APRIL 2020

Update on DIN :

DIN holders of DINs marked as ‘Deactivated’ due to non-filing of DIR-3 KYC/DIR -3 KYC – Web and those companies whose compliance status has been marked as “ACTIVE non-compliant” due to non-filing of Active Company Tagging Identities and Verification (ACTIVE) eform are encouraged to become compliant once again in pursuance of the General Circular No.11 dated 24th March 2020 & General Circular No.12 dated 30th March 2020 and file DIR- 3KYC/DIR-3 KYC- Web/ACTIVE as the case may be between 1st April, 2020 to 30th September 2020 without any filing fee of INR 5000/INR 10,000 respectively.

Clarification on how to conduct General Meeting and pass resolution during this time (Steps to be followed in Video Conferencing and e-voting) :

The Act does not contain any specific provision for allowing conduct of member’s meetings through video conferencing (VC) or other audio visual means (OAVM). It has been noted that section 108 of the Act and rules made thereunder provide for relevant companies to allow e-voting (include remote e-voting) in case of general meetings convened by them. Section 110 of the Act, on the other hand, allow the companies to pass resolutions (except items of ordinary business and items where any person has a right to be heard) through postal ballot (which includes electronic ballot and electronic voting under section 108).

Recent updates on GST:

• Aadhar Authentication for GST Registration: Mandatory authentication of Aadhar Number for every new registration on or after 1st April 2020.
• ⦁ Insertion of Proviso to Rule 80(3) – Threshold limit for GSTR 9C increased: The threshold limit for filing of FORM GSTR 9C for the FY 2018-19 has been increased to Rs. 5 crores from existing limit of Rs. 2 crores.
• Amendment in Rule 43 – Manner of determination of Input tax Credit in respect of Capital goods.
• Amendment to definition of Turnover of Zero-rated supply of Goods in Rule 89(4)
• Due date of Annual Return:The due date for filing of Annual Return in FORM GSTR 9 along with the Reconciliation Statement in FORM GSTR 9C for the FY 2018-19 has been extended from 31st March 2020 to 30th June 2020.
• Waiver from filing of GSTR 1 for certain class of persons:The requirement for furnishing FORM GSTR 1 for FY 2019-20 for taxpayers who could not opt for availing the option of special composition scheme has been waived off, provided they have filed GSTR 3B or GST CMP -08 for all the tax period.

Income Tax Act, 1961

Extension of time till 30th June 2020 for submission of Form 15G/15H – Non Deduction of Tax(TDS) from Bank interest. IT Department to release all pending income tax refunds up to Rs. 5 lakhs immediately; Around 14 lakh taxpayers to benefit. All GST & CUSTOM refunds also to be released; to provide benefit to around 1 lakh business entities including MSMEs. Rs. 18,000 crore of total refund granted immediately.

FEMA

Voluntary Retention Route’ (VRR) for Foreign Portfolio Investors (FPIs) investment in debt – relaxations

VRR scheme was introduced vide AP (DIR Series) Circular 21, dated March 01, 2019. These directions are further modified vide AP (DIR Series) Circular 19, dated January 23, 2020. As part of said scheme, an additional investment cap of INR 45,000 Crore was provided for investment by FPI in Govt Securities and another INR 30,000 Crore in Corporate Debt Instruments under VRR. Now the said investment cap is increased to INR 150,000 Crore, and allocation between Govt Securities, Corporate Debt Instruments and their combination shall be decided by RBI from time to time. FPIs that have been allotted investment limits under VRR may now, at their discretion, transfer their investments made under the General Investment Limit to VRR. Also, FPIs are now allowed to invest in Exchange Traded Funds that invest only in debt instruments.

