has a wider meaning compared to the existing laws and means tax paid on goods or

services or both used in the course or furtherance of business and includes taxes paid on reverse charge basis.

Auditor needs to ensure that the auditee entity has made the credit utilization as per the provisions of GST law.

The credit mechanism and summarized order of utilization of input tax credit is as below:

Cases where input tax credit under GST cannot be availed/ Restrictions on ITC

1. Motor Vehicles & Conveyances

2. Supply of goods and services being:

3. Construction of Immovable property

(Other than Plant & machinery)

Reversal of Input tax credit

As per the rules of Input tax credit, after issuance of tax invoice if the recipient does not make the full payment of the

amount within 180 days, then the credit taken on that invoice is to be reversed. Whenever the payment is made, the

receiver can take the credit of the amount. Therefore the aging analysis of the debtors and creditors needs to be

done. All old invoices issued before 1st October, 2017, should be paid before 31st March 2018.

Depreciation on the capital asset

For the purpose of calculation of depreciation on the capital goods (other than on building), if ITC has been claimed on

the purchase cost of fixed asset, then the tax amount needs to be ignored at the time of calculating depreciation.

Credit of

Allowed for Payment of

IGST CGST SGST

IGST Allowed, Credit Order 1 Allowed, Credit Order 2 Allowed, Credit Order 3

CGST Allowed, Credit Order 2 Allowed, Credit Order 1 Not Permitted

SGST Allowed, Credit Order 2 Not Permitted Allowed, Credit Order 1

Food and

Beverages

Outdoor

Catering

Beauty

Treatment

Health

Services

Cosmetic &

Plastic

Surgery

Allowed only if goods/services of a particular category are used

towards making taxable outward supplies the same category

Life/Health

InsuranceRent-a-Cab

Allowed ONLY if where the services are notified as obligatory for an employer to

provide an employee

Membership of

Club

Health &

Fitness Centre

NEVER Allowed

Travel

Benefits to

Employees

“What's money? A man is a success if he gets up in the morning and goes to bed at night

and in between does what he wants to do."

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Provisions of anti profiteering:

Any reduction in the rate of tax on any supply of goods or services or the benefit of input tax credit should have been

passed on to the recipient by way of commensurate reduction in prices. However it has been the experience of many

countries that when GST was introduced, there has been a marked increase in inflation and the prices of the

commodities. This happened in spite of the availability of the tax credit right from the production stage to the final

consumption stage which should have actually reduced the final prices. This was obviously happening because the

supplier was not passing on the benefit to the consumer and thereby indulging in illegal profiteering. Hence, this

raised a need to introduce anti profiteering provisions.

The crux of the anti profiteering rules is –

If there is a reduction in rate of tax on the outward supply of goods or services

or

Benefit of input tax credit is now available under GST,

then a registered person must pass on the benefit by reduction in prices.

For example- in case of items which were chargeable at a higher rate earlier and now the rates have been lowered or

the items are tax exempt under GST regime, then the credit has to be passed on to the consumers.

Passing of benefit due to reduction in the tax rate, in case of supplies exclusive of tax or for immediate services is not a

big challenge. This is because the reduction in tax rate will directly be evidenced by invoices, and the recipient will get

benefit of the rate reduction.

For the said analysis, an auditor can compare the gross profit earned for March 2018 with the gross profit of financial

year 2016-2017 or gross profit for April 2017 to June 2018. If the gross profit ratio for March 2018 is higher, then

taxpayer entity needs to check whether it is trapped in the anti profiteering provisions.

Based on above analysis, if it is apparent that the provisions of anti profiteering are applicable to the auditee entity,

then the auditor needs to check that whether adequate provisioning has been made against anti profiteering.

Reconciliation

All the taxpayers should reconcile the cash ledger, credit ledger and liability ledger with their books of account. Also it

is to be checked that all the entries have been done before the year end. Also debit notes, credit notes, rate

differences, discounts, etc. are also to be reconciled.

Valuation of the closing stock

At the time of valuation of closing stock as on 31st March, the input tax credit taken on raw material, consumables and

semi finished goods is to be calculated. In Excise, there was a concept of making provision for the tax payable on the

finished goods as on 31st March, whereas no such concept is introduced in the GST.

Analysis of transactions during the year:

For overall scrutiny of transactions of the year, a tabular analysis for GST applicability (CGST, SGST and IGST) as per

state can be done along with the rates chart.

Reverse Charge Mechanism:

Generally, the supplier of goods or services is liable to pay GST. However, in specified cases like imports and other

notified supplies, the liability may be cast on the recipient under the reverse charge mechanism. Reverse charge

means the liability to pay tax is on the recipient of supply of goods or services instead of the supplier of such goods or

services in respect of below notified categories of supply.

1. GTA Services.

2. Legal Services by Advocate.

3. Services supplied by an arbitral tribunal to a business entity.

4. Services provided by way of sponsorship to any body corporate or partnership firm.

5. Services supplied by the Central Government, State Government, Union territory or local authority to a

business entity.

6. Services supplied by a director of a company or a body corporate to the said company or the body corporate.

7. Services supplied by an insurance agent to any person carrying on insurance business.

8. Services supplied by a recovery agent to a banking company or a financial institution or a non-banking

financial company.

9. Supply of services by an author, music composer, photographer, artist or the like by way of transfer or

permitting the use or enjoyment of a copyright covered under section 13(1)(a) of the Copyright Act, 1957

relating to original literary, dramatic, musical or artistic works to a publisher, music company, producer or the

like.

“Your present circumstances don't determine where you can go;

they merely determine where you start."

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GTA Services -

It is the most common type of service on which tax is paid under reverse charge mechanism. Under this type of

service, the receiver is liable to pay tax under RCM while procuring any GTA services. However, GTA has been given

an option to pay tax under forward charge subject to fulfilment of some conditions.

In this regard, the options given to the taxpayer are important to know, which are as below,

CARO reporting:

Clause (vii) of Companies (Auditor's Report) Order, 2016, requires an auditor to express his opinion on the regularity

of the auditee entity on payment of undisputed statutory dues.

For reporting under CARO, in respect of delays in payment of taxes, payment challans are to be checked. From

challans, dates on which payments are made, can be checked.

Closing Balances and provisions:

Review of GST balances as at the reporting date i.e.31 March, 2018 needs to be done.

A reconciliation of GST balances as per books with statutory returns is to be prepared and verified, in case if there are

any differences between balances as per books and returns filed with the department. Verification of reconciliation

of input credit taken by the auditee entity vs. credit available as per the returns uploaded by the vendors also needs

to be done.

Also the Current/Non current classification of GST balances in asset/liability needs to be determined. Further it is to

be ensured that proper credit reversal is made in case of items which are categorized under exempt transfer.

-----*****-----

Sr. No.

Scenario Options Given

01. If GTA is unregistered Company to pay tax under RCM @5% and raise self-invoice

02. If GTA is registered + 5% ‘mentioned’ on invoice

Company to pay tax under RCM @5% and not raise self-invoice (Credit would be claimed on the basis of the GTA’s invoice wherein 5% tax would be mentioned)

03. GTA is registered + 12% has been ‘charged’ on invoice

Company to avail the credit on the basis of the GTA’s invoice (no self-invoice required)

"When everything seems to be going against you, remember that the airplane takes off

against the wind, not with it.”

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