In this Article, we will discuss in detail the provisions of FEMA 1999, the respective rules and regulations regarding maintenance of Foreign Currency Accounts by Persons Resident in India with Banks outside India, and also the provisions related to Acquisition of Immovable Property outside India by a Person Resident in India.


OPENING OF FOREIGN CURRENCY ACCOUNTS
Regulating Provision

Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations 2000, regulate the opening and maintenance of Foreign Currency accounts in or outside India by a Person Resident in India. Relevant Notification is FEMA 10/2000-RB dated 3rd May 2000 as amended from time to time.


CATEGORY RELATED PROVISIONS
Person who has acquired Foreign Currency when he was resident outside India or inherited foreign currency from a person who was resident outside India Can hold, own, transfer the foreign currency so acquired
Authorised Dealer in India Can open, hold and maintain with his branch, head office or correspondent outside India, a Foreign Currency Account for transaction foreign exchange business and other matters incidental thereto in accordance with the rules and regulations made thereunder.
Branch of a Bank Incorporated in India Can open, hold and maintain with a bank outside India, a Foreign Currency Account for the purpose of carrying on normal banking business outside India, subject to compliance with the rules and regulations made thereunder.
Shipping or Airline Company incorporated in India Can open, hold and maintain with a bank outside India, a Foreign Currency Account for the purpose of undertaking transactions in the ordinary course of business.
LIC or GIC Can open, hold and maintain with a bank outside India, a Foreign Currency Account for the purpose of meeting expenditure incidental to the insurance business carried on by them and for that purpose credit to such account insurance premium received outside India.
Exporters who have undertaken turnkey or construction project, or exporting services or engineering goods on a deferred payment basis Can open, hold and maintain with a bank outside India, a Foreign Currency Account provided:
  1. Approval as required under FEMA (export of goods and services) Regulations, 2000 has been obtained for undertaking the contract/project/export of goods or services
  2. Terms and conditions stipulated in the letter of approval has been complied with.
Student Can open, hold and maintain with a bank outside India during his stay outside India, a Foreign Currency Account provided the balance in the account is repatriated to India on his return after completion of his studies.
Participant in Exhibition/ Trade Fairs outside India Can open, hold and maintain with a bank outside India for crediting sale proceeds provided the balance in the account is repatriated to India within one month from the date of closure of the exhibition/fair.
Foreign Nationals Resident in India who are employees foreign Company deputed in India in office/branch/subsidiary/joint venture of the Foreign Company. Salary Payable in India can be credited to such account provided:
  1. The amount so paid does not exceed 75% of the salary accrued to such person from the foreign company.
  2. Remaining Salary shall be paid in India in Indian Rupees.
  3. Income Tax shall be paid on the entire salary in India.
Indian Nationals employed by a Foreign Company sent on Deputation to India in office/branch/subsidiary/joint venture of the Foreign Company. Salary Payable in India can be credited to such account provided:
  1. The amount so paid does not exceed 75% of the salary accrued to such person from the foreign company.
  2. Remaining Salary shall be paid in India in Indian Rupees.
  3. Income Tax shall be paid on the entire salary in India.

OPENING, HOLDING AND MAINTAINING FOREIGN CURRENCY ACCOUNTS OUTSIDE INDIA BY INDIAN ENTITY

Indian Entity means ant Firm or Company or Body Corporate registered or Incorporated in India.Indian Entities may open, hold and maintain Foreign Currency Account with a Bank outside India in the name of its office, or branch or representative outside India by making remittances from India for the purpose of normal business operations.

LIMIT ON REMITTANCES
TYPE LIMIT
Initial Expenses Up to 15% of the average annual sales/income/turnover during the last two financial years or up to 25% of the net-worth whichever is higher.
Recurring Expenses 10% of average annual sales/income/turnover during the last two financial years
The above limitation does not apply in following cases
  • The remittances are made out of funds held in EEFC account of the Indian entity
  • The overseas branch / office is set up or representative posted by a 100% Export Oriented Unit or a Unit in Export Processing Zone or in a Hardware Technology Park or Software Technology Park within 2 years of establishment of the Unit.
CONDITIONS

The overseas branch/ office/ representative shall not enter into any contract or agreement in contravention of the FEMA 1999, rules or regulation made thereunder.


The account so opened shall be closed
  • If the overseas branch/office is not set up within six months of opening the account
  • Within one month of closure of the overseas branch or office
  • Where no representative is posted for six months, the balance in the account shall be repatriated to India.
ACQUISITION OF IMMOVABLE PROPERTY OUTSIDE INDIA
Regulating Provision

Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations 2000, regulate the opening and maintenance of Foreign Currency accounts in or outside India by a Person Resident in India. Relevant Notification is FEMA 7 (R)/2015-RB dated 21.01.2016.


Modes Provisions
Acquire by way of Gift (A) Can acquire by way of gift or inheritance from a person who owned or held such property when he was resident outside India.
Acquire by way of Purchase (B) Can acquire property held by a Foreign national;Can acquire by way of Purchase out of Foreign Exchange held in RFC Account maintained in accordance with Notification 10/2000 RB;Is eligible to hold, if acquired by a person resident in India before 8th July 1947 and continued to hold with the permission of RBI.
Transfer of Asset acquired as per A or B above Can transfer it to his relative who is a person resident in India. Relative means husband, wife, brother or sister or any lineal ascendant or descendant of the individual.

ANNUAL RETURNS PERTAINING TO FOREIGN ASSETS HELD BY RESIDENTS

With the introduction of FEMA, persons resident in India need not submit Annual Returns in respect of all types of foreign assets held by them either in terms of general of specific permission of RBI. However, wherever RBI has given special permission for acquisition as well as sale of assets and submission of returns is one of the conditions of approval, the applicants are required to furnish full details foreign assets as per the prescribed permission.

BUDGET UPDATES


The Month of July started with high hopes and huge expectations as the honourable Finance Minister was set to present the Union Budget 2019. In this Article, we have made an attempt to broadly cover the Budget Amendments in the areas of Direct and Indirect Taxation.

I.DIRECT TAXES
1. Increase in Turnover threshold for reduced Rate of Corporate Tax:

The Finance Minister has proposed to extend the benefit of reduced Corporate Tax of 25% (plus Surcharge and Cess, as applicable) for domestic companies having Turnover or Gross Receipts up to Rs.400 Crores in the Financial Year 2017-18.


A. Measures impacting Individuals, HUF’s and Small Businesses
2. Gift made to a person outside India deemed to accrue or arise in India:

To put to rest the controversy of taxation of receipts of gifts in hands of non-residents, the Finance Minister has proposed to insert new Clause (vii) to Section 9(1) to provide that any gift received by a non-resident from resident on or after 5th July, 2019 shall be deemed to accrue/ arise in India and thereby bringing such receipts into the tax net. However, the benefit of exceptions provided in fourth proviso to Section 56(2)(x) continue to apply in such cases. Also, the relevant article of applicable DTAA shall continue to apply for such gifts.


3. Extension of Deduction under section 54GB of the Act in respect of investment of Capital gain on residential property.

Hitherto, the Deduction under Section 54GB of the Act was only available up to 31stMarch 2019 in respect of investment of the proceeds of Long-Term Capital Gain arising from transfer of a residential property by subscribing to the equity shares of an eligible Company.


This deduction is now extended by another two years i.e. up to 31st March 2021. Further, the condition of minimum shareholding of 50% of share capital or voting rights has been reduced to 25% and the condition restricting transfer of new asset being computer or computer software is relaxed to three years from the current five years.


4. Incentives to save more under National Pension Scheme (‘NPS’):

To promote higher savings and deduction claimable by the Government employees the employer contribution allowable for deduction under this section which was restricted to 10% of the Salary is now increased to 14 % of Salary. Further, any amount the Government employees invests under the National Pension Scheme would be allowable as a deduction under section 80CCD.


To attract more savings through NPS, the Finance Minister has proposed amendment in Section 10(12A) of the Act to provide that 60% of the total amount payable at the time of closure or opting out of the scheme would be exempt.


5. Incentives to tax payers to invest in Affordable Housing Projects:

The Finance Minister has proposed to insert a new section 80EEA so as to allow a deduction up to Rs.1,50,000/- in respect of interest on loan taken for a residential house property from a financial institution during the current financial year for purchase of a property whose stamp duty value does not exceed Rs. Forty-Five Lakhs and the Assessee does not own a residential house at the time of availing the loan. This deduction is given in addition to the deduction for Interest available under Sec 24 of the IT Act.


Corresponding amendment is also proposed in Section 80-IBA of the Act, which provides incentive to developer of ‘affordable houses’ to align with the definition prescribed under GST law.


6. Incentives to tax payers for moving to Electric Vehicles:

To mobilize spending on electric vehicles, the Finance Minister has also proposed to provide a deduction of Rs.1,50,000/- in respect of interest on loan taken for purchase of Electric Vehicle as prescribed in Section 80EEB.



7. Reaching out to high spenders to file income tax returns and for claiming Refund Due:

In order to ensure that persons entering into certain high value transactions do furnish their return of income, it is proposed to amend section 139 of the Act so as to provide that a person shall be mandatorily required to file his return of income, if during the previous year, the person:

  1. Has deposited amounts exceeding Rs. One Crore in one or more Current Account maintained with any bank;
  2. Has incurred expenditure of exceeding Rs. Two Lakhs for himself or any other person for travel to a foreign country;
  3. Has incurred expenditure exceeding Rs. One Lakh towards consumption of electricity;
  4. Fulfils such other prescribed conditions, as may be prescribed
  5. Has claimed exemptions under Section 54 ,54B, 54D, 54EC, 54F, 54G, 54GA and 54GB of the Act.
Further, it is also proposed to provide that every claim of Refund shall be made by an Assessee by furnishing the Return of Income.


8. Tracking of transactions through PAN/Aadhar Number:

In order to have certain high expenditure transactions be tracked, an amendment has been proposed in section 139A of the Act wherein the person could have the Aadhar number be mentioned for such transactions in case the person does not have a PAN.


Further in case a person who has a PAN has not linked his Aadhar number before the notified date then the PAN allotted to the person would be made in operative.


(The above amendments would be effective from 1st September, 2019.)


9. Relief for Arrears of salary under Section 89:

In order to mitigate the hardships faced by the persons claiming relief under section 89 of the Act in computation of their tax liability it is proposed to amend Section 140A, 143, 234A, 234B and 234C of the Act to provide that relief under section 89 of the Act would be taken cognizance of for computing the tax liability.


One wonders as to how would the Assessee now be able to claim the refunds for the taxes demanded and paid incorrectly relating to Assessment Year 2007-08 onwards as the time limit for filing revised returns has already elapsed.


(The above amendment would be effective from Assessment Year 2007-08 onwards).

10. Rationalizing TDS on Life Insurance proceeds not exempt under section 10(10D):

In order to make sure that the income on proceeds on Life Insurance Policy which are not exempt under Section 10(10D) of the Act are offered to tax appropriately, an amendment is proposed to Section 194DA of the Act wherein the TDS would now be done @ 5% of the income from the policy as earlier rate of 1% on the entire amount of the Policy proceeds. (The above amendment would be effective from 1st September, 2019.)


11. Clarification regarding TDS on Purchase of Immovable Property:

Section 194IA of the Act provides for TDS to be deducted on immovable property wherein the consideration exceeds Rupees Fifty Lakhs. It is now proposed to clarify that all amounts/ charges like club membership fees, Car parking fees or any fees which are incidental to transfer of the immovable property shall require deduction of tax at source under this section. (The above amendment is proposed from 1st September 2019.)


12. Expanding the scope of TDS provisions:

Section 194M of the Act is proposed to be inserted for payments made by Individuals and HUF (other than those currently covered under section 194C /194J of the Act) to a resident for carrying out any work or by way of Fees for professional services exceeding Rupees Fifty Lakhs in a financial year, shall at the time of credit or payment to the payee whichever is earlier deduct TDS at the rate of 5%. Tax deducted by the individuals and HUF shall be deposited using their PAN and requirement of obtaining TAN is not attracted in such case.


Consequential amendment is proposed in Section 197 of the Act to enable recipients of the above income to apply for a Lower Deduction Certificate.


There apart, another new Section 194N is proposed to be inserted to provide for TDS @ 2% on cash withdrawal made by any person in excess of Rupees One Crore in a year from any Bank or post office.


Further, the government has notified/ would notify class of persons to whom this requirement would not apply.


13. Online filing of Application for Lower Deduction in case of payment to Non- Residents:

In order to track the TDS under section 195(2) of the Act to be made from the income accruing to Non- Resident on the income from certain transactions wherein the resident payer considers that the whole amount being paid to the Non-resident would not be taxable, it is proposed that the forms and manner of making such application by online mode shall be prescribed, which currently is being done manually by the Assessing officer. (This would be effective from 1st November 2019.)


14. Relief for Non-deduction of TDS to Non-Resident under Section 40 and 201 of the Act:

As per the provisions of Section 201 of the Act in case a person fails to deduct tax at source as per the provisions of the Act or fails to pay the same after deducting the same is considered as an Assessee in Default.


Amendments are being proposed in Section 201 and Section 40 of the Act so as to bring parity in tax treatment in respect of failure to deduct tax on payments due to non-resident vis-a-vis the existing provisions regarding payments to resident deductees, if the specified conditions are satisfied. (This shall take effect from 1st September, 2019)


15. Capturing Income on which no TDS is done:

In order to move to achieving the objective of the Government to provide Assessee’s with prefilled data of income of a person; an amendment is being proposed to Section 206A of the Act wherein banks including cooperative banks, companies etc. would have to file certain details in respect of income paid to residents wherein no tax has been deducted at source at such intervals as may be prescribed.


We are moving towards an era when the government would compile the details of your income and you would only have to vet the same by saying whether you are agreeable to the same or not and whether you are offering any additional income. (The amendment would take effect from 1st September, 2019.)