Merchanting Trade Transactions (MTT) – Revised Guidelines

Vide AP (DIR Series) Circular 20, dated January 23, 2020, RBI revised guidelines governing Merchanting Trade Transactions were issued. Earlier they were revised in March 2014. Certain important changes are as below:

• Previously goods under MTT were not allowed to undergo any transformation. Now minor transformations are allowed, subject to AD bank being satisfied with documentary evidence.
• In the absence of physical documents forming part of MTT, AD Bank can rely on online verification of Bill of Lading/ Airway Bill on the website of International Maritime Bureau or Airline web check facilities.
• Letter of Undertaking (LoU)/ Letter of Comfort (LoC) shall not be issued for supplier’s/ buyer’s credit in case of MTT.
• In case any advance is received towards export leg of MTT, the same can be parked either in EEFC Account in addition to parking in any interest-bearing account which is currently allowed. Hedging is now allowed for amounts parked in interest-bearing accounts. And no fund based / non-fund-based facilities shall be extended against these balances.
• Advance payment towards import leg can be made against bank guarantee or irrevocable letter of credit for cases above USD 500,000. Previously this limit was USD 200,000.
• Third party payments for export and import legs of the MTT are not allowed.
• Additional guidelines are provided for write off and payment of agency commission for MTT cases.

In this juncture of widespread lockdown happening all over the globe and the world economy leaning towards depression, the Central Bank of every country is working hard to assist the economy to a great extent to keep it stable. Each one of you would have been watching the various announcements by Reserve Bank of India for handling this situation, but more often you would not have had understanding of the various terminologies used. This Article is an attempt to introduce you to certain Banking Terms which will help you to an extent in understanding the policy measures and announcements brought in by RBI.

In today’s Article we will concentrate on two key terms the Repo Rate and Reverse Repo Rate.

RBI formulates policies for taking care of the overall economic growth of the country by way of controlling the supply of money in the market, regulation of the quantum of lending by banks, promoting investments etc., These policies which help in regulating money supply, inflation, liquidity in the economy, economic growth are called as Monetary policies of RBI.

REPO RATE

• Repo means “Repurchase Agreement”. These are short term collateral-based borrowing instruments, the rate charged for such borrowings called the repo rate.
• Repo Rate is the rate at which the Central Bank of a Country (in our case Reserve Bank of India) lends money to other commercial banks in case of any shortfall of funds with the commercial banks. To put it in simple terms, the borrowing interest rate for banks, when they borrow money from RBI is called the Repo Rate. Repo Rates are fixed by Reserve Bank of India.
• Commercial Banks sell government securities and bonds to RBI when in needs of funds. The agreement is to repurchase the securities at a late date at a pre-determined price including interest charges.

REVERSE REPO RATE

As the name implies, its just the opposite of Repo Rate. It’s the rate at which RBI borrows money from Commercial Banks. Or to put it more clearly, when commercial banks park their excess funds with RBI, the rate of Interest they will earn for parking such funds is called Reverse Repo Rate. These are usually short-term parking of funds with RBI.

HOW DOES REPO AND REVERSE REPO RATE WORK?

Reserve Bank of India is the deciding authority to play around with Repo and Reverse Repo Rates to manage the liquidity in the economy.

Scenario	RBI’s Action	Funds with Commercial Banks	Impact on Economy’s Liquidity
Reverse Repo Rate Agreement	RBI receives funds from Commercial Banks	Money with commercial banks reduces	Less Cash in economy
Repo Rate Agreement	RBI lends to banks	Money with commercial bank increases	More cash in economy

Now, lets understand how Repo and Reverse Repo Rates has an impact on inflation or deflation in the economy. Before seeing it, let’s understand what is inflation and deflation.

INFLATION

It’s a state where the prices of goods and services in an economy are on the rise. To put it more simply, if you have to pay more currency to purchase goods or services than what you were paying sometime back, then it means there is inflation in the economy. For example, if the price of Onions per kg was Rs 30 per kg a month back, but has now increased to Rs 100 per kg now, then it means there is inflation.

Let’s understand it this way with a demand supply cycle which leads to inflation in the economy:So, in order to control this inflation, RBI increases the Repo rate by which funds available to commercial banks become less and costly, thereby reducing the funds available for lending out to the economy reduces which in turn brings Inflation under Control.

