MAY 2020

Recent updates on GST

1. Amendment in CGST Rules to allow filing of Nil Return (GSTR-3B) through SMS

The Central Government vide Notification No. 38/2020- Central Tax dated 5th May, 2020 has inserted Rule 67A ( Manner of furnishing of return by short messaging service facility) with effect from a date to be notified later in the CGST Rules,2017 to allow the registered person to furnish a Nil return in FORM GSTR-3B for a tax period, through a short messaging service (SMS) using the registered mobile number and the said return shall be verified by a registered mobile number based One Time Password facility(OTP).

Explanation. - For the purpose of this rule, a Nil return shall mean a return under section 39 for a tax period that has nil or no entry in all the Tables in FORM GSTR-3B.”.

2. Extension of validity of E-way bills

CBIC earlier vide Notification no. 35/2020 dated 3rd April, 2020 extended the period of validity till 30th April, 2020 for e-way bill validity expires during the period 20th day of March, 2020 to 15th day of April, 2020.

Now CBIC vide Notification No. 40/2020- Central Tax dated 5thMay 2020 Provided that where an e-way bill has been generated on or before the 24th day of March, 2020 and its period of validity expires during the period 20th day of March, 2020 to the 15th day of April, 2020, the validity period of such e-way bill shall be deemed to have been extended till the 31st day of May, 2020.

3. Verification of filing of Form 3B through EVC

Considering the difficulty faced by registered taxpayers in applying DSC, CBIC vide Notification No. 38/2020- Central Tax dated 5thMay 2020 has provided that a registered person registered under the provisions of the Companies Act, 2013 (18 of 2013) shall, during the period from the 21st day of April, 2020 to the 30th day of June, 2020, also be allowed to furnish the return under section 39 in FORM GSTR-3B verified through electronic verification code (EVC) i.e One time password.

4. Effecting the provisions of rule 87 (13) and FORM GST PMT-09 of the CGST Rules, 2017

The Central Government vide Notification No.37/2020 ,dated 28th April, 2020 on the 21st day of April, 2020, as the date from which Rule 87(13) of the CGST Rules, 2017 ,which states that a registered person may, on the common portal, transfer any amount of tax, interest, penalty, fee or any other amount available in the electronic cash ledger under the Act to the electronic cash ledger for integrated tax, central tax, State tax or Union territory tax or cess in FORM GST PMT-09,& FORM GST PMT –09 shall come into force.

5. Clarification in respect of certain challenges faced by the registered persons in implementation of provisions of GST Laws

Issue:
Sub-rule (3) of that rule 45 of CGST Rules requires furnishing of FORM GST ITC-04 in respect of goods dispatched to a job worker or received from a job worker during a quarter on or before the 25th day of the month succeeding that quarter. Accordingly, the due date of filing of FORM GST ITC-04 for the quarter ending March, 2020 falls on 25.04.2020. Clarification has been sought as to whether the extension of time limit as provided in terms of notification No. 35/2020-Central Tax dated 03.04.2020 also covers furnishing of FORM GST ITC-04 for quarter ending March, 2020.

Clarification
Time limit for compliance of any action by any person which falls during the period from 20.03.2020 to 29.06.2020 has been extended up to 30.06.2020 where completion or compliance of such action has not been made within such time. Accordingly, it is clarified that the due date of furnishing of FORM GST ITC-04 for the quarter ending March, 2020 stands extended up to 30.06.2020.

6. IGST refunds on exports-extension in SB005 alternate mechanism

The Central Board of Indirect Taxes & Customs vide Circular No.22/2020-Customs ,dated 21st April, 2020 has decided to extend the facility of SB005 error correction in the Customs EDI system for Shipping Bills with date upto 31.12.2019. The above decision has been taken considering the unprecedented challenges that the entire country is facing due to the COVID 19 pandemic, and that the exporters are facing genuine hard-ships due to the SB005 errors & resulting in blocking of the IGST refund disbursal, which is otherwise fully automated, except for the refund scroll generation.