B. Compliance, Governance and Rationalization
16. Relaxation in conditions of special taxation regime for offshore funds:

With the intention of giving boost to Fund management activities in India, the Finance Minister has proposed to remove certain deterrents by proposing to amend Section 9A of the Act, so as to provide that:


  1. Condition of minimum corpus of the Fund being Rs. One Hundred Crore shall have to be fulfilled by the end of a period of six months from the end of the month of establishment or at the end of previous year, whichever is later;
  2. The remuneration paid by the Fund to an eligible fund manager in respect of fund management activity undertaken by him on its behalf is not less than the amount calculated in a manner which would be prescribed separately.
(The above amendments are applicable retrospectively and would take effect from Assessment Year 2019-20.)
17. Exemption from application of Deeming Fair Market Value of unlisted shares:

To avoid genuine hardship in certain cases where the consideration for transfer of shares is approved by certain authorities and the person transferring the share has no control over such determination; it is proposed to amend Sections 56(2)(x) and 50CA of the Act appropriately to empower the Board to prescribe transactions undertaken by certain class of persons to which the provisions of section shall not be applicable.


18. Cancellation of registration of the Trust or Institution:

In order to ensure that the Trust or institution do not deviate from their objects, it is proposed to amend section 12AA of the Income-tax Act, to provide that:


At the time of granting the registration to a trust or institution, the Principal Commissioner or the Commissioner shall also satisfy himself about the compliance of the trust or institution to requirements of any other law which is material for the purpose of achieving its objects;


Subsequently if it is noticed that the trust or institution has violated requirements of any other law which was material for the purpose of achieving its objects, and the order, has either not been disputed or has attained finality, then Principal Commissioner or Commissioner may cancel the registration of such trust or institution after affording a reasonable opportunity of being heard. (This shall take effect from 1st September, 2019)

19. Pass-through of Losses in cases of Category-I and Category-II Alternative Investment Fund:

In order to remove the genuine difficulty faced by Category-I and Category-II AIF’s, the Finance Minister has proposed to following amendment in Section 115UB:


  1. The business loss of the investment fund, if any, shall be allowed to be carried forward and it shall be set-off by it in accordance with the provisions of Chapter VI and it shall not be passed onto the unit holder
  2. The loss other than business loss, if any, shall also be ignored for the purposes of pass through to its unit holders, if such loss has arisen in respect of a unit which has not been held by the unit holder for a period of at least twelve months;
  3. ) The loss other than business loss, if any, accumulated at the level of investment fund as on 31st March, 2019, shall be deemed to be the loss of a unit holder who held the unit on 31st March, 2019 in respect of the investments made by him in the investment fund and allowed to be carried forward by him for the remaining period calculated from the year in which the loss had occurred for the first time taking that year as the first year and it shall be set-off by him in accordance with the provisions of Chapter VI;
  4. The loss so deemed in the hands of unit holders shall not be available to the investment fund for the purposes of Chapter VI.
20. Rationalization of provisions relating to maintenance of information and documents by certain persons:

It is clarified that the requirement in Section 92D of the Act, to provide that the information and document to be kept and maintained by a Constituent Entity of an International Group, and filing of required form, shall be applicable even when there is no international transaction undertaken by such Constituent Entity.


Further, it is also proposed to provide that information shall be furnished by the constituent entity of an international group to the prescribed authority.


II. INDIRECT TAXES

The amendments proposed by the Finance Minister with respect to Goods and Service Tax are discussed herein below:


1. Constitution of National Appellate Authority for Advance Rulings (“NAAAR”):

Finance Bill 2019, introduced NAAAR which will be constituted from such date as may be notified.


An appeal can be filed before NAAAR in case of conflicting advance rulings pronounced in two or more States / Union Territories. Such appeals can be filed either by an officer authorized by the Commissioner within 90 days or by the taxpayer within 30 days from the date the last conflicting advance ruling is communicated to the applicant and to the officer respectively.


NAAAR shall issue an order within a period of 90 days from the date of filing of appeal Advance ruling pronounced by the NAAAR shall be binding on-


  1. The applicant and all registered persons having the same PAN;
  2. All concerned officers in respect of the applicant and all registered persons having same PAN
Amendment in Composition Scheme:

New sub-section 2A in section 10 of the CGST Act inserted to bring in an alternative composition scheme for supplier of services or mixed suppliers who were not eligible for the earlier composition scheme and having an annual turnover in preceding financial year up to Rs 50 lakhs, subject to certain conditions – The Scheme was introduced w.e.f. 1st April 2019 vide Notification No. 2/2019 – Central Tax (Rate) dated 7 March 2019.


Further, explanation is being added to Section 10 to clarify that:
  1. for computing the aggregate turnover to determine eligibility for the composition scheme, value of exempt supplies services provided by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount shall not be taken into account;
  2. However, the aggregate turnover shall include the value of supplies made by a person from 1st April of a financial year up to the date he becomes liable for registration under GST.
2. Increase in the Threshold Limit of aggregate turnover for obtaining the registration:

The threshold limit of aggregate turnover for registration for exclusive supplier of goods is increased from Twenty Lakh rupees to Forty Lakh rupees.


As per further explanation, if the person is engaged in exempt supply of services provided by way of extending deposits, loans or advances and in consideration received interest or discount then that person will be still considered as the engaged in the supply of goods.


3.Aadhar Authentication is mandatory in the procedure for registration to registered persons as well as by fresh registrants:

Every registered person, unless exempted, is required to authenticate or furnish proof of possession of Aadhar number, failing which the registration allotted shall be deemed to be invalid


Going forward such authentication or furnishing of proof of possession of Aadhar number shall also be applicable for obtaining new registration, unless exempted.


4.Amendment in provisions related to furnishing of returns to align with new return filing system:

Changes to section 39 (furnishing of returns), which were made earlier by CGST Amendment Act, 2018 but not made effective till date, have been brought in to align it with the new return filing system that is rolled out.


5.Interest to be levied on net GST liability discharged though Electronic Cash Ledger:

In case of late payment of tax, interest shall be computed only on the net GST liability, paid by debiting the Electronic Cash Ledger.


This benefit shall not be available where GST return is furnished after commencement of recovery proceedings for such tax period.


6.Commissioner empowered to issue extension Notification for Annual Return (GSTR-9):

Commissioner has been empowered to issue notification/instructions /directions to extend the time limit for furnishing the annual return upon the recommendation of GST Council.

7.Simplifying Electronic Cash Ledger:

Tax, interest, penalty, fee or any other amount lying in the Electronic Cash Ledger can be transferred to the heads for IGST, CGST, SGST, UTGST or Cess subject to the conditions, restrictions and in the manner to be prescribed.


In case IGST / CGST amount lying in Electronic Cash Ledger is transferred to SGST or UTGST head, the Government shall transfer to State / UT tax account an equivalent amount in the manner to be prescribed.


8.Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019:

A dispute resolution mechanism called Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 (“Scheme”) is proposed. The Scheme has been introduced with an objective to put to rest disputes relating to pending tax dues as declared by a declarant, pertaining to Service tax, Excise Duty, Education Cess, Secondary and Higher Education Cess, Swachh Bharat Cess, Krishi Kalyan Cess and other indirect taxes and Cess. The Scheme is to be effective from a date to be notified.


III CUSTOMS

Customs part of budget has been proposed specially taking care of Indian player and Make in India concept. Rates of many items has been rationalised to discourage imports of product and to incentivize domestic manufacturing. Major amendments made in Customs and custom tariff act has been discussed as follows.


Exemption granted

Capital goods used in following electronic items have been exempted having an impact of boosting manufacturing of mobile and television sector of India.

  1. Populated PCBA
  2. Camera module of cellular mobile phones
  3. Charger/Adapter of cellular mobile phone
  4. Lithium Ion Cell
  5. Display Module
  6. Set Top Box
  7. Compact Camera Module
Following parts of electric vehicles has been exempted to boost e-vehicle manufacturing and e-vehicle use in India:
  1. E-Drive assembly,
  2. On board charger
  3. E-compressor
  4. Charging Gun

Specified Defence equipment and their parts imported by the Ministry of Defence or the Armed Forces has been exempted from basic custom duty


Increase in rate

NAME REMARKS
Road and Infrastructure Cess levied as additional duty of customs on Petrol and Diesel increased from Rs 8 per litre to Rs 9 per litre
Basic custom duty of Floor covering of plastics, tiles, Base metal fittings etc increased from 10% to 15%
Basic custom duty on Stainless steel in ingots or other primary forms; semi-finished products increased from 5% to 7.5%
Basic Custom duty on cashew kernel increased from Rs. 60 per kg or 45% to 70%
Basic Custom duty on gold and precious metals increased from 10% to 12.5 %
Basic custom duty on Completely Built Unit (CBU) of vehicles falling under heading 8702, 8704 has been increased from 25% to 30%

Exemption Withdrawn
NAME REMARKS
Palm stearin and other oils, having 20% or more free fatty acid, Palm Fatty Acid Distillate and other industrial monocarboxylic fatty acids, acid oils from refining, for use in manufacture of soap and oleochemicals Exemption withdrawn
Water blocking tapes for manufacture of optical fiber cable Exemption withdrawn
BOOKS BASIC CUSTOMS DUTY OF 5% now Leviable
uncoated paper used in printing of newspaper BASIC CUSTOMS DUTY OF 10% now Leviable
lightweight coated paper used in printing of magazine BASIC CUSTOMS DUTY OF 10% now Leviable
petroleum crude Basic custom duty at RE.1 per Tonne
Charger/Power adapter for CCTV camera/IP camera/DVR/NVR BASIC CUSTOMS DUTY OF 15% now Leviable

Decrease in rate
Inputs for the manufacture of CRGO steel like Hot rolled coils, MgO coated cold rolled steel coils etc. BCD has been decreased from 5% to 2.5%
Amorphous alloy ribbon BCD decreased from 10% to 5%
Wool Tops and wool fibre BCD decreased from 5% to 2.5%
EI tanned leather Export duty reduced from 15% to NIL
Hides, skins and leathers, tanned and untanned Export duty reduced from 60% to 40%

Other Changes:
  • Power has been granted to the Customs officers to scan a person who has secreted goods liable for confiscation inside his body.
  • Power to investigate and imposing penalty has been granted to Custom officer if has reason to believe that any instrument of payment of duty like SEIS scrips has been obtained fraudulently
  • Power has been granted to proper officer to provisionally attached bank account if it is necessary for protecting the interest of revenue or preventing smuggling .
  • Certain offences are now made cognizable and non bailable.