DEFLATION

Deflation is a situation where the supply of goods and services are more compared to the demand. People don’t have enough money to purchase goods or services, leading to a drop in prices. It just does not stop with drop in prices, it affects the business which might lead to unemployment and becomes a cycle by its own. When such trend of deflation happens affecting the economy, RBI reduces the repo rate to infuse more funds to commercial banks, which in turn lends more money to the market at lesser rates, which in turn increases the purchasing power and revives the economy.

A balance between inflation and deflation is what has to be achieved, which is achieved through the monetary policies of Reserve Bank of India. Below is the history of Repo and Reverse Repo Rates in India as on 27th March 2020:

Source: RBI Website

If we look at the chart, the reverse repo rate has always been maintained less than Repo Rate. This is because RBI cannot be pay greater interest on deposits than it charges on loans by way of Reverse Repo Rate.

RATE CHANGE BY RBI AS PART OF COVID-19 MEASURES

RBI announced the lowest ever Repo Rate on 27th March 2020 as part of the Covid-19 pandemic measures. The lowest that it has hit earlier was in 2009 to 4.74% as part of the global financial crisis. Considering the tough times caused to the economy on account of the pandemic, the repo rate was reduced to infuse more liquidity into the economy.

Introduction

• Internationally, two basic principles of taxation are followed- the residence-based taxation and the source-based taxation. Most of the countries, including India, tax their residents on their global income under residence-based taxation. They tax non-residents on their income sourced in that country under source-based taxation. When a resident of one country earns income from a source in another country, the possibility of double taxation arises because one country may tax that income on the source principle whereas the other country may tax it on the residence principle.

Let us now understand the what term Permanent Establishment means

In a landmark decision i.e. CIT Vs. Vishakhapatnam Port Trust [(1983), 144-ITR-146 (AP)] on the subject of “Permanent Establishment”, the Andhra Pradesh High Court has observed as under:

• “The words “Permanent Establishment” (PE) postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another, which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country onto the soil of another country.”
• In accordance with the concept of PE, the profits of an enterprise of one Contracting State are taxable in the other state, only if the enterprise maintains a PE in the later state and only to the extent that profits are attributable to the PE. The term justifies a nation in treating a foreign person in the same manner as domestic persons in accordance with treaty partners. Thus, a legal concept, PE is a compromise between source state and residence state for purposes of taxation of business profits. Profit attributable to a PE, in the State of Source are either exempted in State of Residence or the State of Residence allows credit of taxes paid by the PE on such profits. To this extent, the taxing jurisdiction by the State of Residence is said to be transferred to the State of Source, where the person needs to file his return of income and comply with domestic tax laws.
• One of the models which uses PE as a main instrument to establish taxing jurisdiction over foreigner’s business activities is the OECD (Organization for Economic Co-operation and Development) Model.

Concerns or Issues	Measures or Guidance of OECD Secretariat
Concern Related to Creation of Permanent Establishment	The exceptional and temporary change of the location where employees exercise their employment because of the COVID-19 crisis, such as working from home, should not create new PEs for the employer. Similarly, the temporary conclusion of contracts in the home of employees or agents because of the COVID-19 crisis should not create PEs for the businesses. A construction site PE would not be regarded as ceasing to exist when work is temporarily interrupted.
Concerns related to the residence status of a company (place of effective management)	A temporary change in location of the chief executive officers and other senior executives is an extraordinary and temporary situation due to the COVID-19 crisis and such change of location should not trigger a change in residency, especially once the tie breaker rule contained in tax treaties is applied.
Concerns related to cross border workers	Where a government has stepped into subsidize the keeping of an employee on a company’s payroll during the COVID-19 crisis, the income that the employee receives from the employer should be attributable, based on the OECD Commentary on Article 15, to the place where the employment used to be exercised. In the case of employees that work in one state but commute there from another state where they are resident (cross border worker), this would be the state they used to work in.
Concerns related to a change to the residence status of individuals	Two main situations could be imagined: A person is temporarily away from their home (perhaps on holiday, perhaps to work for a few weeks) and gets stranded in the host country by reason of the COVID-19 crisis and attains domestic law residence there. A person is working in a country (the “current home country”) and has acquired residence status there, but they temporarily return to their “previous home country” because of the COVID-19 situation. They may either never have lost their status as resident of their previous home country under its domestic legislation, or they may regain residence status on their return. In the first scenario, it is unlikely that the person would acquire residence status in the country where the person is temporarily because of extraordinary circumstances. There are however rules in domestic legislation deeming a person to be a resident if he or she is present in the country for a certain number of days. But even if the person becomes a resident under such rules, if a tax treaty is applicable, the person would not be a resident of that country for purposes of the tax treaty. Such a temporary dislocation should therefore have no tax implications. In the second scenario, it is again unlikely that the person would regain residence status for being temporarily and exceptionally in the previous home country. But even if the person is or becomes a resident under such rules, if a tax treaty is applicable, the person would not become a resident of that country under the tax treaty due to such temporary dislocation.

