APRIL 2019

GST Updates

1.Composition Levy for Service Suppliers

An intra state supplier of services with turnover less than Rs. 50 lakhs in the previous financial year shall pay GST @ 6% w.e.f 1st April 2019 under Composition Levy.

2.Threshold limit increase for Composition Scheme for goods and Restaurant Services!

The threshold limit for availing Composition Scheme has been increased from Rs. 1 crore to Rs. 1.5 crore (For special category states from Rs. 50 lakh to Rs. 75 lakhs)

3.Threshold limit for Registration increased!

Intra state supplier of Goods whose turnover does not exceed Rs. 40 lakhs in the Financial Year is not liable to take registration w.e.f 1st April 2019

4.Last chance to take ITC relating to FY 2017 – 18!

Unutilized ITC for the period July 2017 – March 2018 can be availed within the due date of furnishing the return for March 2019 (ie by 20th April 2019).

5.Revised Order of Utilisation of Input Credit – A Big Relief to Tax Payers !!

CBIC vide Notification No 16/2019 dated 29th March 2019 has allowed for utilization of IGST input credit which is remaining after set off of any IGST liability, against CGST or SGST Liability as the case may be in any order. The effect of this notification is yet to be given in the online portal for filing of returns and is expected anytime soon.

Income Tax Act

Introduction of Income Tax (Second Amendment) Rules 2019 which comes into force from 1st April 2019 which redefines the applicability of respective ITR forms to be used for a specified category of persons. A person who has claimed deduction under Sec 57, or is a director of any company, or who has held any unlisted equity share at any time during the previous year, or to whom clubbing provisions apply can no longer file returns through ITR 1.

Companies Act 2013:

There have been various filing requirements brought out recently in Companies Act, the gist of which is tabulated below:

S.no	Forms	Applicability & Purpose	Due Date	Remarks
1.	E-form-INC-22A (Active Company Tagging Identities and Verification)	Every company incorporated on or before 31 of December, 2017 for filing particulars of the company and registered office with MCA	On or before 25 April, 2019	Penalty for late filing - Rs. 10,000/-
2.	Initial MSME-1	To be filed by specified companies* for furnishing information with the registrar in respect of outstanding payments to Micro or Small Enterprises.	Within 30 days from the date of availability of form on MCA portal	Form is not yet made available for filing purpose on MCA Portal.
3.	Half yearly MSME Return	To be filed by specified companies* for furnishing information with the registrar in respect of outstanding payments to Micro or Small Enterprises during the half year.	For April to September – by 31 of October and For October to March – by 30 of April	Form is not yet made available for filing purpose on MCA Portal
4.	One time DPT-3	Every Company other than Government company for disclosure of details of outstanding money or loan received by company but not considered as deposits	On or before 22 April, 2019	Penalty/Late Fees - Additional fees would be applicable as per the Act
5.	DPT-3 Yearly	Every Company other than Government company for one time disclosure of details of outstanding money or loan received by company.	On or before 30 June from the end f F.Y	Penalty/Late Fees - Additional fees would be applicable as per the Act
6.	DIR-3 KYC	Every director to whom DIN has been allotted for Updating directors database with MCA	On or before 30 April, 2019	Penalty - Rs. 5,000/

Other Acts:
Banking:
Supreme Court quashes RBI Circular on Debt Resolution:

Supreme Court recently declared a Circular of RBI as ultra vires and to be of no effect in law and left RBI in shock! The Circular had asked banks to either resolve or file for insolvency for debt resolution. The Court has said that such actions can be taken only on specific defaults and not in general. The Order has come as a relief to Companies in stressed sectors such as power, shipping, steel, telecom, infrastructure, sugar, fertilizer and sports infrastructure.