Customs Act, 1962 updates:

1. Provisional Clearance of Goods under India’s Trade Agreements

In reference to Circular 18/2020-Customs, dated 11.04.2020, which provides an option to clear goods under preferential tariff claim, in terms of section 18 of the Customs Act, 1962, where a Certificate of Origin (CoO) is not available at the time of filing customs documents, the Central Board of Indirect Taxes & Customs , vide Instruction No. 04/2020 – Customs dated 4th May,2020, has issued instructions that that where original hard copy of Certificate of Origin (CoO) has not been submitted or only digitally signed copy or unsigned copy of CoO is submitted, same may be treated at par with category as listed at serial no. 5(c) of the Circular 38/2016-Customs, provided that the matter is not covered under 5(a), wherein there is reasonable belief that the it involves mis-declaration of origin/value addition.

2. Review of Circular No. 17/2020 dated 03.04.2020 --Measure to facilitate trade during the lockdown period- section 143AA of the Customs Act, 1962

In view of extension in the lockdown period, The Central Board of Indirect Taxes & Customs vide Circular No.21/2020-Customs,dated 21st April, 2020 has extended the relaxation of the requirement to submit bonds as specified in Circular No.17/2020-Customs,dated 3rd April, 2020 & has decided to further extend the facility of accepting undertaking in lieu of bond for the period till 15.05.2020. Consequently, the date for submission of proper bond in lieu of which the undertaking is being temporarily accepted is extended till 30.05.2020. This relaxation will be reviewed by the Board at the end of the lockdown period.

Furthermore, in reference to para 3.3 (ii) of the circular, the undertaking in lieu of bond is to be submitted by the registered email ID of the IEC holder or their authorised Customs Broker. In addition to this requirement, but not in substitution, customs zones may prescribe uploading of the undertaking on e-Sanchit.

FEMA, 1999 updates

1. Relaxations / Extensions of various Compliance Deadlines etc. provided by Department of Commerce to address Corona Pandemic Related Hardships of Exporters

In order to give relief to businesses and affected individuals amidst the stress caused by the novel coronavirus pandemic, Department of Commerce, Ministry of Commerce and Industry has introduced several relaxations and extensions in deadlines etc. with regard to compliances mandated under its schemes and activities. The key relaxations are as follows:

Extensions in Import Validity period and Export obligation period in Advance authorizations/DFIA

The Directorate General of Foreign Trade (DGFT) vide Policy Circular No.35/2015-20 ,dated 23rd April, 2020 has issued the following circular regarding the following procedural formalities may be followed by DGFT RAs and Trade in relation to extension in the import validity period and the export obligation Period for existing Advance Authorizations (AAs)/DFIA expiring from February to July 2020:-

A) Automatic Extension of Import Validity period and EO period by 6 months for AAs under HBP Para 4.41 (e) and Para 4.42(h) where no revalidation/EO Period extension has been granted till date:

i In all such cases where the facility of first or second extension in the import validity period or the EO extension period has not been availed by the exporter earlier, the revised or the extended import validity/EO period, as per the relaxations permitted would be updated in the ICEGATE/Customs System automatically based on a defined protocol between the DGFT-NIC/Customs in this regard.

ii Once the bulk updation and transmission of authorisations have been done by NIC Division, NIC would send RA-wise list of such authorisations to individual RAs with an update script to be run on the local server (available in the Downloads section of the local server). All RAs are required to run this script immediately so that any further extensions/re-validations on the authorizations would take into account this change in the local RA sever also.

iii In case of some individual cases, where the revised updated import validity or EO extension is not available in the ICEGATE, the exporter may approach the DGFT RA with a email/letter request for carrying out an amendment in the AA/DFIA. DGFT RA will accordingly examine the request expeditiously and endorse the extended validity/EO as per the provisions of FTP/HBP and transmit the amendment message electronically to DGFT/ICEGATE server.