In the backdrop of COVID-19 pandemic many governments are forced to take unprecedented measures such as restricting travel and implementing strict quarantine requirements. This unprecedented situation is raising many tax issues, especially where there are cross-border elements in the equation; for example, cross-border workers, or individuals who are stranded in a country that is not their country of residence.

• Amidst the crisis we are all facing through, there is good news for Corporates especially those who have been non-compliant with certain provisions of the Act like filing their annual returns and financial statements on time with MCA. 
• If you are running a company or an LLP and for various other reasons you could not get your company's annual returns filed on time and missed to comply with any other filing requirement as per the Act and right now looking out for any ways to avoid or reduce penal consequences from such non-compliances, here is your way out. 
• With the 'Companies Fresh Start Scheme 2020' and 'LLP Settlement scheme' brought in by the Government, no matter how many years of non-compliance is piling up for your Company/LLP, you can clear it all at once by filing all the pending returns without paying any late fees and also immunity from any prosecution proceedings that could follow for such non-compliance.  

Companies Fresh Start Scheme 2020

• Government of India rolled out Companies Fresh Start Scheme 2020 vide circular dated 30th Mar,2020 to condone the delay in filing Annual return and financial statements and related documents with the registrar, insofar as it relates to charging of additional fees, and granting of immunity from launching prosecution or proceedings for imposing penalty on account of delay associated with certain filings. Only normal fees for filing documents in the MCA-21 registry will be payable in such case during the currency of Companies Fresh Start Scheme 2020. Further the scheme also provides an opportunity to inactive companies to get their companies declared as ‘Dormant Company’ by filing a simple application at a normal fee.
• The scheme shall remain in force from 1st of April 2020 to 30th of September 2020 and it is applicable to any defaulting company to file belated documents which were due for filing on any given date in accordance with the provisions of the scheme. Immunity from the launch of prosecution proceedings shall be provided insofar as it is applicable to delay in the filing of the documents. Any consequential proceedings for non compliance of the provisions of the act are not covered in the scheme. For example, U/s 42(8) every company is required to file a return of allotment within the prescribed period and Section 42(4) requires that the utilization of money raised shall not be made unless the return of allotment has been filed in the registry. Now, the immunity under this scheme will be made available only for the non-compliance of 42(8) i.e, delayed filing of return of allotment, but the consequential proceedings for non-compliance of 42(4) i.e., utilization of money without filing the return of allotment would continue to apply.
• If the Company in relation to any statutory filing has filed any appeal filed against any notice or order passed by an adjudicating authority under the provisions of the Act, shall withdraw the appeal before making an application for issue of immunity certificate for such statutory filing and provide proof of such withdrawal of appeal.
• In cases where the adjudicating authority has imposed penalty for delay in filing of document with the MCA 21 Registry and where no appeal has been preferred by the Company as on the date of the commencement of the Scheme and where the last date for filing the appeal falls between 1st of March 2020 and 31st May 2020, a period of 120 days additional period is allowed with effect from the last date for filing the appeal before the concerned Regional Directors. And during the 120 day period no prosecution proceedings will be will be initiated relating to the delay in the related filing of documents.
• Companies seeking immunity from prosecution proceedings under this scheme shall make an application by filing the e-form CFSS -2020 after the closure of the scheme and after the documents are taken on file or approved by the designated authority as the case may be but not later than six months from the date of closure of the scheme ie., not later than 31st March 2021. And there will be no fee applicable for filing the form CFSS-2020 under this scheme. Based on the declaration made in form CFSS-2020 an immunity certificate shall be issued by the designated authority. After granting the immunity, the Designated authority shall withdraw prosecution proceedings, if any, and proceedings in respect of defaults against which immunity has been so granted shall be deemed to have been completed without further action on the part of the Designated authority.