Recent Supreme Court Judgement on Provident Fund Contributions:

The Supreme Court ruled that the employers cannot segregate “special allowance” from basic wages and must include it for calculation of PF deduction. While dealing with a question on whether special allowances paid by an establishment to its employees would fall under the provision of Employee’s Provident Fund and Miscellaneous Provisions Act, 1952 for computation of deduction of Provident Fund, in this particular case, the apex court observed that no material was placed by the Companies “to demonstrate that the allowances in question being paid to its employees were either variable or were linked to any incentive for production” These special allowances were found to be essentially a part of basic wage camouflaged as part of an allowance to avoid deduction.

Very often I have come across clients asking me “I am an NRI, can I buy a property in India? What should I do to purchase one? How do I make payments?” etc., This Article is an attempt to give the readers a clear understanding of the Regulations of Foreign Exchange Management Act as per the Acquisition and Transfer of Immovable Property in India Regulations 2018, as notified by the Reserve Bank of India vide its Notification No. FEMA 21R/2018-RB dated March 26, 2018. We will in detail understand this topic by analyzing the Notification No. FEMA 21R/2018-RB dated March 26, 2018 as well as the Master Direction – Acquisition and Transfer of Immovable Property under Foreign Exchange Management Act (latest updated on 11th April 2018).

What is a Master Direction?

The Reserve Bank of India has started issuing Master Directions on all regulatory matters beginning January 2016. The Master Directions consolidate instructions on rules and regulations framed by the Reserve Bank under various Acts including banking issues and foreign exchange transactions. The process of issuing Master Directions involves issuing one Master Direction for each subject matter covering all instructions on that subject. Any change in the rules, regulation or policy is communicated during the year by way of circulars/press releases. The Master Directions will be updated suitably and simultaneously whenever there is a change in the rules/regulations or there is a change in the policy. All the changes will get reflected in the Master Directions available on the RBI website along with the dates on which changes are made.

In a Nutshell, Master Directions deal with the HOW/ PROCESS of any Regulation along with the entire content of the Notification!

What is a Notification?

A Notification is the one which defines the Do’s and Don’ts of a particular subject/topic which is regulated by the Reserve Bank of India. Hence, it deals with the WHAT of any Regulation!

SCOPE OF THIS REGULATION:

Part I: Acquisition and Transfer of Immovable Property outside India by a Person Resident in India
Part II: Acquisition and Transfer of Immovable Property in India

Part I: Acquisition and Transfer of Immovable Property outside India by a Person Resident in India

A person resident in India can, acquire property outside India if so, permitted under the FEMA or the regulations framed thereunder or with the general or special permission of the Reserve Bank.

Restrictions don’t apply to

• a) a foreign national resident in India or
• b) if the property was acquired by a person resident in India on or before July 8, 1947 and continued to be held by him with the permission of the Reserve Bank and
• c) to acquisition of property outside India by a person resident in India on a lease not exceeding five years

How and When can a Resident in India acquire property abroad?

• I. According to section 6(4) of the FEMA, a person resident in India can hold, own, transfer or invest in any immovable property situated outside India if such property was acquired, held or owned by him/ her when he/ she was resident outside India or inherited from a person resident outside India
• II.A Resident can acquire by way of gift or inheritance from
  • a) a person referred to in I above,
  • b) a person resident in India who had acquired such property on or before July 8, 1947 and continued to be held by him with the permission of the Reserve Bank,
  • c) a person resident in India who has acquired such property in accordance with the foreign exchange provisions in force at the time of such acquisition.
• III. A Resident Individual can buy property abroad under the Liberalized Remittance Scheme.
• IV. Purchased with Balances in Resident Foreign Currency Account.
• V. A resident can acquire immovable property outside India jointly with a relative who is a person resident outside India, provided there is no outflow of funds from India.

ACQUISITION BY COMPANIES HAVING OVERSEAS OFFICES

A company incorporated in India having overseas offices can acquire immovable property for:
Its business and for residential purpose of its staff, subject to following conditions:
Total remittances should not exceed:

• a) 15% of average annual sales/income/turnover of Indian entity during past 2 financial years or up to 25% of Net worth whichever is higher- for Business
• b) 10% of average annual sales/income/turnover of Indian entity during past 2 financial years- for residential purpose of staff.

Part II: Acquisition and Transfer of Immovable Property in India

Applicable to: Acquisition of Property in India by a Person Resident Outside India
Not applicable to: Acquisition of Transfer of Property by a person resident outside India under a lease not exceeding 5 years.
As per section 6(5) of FEMA, a person resident outside India can hold, own, transfer or invest in any immovable property situated in India if such property was acquired, held or owned by him/ her when he/ she was resident in India or inherited from a person resident in India.

ACQUISITION OR TRANSFER BY Non-Resident Indian and OCI:

Particulars	Allowed to
Acquisition of Immovable Property other than agricultural land/ plantation property/ farm house	NRI and OCI
Acquisition by way of gift other than agricultural land/ plantation property/ farm house from person resident in India or from NRI or OCI who is a relative as defined under Companies Act 2013	NRI and OCI
Inheritance from a person Resident outside India who had acquired the property in accordance with provisions of foreign exchange law in force during such acquisition	NRI and OCI
Inheritance from a Person Resident in India	NRI and OCI

TRANSFER OF IMMOVABLE PROPERTY BY NRI/OCI:

An NRI or OCI can transfer immovable property in India to a person resident in India.

Transfer of any immovable property in India	NRI or OCI to Person Resident in India
Transfer of any immovable property in India other than Agricultural Land, Plantation or Farm House	NRI or OCI to NRI or OCI
Transfer of any immovable property in India other than Agricultural Land, Plantation or Farm House by way of Gift	NRI or OCI to NRI or OCI only if such transferee is a relative defined under Section 2(77) of the Companies Act 2013

PAYMENT MODES:

Allowed :

• 1) Out of Funds received in India through banking channels by way of inward remittance from any place outside India or
• 2) By debit to their NRE/FCNR (B)/NRO account

Not Allowed :

• 1) By way Traveller’s Cheque or
• 2) By Foreign Currency Notes or
• 3) Any other mode other than allowed modes.

JOINT ACQUISITION BY THE SPOUSE OF NRI or OCI:

Person not a resident of India Not an NRI or OCI But Spouse of NRI or OCI	Can acquire immovable property in India other than agricultural land/farm house/plantation property, JOINTLY with his/her NRI/OCI spouse.
Consideration for Acquisition	Out of Funds received in India through banking channels by way of inward remittance from any place outside India or Non-Resident account of the concerned person maintained in India. Payment should not be done by way of Traveller’s Cheque or Foreign Currency Notes or by any other mode except as allowed mentioned above.
Other Conditions	Marriage should have been registered and subsisted for a continuous period of not less than 2 years immediately preceding the acquisition of such property. The Non-Resident Spouse should not otherwise be prohibited from such acquisition.

ACQUISITION OF IMMOVABLE PROPERTY IN INDIA BY FOREIGN NATIONALS:

Foreign Nationals (except 11 restricted countries) resident in India can acquire immovable property in India.

Foreign Nationals resident outside India can acquire immovable property by way of lease not exceeding 5 years and by way of inheritance from a resident.

Restricted Countries for which prior permission from RBI is required: Citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Macau, Hong Kong or Democratic People’s Republic of Korea (DPRK), irrespective of their residential status.

ACQUISITION OF IMMOVABLE PROPERTY IN INDIA BY LTV (Long Term Visa Holder)

Pre-requisite	Citizen of Afghanistan, Bangladesh or Pakistan belonging to minority communities in those countries viz., Hindus, Sikhs, Jains, Buddhists, Parsis and Christians, who is residing in India and has been granted a Long-Term Visa (LTV) by the Central Government.
Eligible to	Purchase one Residential Unit as dwelling unit for self-occupation and one immovable property for self-employment.
Other Conditions	Property should not be located in and around restricted/protected areas as notified by the Central Government or cantonment areas. The person should submit a declaration to Revenue Authority of District in which property is located specifying the source of funds. Registration documents to clearly mention the Nationality and the fact that the person is an LTV. Copy of documents purchased shall be submitted to DCP/FRO/FRRO concerned and to Ministry of Home Affairs (Foreign Division)
Confiscation	The Property may be attached or confiscated in the event of the person’s indulgence in Anti-India Activities.
Sale	Sale is possible only after acquiring Indian Citizenship. If sale has to happen before acquiring Indian Citizenship

ACQUISITION OF IMMOVABLE PROPERTY BY FOREIGN EMBASSIES/DIPLOMATS/CONSULATE GENERALS:

Foreign Embassy/ Diplomat/ Consulate General, can purchase/ sell immovable property (other than agricultural land/ plantation property/ farm house) in India provided –

• a. Clearance from the Government of India, Ministry of External Affairs is obtained for such purchase/sale, and
• b. The consideration for acquisition of immovable property in India is paid out of funds remitted from abroad through banking channels.

ACQUISITION BY BRANCH/ANY OTHER OFFICE OF FOREIGN COMPANIES IN INDIA FOR CARRYING OUR PERMITTED ACTIVITY:

Branch or any other place of business in India, other than a liaison office may acquire immovable property in India which is necessary for or incidental to the activity carried on in India.

The immovable property so acquired can be mortgaged to an Authorized Dealer as a security for any borrowing.

However, acquisition of immovable property in India by a branch, office or other place of business of persons of Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or Hong Kong or Macau or Nepal or Bhutan or 23Democratic People’s Republic of Korea origin/ nationality/ ownership requires the prior approval of the Reserve Bank.

REPATRIATION OF SALE PROCEEDS OF IMMOVABLE PROPERTY IN INDIA:

• (a) A person who has acquired the property U/s 6(5)iv of FEMA or his successor cannot repatriate the sale proceeds of such property without RBI approval.


• (b) Repatriation up to USD 1 million per financial year is allowed, along with other assets under (Foreign Exchange Management (Remittance of Assets) Regulations, 2016) for NRIs/ PIOs and a foreign citizen (except Nepal/ Bhutan/ PIO) who has
  • (i) inherited from a person referred to in section 6(5) of FEMA, or
  • (ii) retired from employment in India or(c) is a non-resident widow/ widower and has inherited assets from her/ his deceased spouse who was an Indian national resident in India.


• (c) NRIs/ PIOs can remit the sale proceeds of immovable property (other than agricultural land/ farm house/ plantation property) in India subject to the following conditions:
  • i.The immovable property was acquired in accordance with the provisions of the foreign exchange law in force at the time of acquisition or the provisions of Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations 2018;
  • ii.The amount for acquisition of the property was paid in foreign exchange received through banking channels or out of the funds held in foreign currency non-resident account or out of the funds held in non-resident external account;
  • iii. In the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties.

CONCLUSION

In general, permissions are given to NRI/OCI/ Foreign Nationals Resident in India (except citizens of restricted countries) / Places of Business of Foreign Residents in India to acquire or transfer immovable property in India. It is very essential to understand the Regulations before entering into any Property Acquisition or Transfer transactions in India by Persons Resident outside India and abroad by Persons Resident in India.

RELATED PARTY TRANSACTIONS- AN UNDERSTANDING

With Audit season commencing for the year, all Audit Firms must be busy preparing revised audit checklists, doing fieldwork and training the Audit Team for more effective performance of an Audit. At this juncture, we felt it would be of great relevance to write an Article on Related party transactions and their disclosure both from Companies Act as well as Accounting Standards perspective, which is a very common thing that an Audit Team would come across in any Corporate Audit.

Need to understand the Related Party Transactions:

• 1. CARO requirements
  

  Under Clause (xiii), Para 3 of the CARO 2016, the auditor shall report the following:
  
  Whether all transactions with the related parties are in compliance with sections 177 and 188 of Companies Act, 2013 where applicable and the details have been disclosed in the Financial Statements etc., as required by the applicable accounting standards;
  
  (The sections are discussed in detail in the later paragraphs)

• 2. Disclosure in Financial Statements
  
  

  The nature of the transaction, the amount involved and the relationship of such Related Parties have to be disclosed in the Financial Statements.

• 3. Disclosure in Board’s Report
  
  

  The Company is required to disclose in the Board’s Report all the related party transactions entered along with the justification for entering into such contract or arrangement by the company during financial year.

Before discussing in detail about the compliances with respect to Related Party Transactions, let us first understand who are the Related Parties of a Company.

Who is a related party?

As per Section 2(76) of the Companies Act 2013, Related Party includes,

• (a) a director or his relative
• (b) key managerial personnel or his relative
• (c) a firm, in which a director, manager or his relative is a partner;
• (d) a private company in which a director or manager is a member or director
• (e) a public company in which a director or manager is a director or holds along with his relatives, more than two per cent of its paid-up share capital.
• (f) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;
• (g) any person on whose advice, directions or instructions a director or manager is accustomed to act:
  
  Provided that nothing in sub-clauses (f) and (g) shall apply to the advice, directions or instructions given in a professional capacity;
• (h) any body corporate which is—
  • (i) a holding, subsidiary or an associate company of such company; or
  • (ii) a subsidiary of a holding company to which it is also a subsidiary; or
  • (iii) an investing company or venture of the Company.
• (i) such other person as may be prescribed;
• Key Managerial Personnel in relation to the company means,
  • a) the Chief Executive Officer or the Managing Director or the Manager;
  • b) the Company Secretary;
  • c) the Chief Financial Officer; and such other officer as prescribed

Illustrations

• 1. Mr. M, a director of K Pvt Ltd. is a related party to the Company K Pvt Ltd.
• 2. Mr. N along with his relatives holds 2% of the paid-up capital of the company M Ltd. In this case Mr.N and M Ltd are related parties.
• 3. DEF Ltd being an associate of ABC Ltd is a related party to ABC Ltd.

What is a related party transaction?

As provided in the section 188 of the Companies Act 2013, any transaction between a Company and its related party relating to

• (a) sale, purchase or supply of any goods or materials;
• (b) selling or otherwise disposing of, or buying, property of any kind;
• (c) leasing of property of any kind;
• (d) availing or rendering of any services;
• (e) appointment of any agent for purchase or sale of goods, materials, services or property;
• (f) such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company; and
• (g) underwriting the subscription of any securities or derivatives thereof, of the company.

shall be regarded as a Related Party Transaction.

Approval of Related Party Transactions

Every Contract or arrangement or transactions to be entered with a related party shall be passed by way of resolution with the consent of the Board irrespective of the Value of the transaction or the Capital of the Company.

In case if any of the director(s) is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of such contract or arrangement. And he shall not be counted for quorum or shall not vote for the transaction.

Provided that, this shall not be applicable to a Company in which more than 90% of the members are relatives of the promoters or the related parties.

The Agenda of the Board Meeting shall disclose-

• the name of the related party and nature of relationship;
• the nature, duration of the contract and particulars of the contract or arrangement;
• the material terms of the contract or arrangement including the value, if any
• any advance paid or received for the contract or arrangement, if any;
• the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;
• whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors; and
• any other information relevant or important for the Board to take a decision on the proposed transaction.

When a prior approval of the Company is required?

For the purposes of first proviso to sub-section (1) of section 188, a company shall enter into a transaction with the prior approval of the company by a resolution, where the transaction to be entered into, as contracts or arrangements, is as per the criteria as mentioned below –

Particulars	Criteria
sale, purchase or supply of any goods or materials, directly or through appointment of agent	10% or more of the turnover of the company or Rs. 100 crore, (whichever is lower)
selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent	10% or more of net worth of the company or Rs. 100 crore, (whichever is lower)
leasing of property of any kind	10% or more of net worth of the company or Rs. 100 crore, (whichever is lower)
availing or rendering of any services, directly or through appointment of agent	10% or more of the turnover of the company or Rs. 50 crore, (whichever is lower)

Contract to be void if not ratified by the Board

Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board and if it is not ratified by the Board or, as the case may be, by the shareholders at a meeting within three months from the date on which such contract or arrangement was entered into, then it shall be voidable at the option of the Board and if the contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it.