TAXATION

Income Computation and Disclosure Standard 3- Construction Contracts

CA Srinidhi S


Income Computation and Disclosure Standard is applicable for computation of income Chargeable under the head “Profits and gains of Business or profession” or “Income from Other sources” and not for the purpose of maintenance of books of accounts. In case of conflict between the provisions of Income Tax Act, 1961 the Act and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that Extent.


Provisions of ICDS are generally applicable to all taxpayers irrespective of their turnover or quantum of income, except for individuals or Hindu Undivided Family as they are not covered under the provisions of Tax Audit. ICDS will not be considered for the computation of Minimum Alternate Tax (MAT).


In this Article we will understand about ICDS 3 on Construction Contracts.



Definitions
  • “Construction contract” is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use and includes :
    1. Contract for the rendering of services which are directly related to the construction of the asset, for example, those for the services of project managers and architects;
    2. Contract for destruction or restoration of assets, and the restoration of the environment following the demolition of assets.
  • “Fixed price contract” is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which may be subject to cost escalation clauses.
  • “Cost plus contract” is a construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus a mark up on these costs or a fixed fee.
  • “Retentions” are amounts of progress billings which are not paid until the satisfaction of conditions specified in the contract for the payment of such amounts or until defects have been rectified.
  • “Progress billings” are amounts billed for work performed on a contract whether or not they have been paid by the customer.
  • “Advances” are amounts received by the contractor before the related work is performed.
    • Applicability
    • Applicable to Contractor for construction contract commencing on or after 1 April, 2016
    • Is Silent regarding applicability to Real Estate Developers
    Overview
    CONTRACT REVENUE
    • The initial amount of revenue, including retentions shall be recognised when there is reasonable certainty of its ultimate collection.
    • Variations in contract work, claims and incentive payments:
      1. To the extent that it is probable that will result in revenue
      2. They are capable of being reliably measured
      3. Uncertain Collection to be booked as book debts i.e., it musn’t be adjusted with contract revenue
    contract cost
    • Costs that relate directly to the specific contract.
    • Costs attributable to contract activity in general and can be allocated to the contract
    • Such other costs as are specifically chargeable to the customer under the terms of the contract
    • Allocated borrowing costs in accordance with the ICDS on Borrowing Costs
    • Costs that are incurred in securing the contract are also included as part of the contract costs, provided
      1. they can be separately identified;
      2. it is probable that the contract shall be obtained.

    To be reduced by - incidental income, not being in the nature of interest, dividends or capital gains that is not included in contract revenue.


    Recognition of Contract Revenue and Expense
    Contract Revenue and Expense

    Contract Revenue – as revenue Contract Costs – as expense with reference to the stage of completion of the contract

    Method of Recognition – Percentage completion method
    • Contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed.
    • Stage of completion is determined with reference to
      1. The proportion that contract costs incurred for work performed up to the reporting date bear to the estimated total contract costs;
      2. Surveys of work performed;
      3. Completion of a physical proportion of the contract work.
    • Note: In the initial stages of contract, when the revenue cannot be estimated with certainty then the revenue should be recognized to the extent of contract cost. The initial stage of the contract shall not extend beyond 25 % of the stage of completion.
    • Indian courts have held that retention money should be recognized as income when right to receive is established –
      1. CIT vs. Simplex Concrete Tiles India Pvt Ltd (179 ITR 8) (Cal HC)
      2. CIT vs East Coast Constructions & Industries (283 ITR 297) (Mad HC)
      3. Question 11 of the Circular clarifies that retention money shall be recognized subject to reasonable certainty of ultimate collection
      4. Delhi High Court held – retention money should be recognized based on accrual;
    Exclusions
    • Contract costs that relate to future activity on the contract;
    • Payments made to subcontractors in advance of work performed under the subcontract.
    Changes in Estimates

    The percentage of completion method is applied on a cumulative basis in each previous year to the current estimates of contract revenue and contract costs. Where there is change in estimates, the changed estimates shall be used in determination of the amount of revenue and expenses in the period in which the change is made and in subsequent periods.


    Transitional Provisions

    Contract revenue and contract costs associated with the construction contract, which commenced on or after 1st day of April, 2016 shall be recognised in accordance with the provisions of this standard.


    Contract revenue and contract costs associated with the construction contract, which commenced on or before the 31st day of March, 2016 but not completed by the said date, shall be recognised based on the method regularly followed by the person prior to the previous year beginning on the 1st day of April, 2016.


    Disclosure
    • The amount of contract revenue recognised as revenue in the period.
    • The methods used to determine the stage of completion of contracts in progress.
    • Amount of costs incurred and recognised profits (less recognised losses) upto the reporting date;
    • The amount of advances received;
    • The amount of retentions.
    Comparison between ICDS III and AS 7

    S.No Basis ICDS III AS 7
    1 Contract revenue Contract revenue includes retention money It does not specifically mention about retention money as part of contract revenue.
    2 Borrowing cost Borrowing cost forms part of the contract cost. AS 7 does not specifically provide for borrowing cost being part of the contract cost.
    3 Initial stage of contract Initial stage of contract shall not extend beyond 25% of the total contract completion stage. It does not define any percentage for the initial stage of contract.
    4 Expected loss ICDS does not provide for recognition of any expected loss. All the expected losses should be recognized fully and not in proportion to percentage of completion.
    5 Revenue Recognition Reasonable certainty Reliably estimated:

    Trending Topics

    JOINT ARRANGEMENT - DECONSTRUCTION
    Brief Introduction to IND AS
    • With the advent of all Companies across the world coming together as a Global Village now as compared to earlier, the need to converge Reporting Standards with International Standards was felt, which has led to the introduction of IND AS. The IND AS are basically standards that have been harmonised with the IFRS to make reporting by Indian companies more globally accessible.
    • Ministry of Corporate Affairs notified the Companies (Indian Accounting Standards) Rules, 2015 and later amended the same Companies (Indian Accounting Standards) Amendment Rules, 2016.
    • The Rules stipulated the adoption and applicability of IND AS in a phased manner beginning from the Accounting period 2016-17.
    • MCA has notified a phase-wise convergence to IND AS from current Accounting Standards. IND AS shall be adopted by specific classes of companies based on their Net worth and Listing status.
    Phase I

    Mandatory applicability of IND AS to Companies from 1st April 2016, provided –
    • It is a Listed Company or an Unlisted Company;
    • Its Net worth is greater than or equal to INR 500 crores.

    Note: Net worth shall be checked for the previous three Financial Years, i.e. 2013-14, 2014-15 and 2015-16.


    Phase II

    Mandatory applicability of IND AS to Companies from 1st April 2017, provided –
    • It is a Listed Company or is in the process of being listed and its Net worth is less than INR 500 crores
    • Other Companies in which Net Worth is greater than or equal to INR 250 crores but less than INR 500 crores.

    Note: Net worth shall be checked for the previous four Financial Years, i.e. 2013-14, 2014-15, 2015-16 and 2016-17.


    Other noteworthy points
    • Companies meeting specified thresholds given above for the first time shall apply Indian Accounting Standards (IND AS) from immediate next accounting year.
    • For example: : Companies meeting threshold for the first time on March 31, 2017 shall apply Ind AS for the financial year 2017-18 onwards.
    • An Indian Company which is a Subsidiary, Associate, Joint Venture and other similar entity of a Foreign Company should prepare its Financial Statements in accordance with IND AS if it meets the criteria specified above.
    IND AS 111 – Joint Arrangement

    Investments are broadly classified into 4 categories under Indian Accounting Standards (IND AS) –
    • Subsidiary
    • Associate
    • Joint Arrangement
    • Other forms of investments including Financial Instruments

    IND AS 111 describes the accounting for a joint arrangement. The investor will be required to either apply the equity method of accounting or recognize, on a line by line basis, its share of the underlying assets, liabilities, revenues and expenses. The accounting treatment will depend on the substance of the arrangement among the parties.


    Concepts involved
    • "Joint Arrangement" refers to a binding agreement among two or more parties having joint control over an arrangement.
      1. Arrangement refers to a contractual agreement among two or more parties in having joint control over the operational and financial decisions of the commonly controlled entity.
      2. Two or more parties refer to two or more legal entities.
      3. Joint Control is as defined below.
    • "Joint Control" is a situation arising through a contract, where two or more parties share control on taking decisions about activities requiring UNANIMOUS CONSENT of the parties to the arrangement who share such control.
      • Example:
    • Company ABC is held by 3 investors A (50%), B (40%) and C (10%). The arrangement entered into by the parties require a minimum of 75% majority to approve decisions that significantly affect the returns of the entity.

      Investor A does not enjoy sole control over the arrangement since the holding is 50% whereas the requirement for decision making is 75%. Thereby A and B together control over 75% of Company ABC, thus implying A and B have joint control.
    • Classification of Joint Arrangement
      Parties that have joint control of a joint arrangement can be further classified into two categories depending upon the rights and obligations of the parties of the arrangement.
    article
    article
    Assessment of rights and obligations for appropriate classification
    Special Purpose Vehicle –

    ⦁ A joint arrangement that is not structured through a SPV is a joint operation.