The Scheme shall not be applicable to:

1. Companies against which action for final notice for striking off the name under section 248 of the Act has already been initiated by the Designated authority
2. Where any application has already been filed by the Companies for action of striking off the name of the Company from the ROC.
3. Companies which have amalgamated under a scheme of arrangement or compromise under the Act.
4. Where applications have already been filed under section 455 of the Act for obtaining the Dormant Status before this scheme.
5. “Vanishing Companies”
6. For filing of forms related to increase in authorized capital increase and also charge related documents.
• The defaulting inactive companies while filing due documents under CFSS 2020 can simultaneously either apply to get themselves declared as Dormant Company by filing e-form MSC-1 at a normal fee or apply for striking off the name of the Company by filing STK-2 by paying the applicable fee.
• The Fresh Start scheme and modified LLP Settlement Scheme incentivize compliance and reduce compliance burden during the unprecedented public health situation caused by COVID-19. The USP of both the schemes is a one-time waiver of additional filing fees for delayed filings by the companies or LLPs with the Registrar of Companies during the currency of the Schemes. The Schemes, apart from giving longer timelines for corporates to comply with various filing requirements under the Companies Act 2013 and LLP Act, 2008, significantly reduce the related financial burden on them, especially for those with long standing defaults, thereby giving them an opportunity to make a “fresh start”.

The purpose of Ind AS 23 is to appropriately identify and capitalize borrowing costs incurred for the purpose of acquiring, constructing or producing any qualifying asset. The reason behind this treatment is that benefits from such qualifying assets are obtained over a period of time instead of a single accounting period.

The application of this standard extends to qualifying assets measured at cost and not at fair value.

Understanding important terms

• Borrowing costs - interest and other costs that an entity incurs in connection with the borrowing of funds.
• Qualifying assets - an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

CAPITALISATION

An entity shall capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. An entity shall recognize other borrowing costs as an expense in the period in which it incurs them.

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be included in the cost of that asset. Such borrowing costs shall be capitalized as part of the cost of the asset when it is probable that they will result in future economic benefits to the entity and the costs can be measured reliably.

Directly Attributable

The term directly attributable becomes essential in the above paragraph. It means those borrowing costs incurred by the entity towards funds utilized with respect to any expenditure incurred by the entity in acquiring, constructing or producing the qualifying asset.

Alternatively, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made.

However, in certain cases, determination of such directly attributable costs is difficult and requires exercise of judgement.

The standard also necessitates entities to deduct any investment income earned through temporary investments of the borrowed amounts.

Specific Borrowings

When the amount borrowed is used specifically for the purpose of acquisition, construction or production of a qualifying asset, it is treated as specific borrowing.

General Borrowings

When the amount borrowed is generally used for the purpose of acquisition, construction or production of a qualifying asset, it is treated as general borrowing.

Limit on Capitalisation

The amount of borrowing costs that an entity capitalizes during a period shall not exceed the amount of borrowing costs it incurred during that period.

The above statement can be understood on combined reading of the below definitions provided in the standard –

• Application of Capitalisation RateEntity shall determine borrowing costs eligible for capitalisation by applying a capitalisation rate to the expenditures on that asset.
• Meaning of Capitalisation RateThe capitalisation rate shall be the weighted average of the borrowing costs applicable to the borrowings of the entity that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset.