The company shall proceed against a director or any other employee who had entered into such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as a result of such contract or arrangement.

Penalty in case of violation

Any director or any other employee of a company, who had entered into or authorised the contract or arrangement in violation of the provisions of this section shall,

1. in case of listed company, be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than Rs. 25000 but which may extend to Rs,5 lakhs, or with both; and
2. in case of any other company, be punishable with fine which shall not be less than Rs.25,000 but which may extend to Rs.5 lakhs.

ROC Compliances:

Form MGT - 14

Disclosure of particulars of arrangements/contracts/agreements entered into by the company with related parties after being passed at the Board Meeting. The particulars of such resolutions are to be filed in this form.

Private Limited companies are exempted from filing of E-form MGT – 14 as per MCA vide notification dated 05.06.2015.

If the company fails to file MGT – 14, the company shall be punishable with a fine not less than Rs.5 lakhs which may extend upto Rs. 25 lakhs. And, every officer of the company shall be punishable with a fine which shall not be less than Rs. 1 lakh but which may extend upto Rs.5 lakh.

AS – 18 Related Party disclosures:

As provided under AS – 18, the related parties are described as under:

• (a) enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise (this includes holding companies, subsidiaries and fellow subsidiaries);
• (b) associates and joint ventures of the reporting enterprise and the investing party or venturer in respect of which the reporting enterprise is an associate or a joint venture;
• (c) individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that gives them control or significant influence over the enterprise, and relatives of any such individual;
• (d) key management personnel and relatives of such personnel;
• (e) enterprises over which any person described in (c) or (d) is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the reporting enterprise and enterprises that have a member of key management in common with the reporting enterprise.

What is to be disclosed as per AS -18?

If there have been transactions between related parties, during the existence of a related party relationship, the reporting enterprise should disclose the following in the Notes to accounts and in the Financial Statements:

• (1) the name of the transacting related party;
• (2) description of the relationship between the parties;
• (3) description of the nature of transactions;
• (4) volume of the transactions either as an amount or as an appropriate proportion;
• (5) any other elements of the related party transactions necessary for an understanding of the financial statements;
• (6) the amounts or appropriate proportions of outstanding items pertaining to related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date;
• (7) amounts written off or written back in the period in respect of debts due from or to related parties.

CONCLUSION :

It becomes really important to clearly understand the related party transactions by obtaining enough details from the Management. During performance of the Audit, its not just the financial transactions that needs to be given importance to, but also the Minutes of the meeting of the Board of Directors and General Meetings of the Company that have to be clearly studied to understand and disclose the extent and nature of related party transactions and their related compliance.

Timely refund mechanism is essential in tax administration, as it facilitates trade through release of blocked funds for working capital, expansion and modernization of existing business. The provisions pertaining to refund contained in the GST law aim to streamline and standardise the refund procedures under GST regime.

Accumulation of Input Tax Credit happens when the tax paid on inputs is more than the output tax liability. Such accumulation will have to be carried over to the next financial year till such time as it can be utilised by the registered person for payment of output tax liability.

As per Section 54(3) of the CGST Act, 2017, a registered person may claim refund of unutilised input tax credit at the end of any tax period. A tax period is the period for which return is required to be furnished. Thus, a taxpayer can claim refund of unutilised ITC on monthly basis.

Refund of unutilized input tax credit can be claimed in the following two cases under GST:

• 1. Unutilized input tax credit on zero-rated goods/services on which no payment of tax was made can be claimed as refund.
• 2. Accumulation of unutilized ITC due to higher tax rate on inputs than the output supplies (other than zero-rated/exempted goods)

1. Zero rated supplies made without payment of tax:

As per Section 16(3) of the IGST Act, 2017, a registered person making zero rated supply is eligible to claim refund under either of the following options, namely:

• Supply of goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or
• Supply of goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied.