  B) Extension of Import Validity period and EO period by 6 months for AAs under HBP Para 4.41 (e) and Para 4.42(h) where revalidation/EO period extension has been granted till date:

For those AAs where 1st or the 2nd re-validation or EO extension has been granted under the respective paras of HBP, automatic transmission of extended dates is not possible due to system architecture issues. In such cases, the exporters shall make an amendment request through email/letter to the concerned Regional Authority providing the details of the case. RAs, upon receiving such requests from the exporters, shall expeditiously verify the eligibility of the request, and then carry out the amendments for Revalidation / EOP Extension in the local server.

C) Extension of Validity/EO by 6 months for AAs under HBP Para 4.41(e) and Para 4.42(h) where authorizations are Physical (non-EDI) in nature:

For such authorisations, the procedure to be adopted would be similar to amendment requests as given in para (B) above. The authorizations need to be produced physically at the concerned Regional Authority with a request for extension in EO/re-validation. The concerned RA shall examine the request and endorse the extended validity/EO based on eligibility as per provisions of FTP/HBP.

D) Same procedure, as given in Para A, B & C shall apply for extension of validity of the DFIAs for import.

As a precautionary move to prevent any kind of opportunistic takeovers of Indian Entities by Chinese Companies in the midst of Covid-19 issues that the country is facing, the Government of India announced changes to Foreign Direct Investment Policy (FDI) relating to FDI in Indian Entities from countries which share a land border with India. In this article we will see what those changes are when it is effective from and the impact it will have on Indian Companies.

Before we understand the changes proposed in FDI policy, lets take some time to quickly understand the institutional framework of how a change is brought about in the first place and what all departments are involved.

PRESS NOTE 3 (2020 Series)

The first step of DIPP suggesting the necessary policy change has already happened by way of a Press Note 3 (2020 series) dated 17th April 2020. The Press Note contained the following changes proposed to FDI Policy:

Para 3.1.1 (a) A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

Para 3.1.1 (b) In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of the para 3.1.1(a), such subsequent change in beneficial ownership will also require Government approval.

INFERENCE: It is understood from above that its not just investment from countries sharing land border needs Government Approval, but investment from any other country too where such company is indirectly owned by citizens of the countries sharing land border with India has to seek Government Approval. The definition of beneficial ownership is awaited to understand the implication of this revised clause.

Though DPIIT has issued the revised FDI policy, it will take effect only from the date FEMA Notification has been approved and published in the Official Gazette.

Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2020

Rule 6(a) the following substitutions have been brought about:

“Provided that an entity of a country, which shares land border with India or the beneficial owner of an investment into India who is situated in or is a citizen of any such country, shall invest only with the Government approval:

Provided further that, a citizen of Pakistan or an entity incorporated in Pakistan shall invest only under the Government route, in sectors or activities other than defence, space, atomic energy and such other sectors or activities prohibited for foreign investment:

Provided also that in the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction or purview of the above provisos, such subsequent change in beneficial ownership shall also require government approval”.

INFERENCE: DEA has brought about the changes is the rules by way of a notification dated 22nd April 2020 in order to give effect to the FDI Policy changes proposed by DPIIT. Still only when FEMA Notification comes to place and gets published in the official gazette, the revised regulations of RBI as per the FEMA Notification will become operational.

RBI is yet to issue the revised Regulations by way of a notification to this effect.

CHINESE INVESTMENTS IN INDIA:

Chinese Investments in India span over a variety of sectors like manufacturing, infrastructure, telecom, petrochemicals, software and IT. Its pertinent to note that technology start up space in India has been funded by Chinese venture capitalists. A quick list of the famous technology Start- ups funded by Chinese Investments are Paytm, Flipkart, Swiggy, Zomato, Oyo, Ola, Big Basket, Byju’s, Snap Deal, Quikr and Make my Trip. Chinses giants like Alibaba and Tencent have funded large number of Indian Start-ups. China is already embedded in Indian Society, the economy and the technology ecosystem that influences it.

It is also pertinent to note that Chinese brands dominate the mobile phone segment in India with major brands like VIVO, OPPO capturing major market share.

Also, the single biggest Chinese acquisition has been in the pharma sector with shanghai based Fosun Pharma acquiring Gland Pharma for $1.09 billion.

CONCLUSION:

The Press Note doesn’t directly mention China, but refers to Investments from countries sharing land border with India. Considering size of china and its huge investments in India, it seems like China is the Target. The key Trigger for these policy changes seems to have arisen from the increase in stake in HDFC by People’s Bank of China to 1.01%. There is a fear that China might take advantage of the economic slowdown and falling stock markets due to Covid-19 by investing in suffering Indian Companies.

There have been strong reactions from Chinese Government that such a move by India is in violation of WTO’s principles of non-discrimination and facilitation of trade and investment, which India is denying on the grounds that WTO’s rules do not cover foreign investments. These new restrictions will slow down the pace of investment from Chinese companies in India and might lead to a Trade Issue with China in the future, where China might seek relaxations in FDI Policy of India in exchange of some concessions that it would offer. We have wait and watch what is happening.

Conducting General Meetings through Digital modes

In the Digital era, when the use of technology is blended in our day to day lives and especially in the current pandemic situation, when most of the business is going digital and meetings happening over the cloud, it becomes necessity than an update for amending the law to allow mandatory general meetings such as Annual General Meeting and Extraordinary General meeting to happen over video conferencing or other audio visual means.

In this scenario, MCA has issued various clarification circulars on how to conduct AGM and EGM through video conferencing or other audio visual means. But the circular has also clearly mentioned that this is allowed only for the purpose of conducting such meetings during the calendar year 2020, meaning it is only applicable for the financial year ended on 31st December 2019 or 31st March 2020 only.

A.For companies which are required to provide the facility of e-voting (For eg., listed companies)

1.Manner and mode of issue of notice before convening the General Meeting:

2. Before sending the notices and copies of financial statement with the reports, a public notice shall be published by way of advertisement in a newspaper at least once in English language in an English news paper having wide circulation and in a newspaper in a language of the district in which the registered office is situated having wide circulation, preferably both newspapers having electronic editions and specifying the following information:

3.In case the company has received permission from the relevant authorities to conduct General meeting at the registered office of the Company, in addition to holding such meeting with physical presence, the company shall also provide facility of VC or OAVM to allow other members to participate and vote in such meeting.

B.For companies which are not required to provide the facility of e-voting (For eg., unlisted companies)

1. AGM may be conducted through VC or OAVM only by a company which has in it’s records, the email addresses of at least of half of it’s total members who –

2.The Company shall take all necessary steps to register the email addresses of all persons who have not registered their email addresses with the Company.

In these meetings other than the ordinary business, only those items of special business, which are considered unavoidable by the board may be transacted.

Financial statements including board’s report, auditor’s report or other documents required to be attached shall be sent only by e-mail to the members, trustees for the debenture holder of any debentures issued by the company and to all other persons so entitled to receive these documents.

In case the Company is unable to pay dividend to any shareholder through electronic mode, the company upon normalisation of the postal services, dispatch the warrant/cheque to such shareholder by post.

The Companies shall ensure that all other Compliances associated with provisions relating to general meetings of making disclosures, inspection of related documents/registers by members, etc as provided in the Act and the articles of association of the Company are made through electronic mode.

Residential Status of Individual Under Income Tax Act

Introduction:

Determination of the residential status under Income Tax Act plays a vital role to determine whether a person comes under the tax net or not. Section 6 of the Income Tax Act deals about the concept of resident for Income tax purposes. Finance Act 2020 dated 23.03.2020 amends Section 6 of the Income Tax Act. This article will throw light on the amendments to Section 6 vide Finance Act 2020 dated 23.03.2020.

The Purpose of determining the residential status:

It is important to determine the residential status which further determines the nature and the scope of the income of the persons which comes under the tax net.

Section 6 of Income Tax Act

Residential status of an individual

An individual is said to be a resident, if, he satisfies any of the following condition:

Residential status of Indian citizen/ Indian origin who visits India

For Indian Citizen or Indian Origin individual who left India and visits India will be resident if the period of stay was 182 days or more. This period of 182 days is now reduced to 120 days vide Finance Act 2020 in amendment to Clause b in explanation 1 of Section 6 (1) .

Further, Indian citizen or Person of Indian origin having income in the previous year exceeding 15 lakhs excluding the income from foreign source visits India for a period of 120days or above shall be resident as per Income Tax Act.

“Income from foreign sources” means income accurse or arisen outside India except the income derived from a business controlled in or profession set up in India.

Ordinary Resident and Not an Ordinary Resident

“Not ordinarily resident” in a previous year means if the person is an individual who has been non-resident in 9 out of the 10 previous years preceding that year, or has during the 7 previous years preceding that year been in India for an overall period of 729 days or less.

Deemed Resident

The concept of deemed resident is introduced by Finance Act 2020 by way of insertion of clause 1A to Section 6. Deemed Resident is considered to be not an Ordinary Resident. According to which if all 3 conditions are satisfied then the individual is deemed to be the Resident:

CBDT clarified vide press release dated 02.02.2020 that income earned outside India by deemed resident will not be taxable unless it is derived from business or profession in India.

Conclusion

Indian Citizen/ Indian origin have to plan their travel stay in India limited to 120 days to not to come under the tax net. The explanation clause “income from foreign source” has clarified income earned or accrued outside India is not taxable but the income from any business or profession set up in India alone is taxable. The taxability of capital gains aspect of the income earned from sale of capital assets is not dealt for the deemed resident.

The taxability of amount exceeding 15 lakhs other than the income from foreign source is a respite to the Indian citizen/ Indian Origin visiting India as it is clarified that all their global income is not taxable in India. The amendment to Section 6 vide Finance Act 2020, has a balanced approach by giving respite to genuine Indian Citizen/Indian Origin visiting India in one hand and at the same time to bring the Persons under the tax net under the concept of deemed resident who is purposely not paying tax in any country by reason of resident domicile.

Ind AS 20 has been introduced to provide guidance in the accounting and disclosure aspects with respect to government grants. Government grants may be significant for entities and thereby necessitates appropriate accounting treatment in the books of accounts and disclosures in financial statements to facilitate comparison.

In this article, we will understand the following –

This brings us to next aspect of discussion i.e., understanding of the terms ‘government grants’ and ‘government assistance’.

Government assistance

Government assistance is action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria.

The following observations can be made from the above definition –

Example –

Free technical advices provided by government to an entity are government assistance that cannot reasonably have a value placed upon them and thus cannot be accounted for in the books of the entity. Another example for government assistance would be provision of guarantee against default on loans availed by an entity.

Government grants

Government grants are assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity.

The following observations can be made from the above definition –

Ind AS 20 is not applicable in case of assistance received from the government owing to its ownership in the entity. The reason is that money invested as an owner is repayable by the entity to the government.

Recognition Criteria

Government grants, including non-monetary grants at fair value, shall not be recognised until there is reasonable assurance that –

Based on the above criteria for recognition, we infer that mere receipt of a grant does not provide conclusive evidence on compliance or fulfillment of conditions attached with the grant.

Example –

Government provides a grant of Rs. 50,00,000 for R&D of Covid 19 Vaccine to a Pharmaceuticals Company. No condition was attached to the grant. As no conditions were attached to the grant, it shall be recognised in P&L A/c immediately.

Example –

Government provides a grant of Rs. 50,00,000 for R&D of Covid 19 Vaccine to a Pharmaceuticals Company although similar expensive vaccines were available in the market. The condition attached to the grant was that development of new vaccine must be completed within a period of 2 years cutting down the costs come down by at least 40%. In this case, if the company estimates that the conditions attached to the grant shall be met, it shall be recognised as deferred income and taken to the P&L A/c over the period of 2 years.

Non-monetary government grants

In some cases, the government provides a grant to the entity in the form of a non-monetary asset, such as land or building for its use.

The accounting prescribed in such circumstances is recording both grant and asset at their respective fair values. The standard also provides for an alternative approach in accounting. This suggests accounting both the grant and asset at nominal values.

Normally, all entities would want to show their asset base even though option for accounting at nominal value is available. The policy adopted by the company shall be applied for all non-monetary assets on a consistent basis year-on-year.