Illustration to understand the cumulative impact of above statements

1. Specific borrowings – 10 lakhs at 20% availed at the beginning of Year 1
2. General borrowings – 10 lakhs at 16% availed at the beginning of Year 1

Year 1

1. 15 lakhs expenditure towards qualifying asset.
2. Interest calculated on above expenditure as per Ind AS 23 – INR 2,80,000 (2 lakhs + 80,000)
3. Actual interest charge for the year – INR 2,80,000
4. Interest to be capitalized – INR 2,80,000 (lower of the above two values)

Year 2 (assuming no repayment of borrowings)

1. 15 lakhs expenditure towards qualifying asset.
2. Interest calculated on above expenditure as per Ind AS 23 (including Year 1 expenditure) – INR 5,60,000 (2.8 lakhs of Year 1 + 2.8 lakhs of Year 2)
3. Actual interest charge for the year – INR 2,80,000
4. Interest to be capitalized – INR 2,80,000 (lower of the above two values)

COMMENCEMENT OF CAPITALISATION

An entity shall begin capitalizing borrowing costs as part of the cost of a qualifying asset on the commencement date. The commencement date for capitalisation is the date when the entity first meets all of the following conditions –

1. It incurs expenditures for the asset;
2. It incurs borrowing costs; and
3. It undertakes activities that are necessary to prepare the asset for its intended use or sale.

Note – The cumulative nature of above conditions thereby eliminates capitalizing borrowing costs against advance payments made by entities towards qualifying assets.

SUSPENSION OF CAPITALISATION

An entity shall suspend capitalisation of borrowing costs during extended periods in which it suspends active development of qualifying asset.Any borrowing costs that an entity may incur during an extended period of suspension of the activities for the purpose of qualifying assets, do not qualify for capitalisation.

Note – If the suspension is on account of geographical conditions of the location of qualifying asset or the nature of qualifying asset itself, it does not result in suspension of capitalisation.

CESSATION OF CAPITALISATION

An entity shall cease capitalizing borrowing costs when substantially all the activities necessary to prepare the qualifying asst for its intended use or sale are complete.

Note - Substantial completion of all activities generally indicates physical construction of the qualifying asset. Any administrative work associated with intended use or sale shall not be considered.

SPECIAL ISSUES IN IND AS 23

Specific Borrowing Considered as General Borrowing

• As discussed in previous paragraphs, to the extent that an entity borrows funds generally, the entity shall apply a capitalisation rate to determine the amount of borrowing costs eligible for capitalisation.
• However, a question arises as to whether borrowings made specifically for the purpose of a qualifying asset can be considered as part of general borrowings once the qualifying asset is ready for its intended use.
• This has been clarified by amendment to the standard (w.e.f. 01st April 2019) that while computing the capitalisation rate for funds borrowed generally, an entity should exclude borrowing costs applicable to borrowings made specifically for obtaining a qualifying asset, only until the asset is ready for its intended use or sale.
• Borrowing costs related to specific borrowings that remain outstanding after the related qualifying asset is ready for intended use or for sale would subsequently be considered as part of the general borrowing costs of the entity.
• The standard also clarifies that an entity includes funds borrowed specifically to obtain an asset other than a qualifying asset as part of general borrowings.

Cash flows from the operating activities

Cash flows from the operating activities would be sufficient to finance the capital expenditures incurred during the period. Can the entity claim that the general borrowings have been used to finance other transactions and not to finance the qualifying assets, in which case no borrowing costs would be capitalized?

The following sequence is to be presumed always on fund utilization for qualifying assets –

1. Specific borrowings
2. General borrowings

Cash flows from operating activities are not considered to be utilized for financing the qualifying assets.

DISCLOSURES

An entity shall disclose the following –

1. Amount of borrowing costs capitalized during the period; and
2. Capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation.