With a view to provide comfort to the citizens and corporate community by minimizing transaction cost and litigation costs, and also with the aim of taking a sever view of willful, malafide and fraudulent transactions, the procedure for Compounding of Contraventions under FEMA 1999 has to been framed. In this Article, we will understand in detail what are compounding of offences, the procedure for compounding, the empowered authorities for compounding, types of offences that can be compounded, time limit for compounding etc., RBI has issued a Master Direction of Compounding of Offences which is updated from time to time and lays down the basic framework for the compounding process.
Contravention and Compounding of Contravention:
Before we get to understand compounding, we need to have clarity on what is a Contravention under FEMA Act 1999.
A contravention is breach of the provisions of the Foreign Exchange Management Act (FEMA), 1999 and rules/ regulations/ notification/ orders/ directions/ circulars issued there under.
Compounding is the process of:
- Voluntary admission of contravention
- Pleading guilty
- Seeking redressal
Power to Compound:
Power of Compounding lies with Reserve Bank of India as conferred by Section 13 of FEMA 1999 except the contraventions under Section 3(a).
List of contraventions compounded by Regional Offices of the Reserve Bank of India are as follows which are mostly related to Foreign Direct Investment:
- Delay in reporting inward remittance received for issue of shares
- Delay in filing form FC(GPR) after issue of shares.
- Delay in filing the Annual Return on Foreign Liabilities and Assets (FLA).
- Delay in issue of shares/refund of share application money beyond 60 days, mode of receipt of funds, etc.
- Violation of pricing guidelines for issue/transfer of shares.
- Issue of ineligible instruments
- Issue of shares without approval of RBI or Government, wherever required.
- Delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident.
- Receiving investment in India from non-resident or taking on record transfer of shares by investee company.
- Delay in reporting the downstream investment made by an Indian entity or an investment vehicle in another Indian entity (which is considered as 7 indirect foreign investment for the investee Indian entity in terms of these regulations), to Secretariat for Industrial Assistance, DIPP.
- Delay in reporting receipt of amount of consideration for capital contribution and acquisition of profit shares by Limited Liability Partnerships (LLPs)/ delay in reporting disinvestment/transfer of capital contribution or profit share between a resident and a nonresident (or vice-versa) in case of LLPs
- Gift of capital instruments by a person resident in India to a person resident outside India without seeking prior approval of the Reserve Bank of India.
List of contraventions compounded by FED CELL New Delhi relating to Branch, Liaison Office, Immovable Property and Receipt of Deposits are as follows:
- Contraventions relating to acquisition and transfer of immovable property outside India
- Contraventions relating to acquisition and transfer of immovable property in India
- Contraventions relating to establishment in India of Branch office, Liaison Office or project office
- Contraventions falling under Foreign Exchange Management (Deposit) Regulations, 2000
The monetary limits for handling above contraventions are as follows:
| Location | Monetary Limit of contravention |
|---|---|
| All Regional Offices (except Kochi and Panaji) | No limit |
| Regional Offices Kochi and Panaji | Upto Rs 100,00,000/- |
| CEFA Mumbai (Cell for Effective Implementation of FEMA) | Rs 1,00,00,000/- and above under the jurisdiction of Panaji and Kochi |
| CEFA Mumbai | All other contraventions not specified above |
Important Aspects:
| Scenario | Status |
|---|---|
| Similar Contravention committed within 3 years from date of original contravention. | Cannot be compounded |
| Any Transaction needing proper approvals or permission from statutory authorities. | Will not be compounded until such approvals as obtained from respective authorities. |
| Serious Contravention cases like Money Laundering, terror financing affecting the sovereignty and integrity of Nation | Will not be compounded and case will be referred to DOE for further investigation. |
| In case of pending appeal based on DOE adjudication | Compounding application cannot be made |
Process of Compounding:
Ascertaining the nature and allowability of contravention for compounding:
The Nature of any contravention is ascertained keeping in view the following indicative points:
- Whether the contravention is technical and or minor in nature and needs only an administrative cautionary advice
- Whether the contravention is serious in nature and warrants compounding of the contravention
- Whether the contravention prima facie involves money-laundering, national and security concerns involving serious infringement of the regulatory framework.
RBI reserves the right to classify the contraventions as stated above and neither the contravener nor others have any right to classify any contravention as technical Suo moto.
LATE SUBMISSION FEE (LSF):
Late Submission Fee is a concept introduced in 2017 for transactions undertaken on or after November 7th 2017. LSF is only for Reporting Delays and not for any other kind of contraventions. A contravener can regularize reporting delays by paying LSF without going through the compounding procedure.
Amount of LSF will be as per Following Matrix:
| Amount involved in reporting (Rs) | Late Submission Fees as % of amount involved | Maximum amount of LSF applicable |
|---|---|---|
| Upto 10 million | 0.05% | Rs 1 million or 300% of the amount involved whichever is lower |
| More than 10 million | 0.15% | Rs 10 million or 300% of the amount involved whichever is lower |
Reporting contraventions
Reporting contraventions by LO/BO/Minimum applicable LSF will be Rs 100
LSF may be paid by way of a demand draft drawn in favour of Reserve Bank of India and payable at the Regional Office concerned.
CRITERIA FOR CALUCLATION OF COMPOUNDING AMOUNT:
| Type of Contravention | Formula |
|---|---|
Reporting Contraventions
|
Fixed amount : Rs10000/- (applied once for each contravention in a compounding application) + Variable amount as under
|
| Reporting contraventions by LO/BO/PO | As above, subject to a ceiling of Rs 2 lacs. In case of project office, amount of contravention shall be 10% of project cost and then calculation to be done accordingly. |
| AAC/ APR/ Share certificate delays In case of non-submission/ delayed submission of APR/ share certificates (FEMA 120) or AAC (FEMA 22) or FCGPR (B) Returns (FEMA 20) or FLA Returns (FEMA 20 (R)) | Rs.10000/- per AAC/APR/FCGPR (B) Return delayed. Delayed receipt of share certificate – Rs.10000/- per year, the total amount being subject to ceiling of 300% of the amount invested. |
|
Allotment/Refunds -
Para 8 of FEMA 20/2000-RB (non-allotment of shares or allotment/ refund after the stipulated 180 days)
LO/BO/PO - (Other than reporting contraventions) |
Rs.30000/- + given percentage:
For project offices the amount of contravention shall be deemed to be 10% of the cost of project |
| All other contraventions except Corporate Guarantees but including all contraventions of FEMA 20(R)/2017-RB dated November 07, 2017 other than FLA Returns |
Rs.50000/- + given percentage:
|
| Issue of Corporate Guarantees without UIN/ without permission wherever required /open ended guarantees or any other contravention related to issue of Corporate Guarantees. |
Rs.500000/- + given percentage:
In case the contravention includes issue of guarantees for raising loans which are invested back into India, the amount imposed may be trebled. |
PAYMENT OF COMPOUNDING PENALTY:
The amount should be paid within 15 days from the date of the order by way of a demand draft. On realization of the sum for which contravention is compounded, a certificate shall be issued by the Reserve Bank indicating that the applicant has complied with the order passed by the Compounding Authority.
In case of non-payment of the amount indicated in the compounding order within 15 days of the order, it will be treated as if the applicant has not made any compounding application to the Reserve Bank and the other provisions of FEMA, 1999 regarding contraventions will apply. Such cases will be referred to the Directorate of Enforcement for necessary action.
APPEAL ON COMPOUNDING ORDER:
As compounding is based on voluntary admissions and disclosures, there is no provision under the Compounding Rules for an appeal against the order of the Compounding Authority or for a request for reduction of amount compounded or extension of period for payment of the amount imposed.
CONCLUSION
Compounding process is to give significant relief to person committing such contravention who accepts it voluntarily.Where a contravention has been compounded, no proceeding or further proceeding, as the case may be, shall be initiated or continued, as the case may be, against the person committing such contravention in respect of the contravention so compounded. Hence its advisable to immediately apply for compounding as soon as the person becomes aware of such contravention.
Companies Act 2013
MCA Compliance Monitoring System (MCA-CMS)
After introducing a series of new filing compliance requirements viz INC 22A (where the director or the KMP of the Company has to take a picture at the registered office of the company and file it to the department, thus making sure the registered office of the company is functional and updating the companies contact details with the Registrar) and DIR 3 KYC (to make sure the KYC and contact details of the Directors are updated every year with the Registrar), MCA has come up with yet another initiative to track the compliances by the Corporate and to make the compliance procedures simpler by introducing an Artificial Intelligence enabled mechanism called Ministry of Corporate Affairs – Compliance Monitoring System (MCA-CMS).
Through MCA-CMS, MCA shall serve Show Cause Notice (SCN) for non compliances to the defaulting companies’ e-mail ID registered with the registrar and the defaulting companies shall reply to the notices online through the website www.mcacms.gov.in . Currently SCN through MCA-CMS are getting issued only for non compliances under section 96 and 204 only, for non compliances of provisions relating to Annual General Meeting and Secretarial audit only.
How SCN is issued by MCA-CMS?
- The SCN will be issued by the MCA-CMS to the registered e-mail ID of the Company only and no letter will be sent to the registered office of the company through post or otherwise.
- Every SCN issued will have a CMS reference number which will be used by the defaulting companies to reply to the notice
- The SCN will contain details of non-compliance including the relevant section of Companies act 2013 under which the notice is served upon.
- The notice will also mention the timeline within which the notice has to be replied by the Company
What shall be done by the Company which received the SCN?
- On receiving the SCN the company shall immediately forward the copies to all the directors and Key Managerial Personnel of the Company.
- The company shall prepare the reply for the SCN and submit it through the MCA-CMS website alongwith the necessary documentary evidences to substantiate it’s reply within the timeline mentioned in the SCN.
- If the Company has not submitted any reply to the SCN within the timeline allowed, it will be deemed that the company has no explanation to offer to the SCN and necessary legal actions for the non-compliances mentioned in the SCN will be taken by the MCA against the company.
How does the process work?
- On receiving the SCN, the companies shall log onto the MCA CMS website and click on the “Reply to Show Cause notice” option available
- The companies shall enter their CMS Reference number mentioned in the SCN and the system will validate the CMS reference number and generate and send an OTP to the registered E-mail ID of the Company.
- On validating the OTP received by the Company, option to reply to the notice will be enabled.
- Only a maximum of 480 words can be typed in the reply column provided and two attachments shall be submitted along with the reply. The total size of the two attachments shall not exceed 50 MB.
- On submitting the reply, the system will display a confirmation message for the successful submission of the reply. Once the reply is submitted, it cannot be altered.
- On verification of submission of the reply, the adjucating authority shall pass an order within 90 days from the date of issue of notice.
- If aggrieved by the order of the adjucating authority, the company shall file an appeal to the Regional director, in writing within 60 days from the date of receipt of the order.
TAXATION
Overview of New GST return
In the 31st GST Council Meet, it was decided that a New Return System under GST would be introduced for taxpayers. This return system will contain simplified return forms, for ease of filing across taxpayers registered under GST.
Under this New Return System, there will be one main return GST RET-1 and 2 annexures GST ANX-1 and GST ANX-2. This return will need to filed on a monthly basis, except for small taxpayers who can opt to file the same quarterly. Small taxpayers are taxpayers with a turnover up to Rs 5 crore in the preceding financial year.
The main return GST RET-1 will contain details of all supplies made, input tax credit availed, and the payment of taxes, along with interest, if any. This return will contain two annexure forms namely GST ANX-1 and GST ANX-2. GST ANX-1 (Annexure of Supplies) is for reporting details of all outward supplies, inward supplies liable to reverse charge, and import of goods and services, that will need to be reported invoice-wise (except for B2C supplies) on a real-time basis. GST ANX-2 (Annexure of Inward Supplies) will report details of all inward supplies. Most of these details will be auto-drafted from the details uploaded by the suppliers in their GST ANX-1. The recipient of supplies will be able to take action on these auto-drafted documents, which will be available to them on a real-time basis.
These are some of the changes introduced in the new return system
- Harmonized System of Nomenclature (HSN) code will be needed in order to submit details at a document level (on the basis of turnover) versus a separate HSN summary.
- A user will also get HSN via his GST ANX-2, wherever a supplier was supposed to declare the HSN code.
- B2B supplies, liable to reverse charge mechanism need not be shown by the supplier in the GST ANX-1, however, the aggregate figure will need to be shown in GST RET-1.
- Inward supplies which are liable to RCM has to be declared in GST ANX-1 at the GSTIN level, by the recipient of supplies.
- The concept of B2C-L has been removed. The turnover limit for quarterly filers (small taxpayers) will be considered as Rs 5 crore versus the present limit of Rs 1.5 crore.
- A recipient can report missing invoices at an invoice level (that is when a supplier has not uploaded an invoice in T+2 period).
Certain terms used in New return
Missing invoices:
Whenever a supplier has not uploaded an invoice or a debit note, and a recipient claims ITC, it will be termed as “missing invoices”. When ITC is availed on missing invoices by a recipient, and these missing invoices do not get uploaded by the supplier within the stipulated time frame, then the ITC availed with respect to such debit notes/invoices will be recovered from the recipient.
Locking of invoices:
A recipient will have the option to lock in an invoice, if he agrees with the details reported in that invoice., If there is a huge volume of invoices, it may not be practical to lock in individual invoices, and in such cases, deemed locking of invoices will be done on those invoices uploaded which are neither rejected nor have been kept as pending by recipient.
3. Unlocking of the invoices:
An invoice on which ITC has already been availed by a recipient will be considered a locked invoice, and will not be open for amendments. In case an amendment needs to be made to a particular invoice, the supplier will have to issue a debit or a credit note. An incorrectly locked invoice can be unlocked by the recipient online, subject to a reversal of ITC claim made, and an online confirmation thereafter.
4. Pending invoices:
An invoice which has been uploaded by a supplier, however one of the following scenarios applies to that invoice:
- The recipient has not received the supply
- The recipient is of the opinion that there is a need for an amendment in the invoice
- The recipient is unsure about availing ITC for the time being
An invoice in such cases will be marked pending by the recipient, and no ITC will be availed by a recipient on these pending voices.
Rejected invoices:
When the recipient’s GSTIN is filled incorrectly by the supplier, the invoice will be visible for a taxpayer who is not the receiver of such supplies. As ITC will not be eligible to be taken on these invoices, the recipient will need to reject these invoices. To make the task of rejecting invoices hassle-free, the matching IT tool will have the option to create a recipient/seller master list via which the correct GSTIN can be identified.
Availing of Input Tax Credit
Availing of ITC will depend on uploading of invoices or debit notes by the supplier, within the stipulated time frame. An invoice uploaded by the supplier within the 10th of the following month will be visible continuously for the recipient. The taxes payable thereafter which can be claimed as ITC will be posted in the ITC table of the recipient’s return before the 11th of the following month. These invoices will be available for availing ITC in the return which is filed by the recipient. Invoices that are uploaded by the supplier after the 10th of the following month will get posted in the concerned field of the recipient’s return of the subsequent month, however, the viewing facility will be on a continuous basis.
Transition Plan to New GST Return System
The New GST Return System has been launched on a trial basis from July 2019, and the full-fledged system will be put into place from April 2020 (earlier: October 2019). This transition plan will be carried out in a phased manner. The trial phase will be for users to familiarize themselves with the annexure forms of the new return system.
Trending Topics
IND AS 37 – PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
Provisions are created against liabilities that are uncertain with respect to its timing or amount but certain to involve outflow of entity’s resources embodying economic benefits.
Any past event which gives rise to an existing obligating event (liability) can be categorised into two broad categories
- Legal obligation/liability
- Constructive obligation/liability
A legal obligation is an obligation that derives from
- A contract (whether express or implied)
- Legislation
- Other operation of law.
A constructive obligation is an obligation that derives from an entity’s actions where
- By an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities
- As a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities.
CONSTRUCTIVE OBLIGATION
Constructive obligation essentially means obligations on the entity on account of customs/practices to sustain good name and relations within the entity’sindustry/market.
Note: If an entity can change its way of operation and can possibly avoid the obligation, then a constructive obligation does not arise since a realistic alternative to settling the obligation exists.
Example –X Ltd. is engaged in the manufacture of chemicals and fertilizers. Effluents discharged in themanufacturing process have polluted the river near the manufacturing plant. XLtd. promised to reduce the water pollution by installing the necessaryEffluent Treatment Plant to the General Public. However, during the year no steps are taken to install theplant. No legal obligation existed requiring the company to reduce its pollution. In thiscase, though there is no law but by promising to take steps to reduce pollution, X Ltd.has created a valid expectation on the part of public that it will discharge itsresponsibilities. So, the obligation in this case is a constructive obligation.
Example –An entity in the oil industry causes contamination and operatesin a country where there is no environmental legislation. However, the entity has a widelypublished environmental policy in which it undertakes to clean up all contamination that itcauses. The entity has a record of honouring this published policy.The obligating event is thecontamination of the land, which gives rise to a constructive obligation because the conductof the entity has created a valid expectation on the part of those affected by it that the entitywill clean up contamination.
Example –The Board of an entity decided to close down a divisionmaking a particular product. A detailed plan for closing down the divisionwas agreed by the board; letters were sent to customers warning them to seek an alternativesource of supply and redundancy notices were sent to the staff of the division.The obligating event is thecommunication of the decision to the customers and employees, which gives rise to aconstructive obligation from that date, because it creates a valid expectation that the divisionwill be closed.
PRIMARY CONDITIONS FOR INITIAL RECOGNITION
Creation of provision requires the satisfaction of the following three cumulative conditions –
- Entity shall have a present obligation as a result of a past event
- Entity shall be expected to settle the obligation through an outflow of resources having economic benefits
- Reliable estimate can be made of the amount.
Example - Penalties or clean-up costs for unlawful environmental damage wouldlead to an outflow of resources embodying economic benefits in settlement, thus requiring the creation of provision.
PROVISIONING FOR RESTRUCTURING
Restructuring is a process or a programme under the planning and control of the management of an entity that materially changes –
- Scope of business undertaken by the entity
- The manner in which business is conducted.
Examples
- sale or termination of a line of business
- the closure of business locations or the re-location of businessactivities
- changes in management structure etc.
All obligations that arise with respect to restructuring are constructive obligations. Hence, the conditions necessary to satisfy any obligation as a constructive obligation shall be met.
Essential observations to be made by an entity before the creation of provision against a restructuring plan –
Whether the entity hasa detailed formal plan for the restructuring identifying at least
- The business or part of a business concerned
- The principal locations affected
- The location, function, and approximate number of employees who will becompensated for terminating their services
- The expenditures that will be undertaken
- when the plan will be implemented
Whether the entity has raised a valid expectation in those affected that it will carry out the restructuring in any manner.
Example – On the reporting date of an entity, the Board decided to close down a divisionmaking a particular product. On the same date, a detailed plan for closing down the division was agreed by the Board; letters were sent to customers warning them to seek an alternative source of supply and redundancy notices were sent to the staff of the division.
DISCLOSURE REQUIREMENTS
For each class of provision, an entity should disclose:
- The carrying amount at the beginning and end of the period
- Additional provisions made in the period, including increases to existing provisions
- Amounts used (i.e., incurred and charged against the provision) during the period
- Unused amounts reversed during the period
- The increase during the period in the discounted amount arising from the passage of time and the effect of any change in the discount rate
FURTHER DISCLOSURE REQUIREMENTS
An entity should disclose the following for each class of provision
- A brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits
- An indication of the uncertainties about the amount or timing of those outflows. Where necessary to provide adequate information, an entity should disclose the major assumptions made concerning future events
- The amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement.
Recent Updates
GST
Blocking of E-Way Bill Genaration
Blocking of E-Way Bill generation facility has been implemented on EWB Portal from 2nd December 2019, for those taxpayers who has not filed 2 or more Consecutive GSTR 3B Return on GST Portal
Unblocking of EWB generation facility
The EWB generation facility would be automatically unblocked in the event of filing of their GSTR 3B return for the default period(s), reducing the default period to less than 2 consecutive tax periods. The blocking will be automatically lifted on the EWB system next day.
Annual Returns for FY 2017-18
Government has made some changes in the forms of Annual Return (GSTR-9) and the Reconciliation Statement (GSTR-9C) vide Notification No. 56/2019 dated 14.11.2019. These changes do not impact the current tools required for preparation and filing of GSTR-9 and GSTR-9A for the financial year 2017-18. For GSTR-9C, some changes are required in the offline tool and online which is under development and is likely to made available by 14th December, 2019.
Changes in rates of GST
- Outdoor Catering to attract rate of 5% (Without ITC)
- 8th GST Council meeting will be held on 18 December 2019, Wednesday - It is expected that the five slab structure will be brought down to three slabs by a rise in rates, especially from the 5% tax rate up to a maximum of 9-10% and the removal of 12% tax rate. Moreover, certain items that were exempted or nil rated may make a comeback under the tax net.
FEMA
RBI keeps repo rate unchanged
On the basis of an assessment of the current and evolving macroeconomics situation, the Monetary Policy committee decided to keep the policy repo rate under the liquidity adjustment facility unchanged at 5.15 per cent.
Income Tax
TDS U/S 194M
Tds u/s 194M is applicable with effect from 01.09.2019. It is applicable to Individual/HUF (For whom Sec194C,194H & 194J are not applicable) shall deduct 5% at the time of Payment or credit in the books to any residents for : Carrying out any work (Including Supply of labour for carrying out any work) as per Contract, Commission (Other than Insurance Commission) or Brokerage and Fees for Professional Services
Other Information
NEFT System would be available 24*7 all days of year with effect from December 16,2019