    ⦁ A joint arrangement that is structured through a SPV can be either a joint operation or joint venture. Such categorisation is subject to judgement and is based on the following principles given below –
    ⦁ Legal form of the arrangement Example – In case the SPV under the arrangement is a Company, the legal form of a Company causes it to consider the assets and liabilities in its own right. In such cases, generally, the parties are considered to be Joint Venturers.

    ⦁ Terms agreed to by the parties Example – Considering the same example of SPV being a Company, the parties to the arrangement may contractually modify the features of the SPV in such a way that each party has an interest on the assets and obligation towards liabilities. In such cases, parties are considered to be Joint Operators.

    ⦁ Other facts and circumstances Example – In case the parties are substantially the source of cash flows for the entity under arrangement, thus ensuring its continuity, indicates the parties have an obligation for the liabilities of the arrangement.

    ⦁ Accounting with regard to Joint Arrangement
    ⦁ Joint Venture Parties to joint control under the Joint Venture Arrangement are to account for such arrangement under EQUITY METHOD. What is EQUITY METHOD? Equity method of accounting under IND AS 111 gives reference to IND AS 28 –Accounting for Associates. The method provides for initial recognition of investment at cost and the carrying amount is increased or decreased to recognise for movement in investor’s share of profits after the acquisition date. Simultaneous increase or decrease is accounted for in the Profit and Loss Account or Other Comprehensive Income. Such classification is accounted for on the same lines as that classification in investee’s financial statement. Note: Parties that participate in joint arrangement but does not have joint control are to account for its interest as per IND AS 109 – Financial Instruments.

    ⦁ Joint Operation Parties to joint control under the Joint Operation Arrangement are to account for such arrangement using line by line basis of accounting. It follows accounting for proportionate share of assets, liabilities, revenue and expenses. Note: Parties that participate in joint arrangement but does not have joint control are to account for its interest as per applicable IND AS.

    article

    Illustration 1 – Joint Venture

    A and B establish Joint Venture ABC in which A and B have rights to assets and obligations for liabilities of ABC. A owns 60% and B owns 40% of the equity in ABC. However, the contractual terms of joint arrangement state that A has the rights to all of Building No. 1 and the obligation to pay all the third-party debt in ABC. A and B have rights to all other assets and obligations for other liabilities in ABC in proportion to their equity interests (i.e. 60% & 40%).


    ABC’s Balance Sheet is as follows –
    Liabilities Amount Assets Amount
    Equity 70 Building No. 1 120
    Profit for the year 50 Building No. 2 100
    Other Liabilities 50 Other Current Assets 50
    Debt 120 Cash 20
    Total 290 Total 290

    A’s Balance Sheet is as follows –
    Liabilities Amount Assets Amount
    Equity 500 Asset No. 1 400
    Profit for the year 175 Asset No. 2 175
    Debt 150 Investments 200
    Current Liabilities 70 Cash 120
    Total 895 Total 895

    Under IND AS 111, A would record the following in its financial statements, to account for its rights to the assets in ABC and its obligations for the liabilities in ABC.
    Liabilities Amount Assets Amount
    Equity 500 Asset No. 1 400
    Profit for the year 205 Asset No. 2 175
    Debt 150 Investments (Note 1) 230
    Current Liabilities 70 Cash 120
    Total 925 Total 925

    Note 1 A has right over 60% of the profits of ABC. Thereby, the value of Investments includes the share of profits (60%).

    Illustration 2 – Joint Operation

    A and B establish Joint Operation ABC in which A and B have rights to assets and obligations for liabilities of ABC. A owns 60% and B owns 40% of the equity in ABC. However, the contractual terms of joint arrangement state that A has the rights to all of Building No. 1 and the obligation to pay all the third-party debt in ABC. A and B have rights to all other assets and obligations for other liabilities in ABC in proportion to their equity interests (i.e. 60% & 40%). ABC’s Balance Sheet is as follows –


    Liabilities Amount Assets Amount
    Equity 70 Building No. 1 120
    Other Liabilities 50 Building No. 2 50
    Debt 120 Cash 20
    Total 240 Total 240

    Under IND AS 111, A would record the following in its financial statements, to account for its rights to the assets in ABC and its obligations for the liabilities in ABC.


    Liabilities Amount Assets Amount
    Debt (Note 2) 120 Building No. 1 (Note 1) 120
    Employee Benefit Obligation 30 Building No. 2 60
    Equity 42 Cash 12
    Total 192 Total 240

    Note 1 Since A has the rights to all of Building No. 1, it records the amount in its entirety.


    Note 2 – A’s obligations are for the third-party debt in its entirety.