The first category pertains to refund of unutilised ITC for which the registered person has to supply under Bond/LUT (as prescribed in Rule 96A of CGST Rules) and in the second category supply has been made after payment of Tax (IGST). In both the cases, refund can be applied under Section 54 of the CGST Act, 2017 read with Rule 89 or Rule 96, as the case may be, of the CGST Rules, 2017.

The application filed for refund of unutilized ITC on account of zero rated supplies shall be accompanied with documentary evidence as referred to in rule 89(2) of CGST Rules, 2017, which includes the Input Tax credit invoices, outward supply invoices and proof of realization of export proceeds for the refund application period

The formula for grant of refund in cases where the refund of accumulated Input Tax Credit is on account of zero rated supply is based on the following:

Refund Amount = (turnover of zero rated supply of goods + turnover of zero rated supply of services) x Net ITC /Adjusted total turnover

Note

• 1. “Turnover of zero-rated supply of goods” means the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking;
• 2. “Turnover of zero-rated supply of services” means the value of zero-rated supply of services made without payment of tax under bond or letter of undertaking, calculated in the following manner, namely: -
  Zero-rated supply of services is the aggregate of the payments received during the relevant period for zero-rated supply of services and zerorated supply of services where supply has been completed for which payment had been received in advance in any period prior to the relevant period reduced by advances received for zerorated supply of services for which the supply of services has not been completed during the relevant period

Inverted duty structure:

Where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies) , refund can be applied under Section 54 of the CGST Act, 2017 read with Rule 89 of the CGST Rules, 2017.

Rule 89(2)(h) of CGST Rules, 2017 stipulate that refund claim on account of accumulated ITC (where such accumulation is on account of inverted duty structure) has to be accompanied by a statement containing the number and date of invoices received and issued during a tax period.

Rule 89(3) of CGST Rules, 2017 also provide that where the application relates to refund of input tax credit, the electronic credit ledger shall be debited by the applicant in an amount equal to the refund so claimed.

However, the Government also has the power to notify supplies where refund of ITC will not be admissible even if such credit accumulation is on account of an inverted duty structure.

The government in exercise of powers conferred by this section, has issued Notification wherein it has been notified that no refund of unutilised input tax credit shall be allowed under sub-section (3) of section 54 of the said Central Goods and Services Tax Act, in case of supply of construction services and in case of the certain goods including woven fabrics, knitted or crocheted fabric, rail locomotives and parts thereof.

Provisions similar for refund of accumulated ITC for both types of Refund Applicants (suppliers making zero-rated / inverted duty supplies)

• Where the application relates to refund of input tax credit, the electronic credit ledger shall be debited by the applicant by an amount equal to the refund so claimed as per Rule 89(3) of CGST Rules, 2017
• Also, interest will be paid for any delay in sanctioning of Refund beyond the mandated period of 60 days (as per Rule 94 of CGST Rules, 2017).
• The refund and/or interest sanctioned, if any, will be directly credited to the bank account of the applicant.
• Refund application must be filed in Form GST RFD-1 before the expiry of 2 years from the ‘relevant date’.
• Relevant date has been explained in following scenarios
  • - Goods exported by sea or air – Date on which the ship or aircraft in which the goods are loaded, leaves India
  • - Goods exported by land – Date on which the goods pass the frontier
  • - Goods exported by post – Date of dispatch of goods by the concerned post office
  • - Services exported, where the supply of service has been completed prior to the receipt of payment – Date of receipt of payment.
  • - Services exported, where the payment has been received in advance, prior to the date of issue of invoice – Date of issue of invoice.
  • - Unutilized input tax credit – End of the financial year in which the claim for tax refund arises.
• No refund of unutilised input tax credit is allowed in cases where the goods exported out of India are subjected to export duty. Further, no refund of input tax credit is allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.

Significant Economic Presence is a concept introduced by the Finance Act 2018, w.e.f AY 2019-20 by inserting a new explanation 2A to Section 9(1)(i) of the Income Tax Act, 1962 which explains that where a non resident has a Significant Economic Presence (SEP) in India, it shall constitute as ‘business connection’ in India. And any income accruing or arising directly or indirectly through or from any ‘business connection’ in India, will be deemed to accrue or arise in India. Thus, when a person is treated as having significant economic presence in India and generates income out of it, it will be taxable in India irrespective of his residential status.

What is Significant Economic Presence?

The explanation clarifies SEP as follows:

• 1. Transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions exceeds the threshold limit which is yet to be prescribed; or
• 2. Systematic and continuous soliciting of business activities or engaging in interaction with prescribed number of users, in India through digital means.

The act provides that, when a non resident receives payment exceeding the threshold limit from sale of goods or services or property, including income from provision of download of data or software in India, or solicits business activities systematically and continuously through digital means or engages in interaction with specified number of users in India through digital means, he is deemed to have a Significant Economic presence in India.

The Need for SEP:

Traditionally, where an enterprise is a resident in one country and the income of the enterprise is generated out of another country (Source country), the taxes will be collected only by the country in which the enterprises is a resident and not by the source country unless and until the enterprise has a permanent establishment (PE) in the source country. Thus, for the source country to collect taxes on the income generated out of it’s own country, physical presence of the enterprise was required. However, in today’s digital age, a non-resident can carry out transactions from a remote location without any physical presence in another country.

OECD (Organisation for Economic Co-Operation and Development) an organization founded to promote international trade and economic progress, in it’s BEPS (Base Erosion and Profit Shifting) project, sets out 15 action plans to address tax avoidance and to ensure that profits are taxed where the economic activities are carried out and where the value is created. And the OECD-BEPS Action plan 1 is for addressing the tax challenges of Digital Economy.

The action plan points out that the International tax rules which were designed years ago has to undergo change owing to the increasing number of digital transactions. The evolution of business models in general and the growth of digital economy in particular have resulted in non-resident companies operating in a jurisdiction in a fundamentally different manner than at the time, the international tax rules were designed. With the help of Information and Communication Technology that is available in the today’s digital world, the ability of a non resident enterprise to transact in a jurisdiction without a physical presence in the jurisdiction have dramatically expanded.

The BEPS action plan has analysed various options to address these challenges and in order to align with the action plan, India has so far introduced two concepts, one Equalisation levy in 2016 and the second Significant Economic Presence in 2018. Equalisation levy was the first step taken by India to tax certain specified digital transactions carried out by non residents. By introducing the concept of significant economic presence, India is advancing further on taxation of the digital economy.

Prior to introduction of SEP, there were many case laws, wherein it was decided that many digital transactions were not taxable in India as the parties involved does not have a PE in India. Thus, bringing in a concept of SEP is an added advantage wherein, the taxability of transaction can be decided based on the economy where it was created irrespective of the physical presence of the provider of goods/services or property.

Issues on applicability of SEP:

Though the concept of SEP is applicable from this AY, the impact of this would be very minimal as India has executed tax treaty (DTAAs) with various countries and the PE definition as per the treaty would override the provisions of SEP as per the Act. Until the treaties are modified, the SEP provisions could not be made applicable to many transactions.

Though, it has been a year since the SEP provisions are introduced, the threshold limits as mentioned in the explanation is not yet prescribed by the department. Once the threshold limits are prescribed, the practicality of finding out the significant economic presence could be very tedious, it would be very difficult to calculate the number of users with which the non-resident has interacted to identify whether it has crossed the prescribed limit. Moreover if the SEP is established, the attributable profits which will be taxable in India, has to be determined which could be very complex exercise and the method of identifying the profit attributable to SEP are not made clear by the department.

The equalisation levy was introduced in 2016 to collect taxes on specified digital transactions like online advertisements, a flat rate of 6% tax has to be paid in case of equalization levy and the foreign tax credit also would not be made available for the non-resident under the equalization levy. Now, with the introduction of SEP, will the transactions already subjected to the equalization levy fall into SEP again? The question still needs to be addressed.