Example –

ABC Ltd. received a piece of land free of cost from the government to set up a manufacturing unit. The fair value of the land is Rs 25 crores.

Option 1 is to record the land at Rs 25 crores with a corresponding credit to deferred income. Alternatively, it can also record at nominal value.

Grants related to assets

Government grants related to assets, including non-monetary grants at fair value, shall be presented in the balance sheet by setting up the grant as deferred income.

The grant set up as deferred income is recognised in profit or loss on a systematic basis over the useful life of the asset.

Grants related to non-depreciable assets

Grants related to non-depreciable assets may also require the fulfilment of certain obligations and would then be recognised in profit or loss over the periods that bear the cost of meeting the obligations.

Example – Government provides a land free of cost to ABC Ltd. for the purpose of constructing a factory building over the land. In this case, the grant equivalent to fair value of the land, shall be amortised over the useful life of the building constructed over the land.

Forgivable Loans

Waiver or remission of loan by government are known as forgivable loans. It shall be treated as a government grant if there is reasonable assurance that the entity will meet the terms and conditions for forgiveness of the loan.

Example – XYZ Ltd. received a loan of Rs. 50 lakhs from government in the year 2017-18. Due to XYZ Ltd.’s inability to repay, the government remitted repayment to the extent of Rs. 10 lakhs. This shall be accounted for as a forgivable loan as per the standard.

Loan A/c Dr. - 10 lakhs
To P&L A/c 10 lakhs

Further, the benefit of a government loan at a below-market rate is a government grant to be recognised under Ind AS 109. Example – Entity has received a loan from Government at nominal rate of 1% as against market rate of 8%. This scenario has been specifically dealt in Ind AS 109 and thereby, not covered within the purview of Ind AS 20.

Presentation of Government Grants

It can be broadly classified into two categories – Grant related to asset

Company has purchased an asset for Rs 10 crores and received Rs 2.5 crores from the government. The entity shall have the option to account for the asset on gross basis or on net basis.

Option (Gross Basis) –

Asset A/c Dr. 10.00 crores

To Bank A/c 7.50 crores

To Deferred Income A/c 2.50 crores

Option (Net Basis) –

Asset A/c Dr. 7.50 crores

To Bank A/c 7.50 crores

However, in statement of cash flows, presentation is permitted only on gross basis.

Other monetary items – Presented as part of P&L A/c as a separate line item under ‘Other Income’ or alternatively as a deduction from the related expenditure.

Repayment of Government Grants

In certain circumstances due to non-satisfaction of conditions precedent associated with the grant, the company shall be bound to repay the grant received by them.

A question arises as to why accounting for grant must be accounted for in the first place and further reverse it in future. The reason is that the standard prescribes for reasonable assurance of satisfying the conditions at the time of initial recognition and the effect for repayment arises at a subsequent period of time.

It is to be treated as a change in accounting estimate, thus requiring only a prospective effect. It can be broadly classified into two categories –

Example –

X Ltd. received a revenue grant of Rs. 80 crores in 2016-17 with certain conditions to be fulfilled before 31st March 2020. It has accounted the grant as deferred income since 2016-17. Due to non-fulfillment of the conditions, the grant becomes fully refundable in 2019-20.
The company shall recognize the refund in 2019-20 as follows –
P&L A/c Dr. 60 crores

Deferred Income A/c Dr. 20 crores

To Bank A/c 80 crores

Determination of Carrying Value in case of Impairment of an Asset

The carrying amount of asset for determining impairment loss should be calculated as net of balance in deferred income, even if for the purpose of balance sheet, the presentation is on gross basis.

Example – Carrying value of the asset as per balance sheet – Rs. 10 lakhs
Deferred income - Rs. 4 lakhs, to be accounted over the next 4 years.
Recoverable amount as determined - Rs. 2 lakhs for the asset.
Net carrying amount of asset shall be Rs. 6 lakhs (10 lakhs less 4 lakhs). Therefore, the impairment loss shall be Rs. 4 lakhs (2 lakhs less 6 lakhs).

Disclosure Requirements

1.Accounting policy adopted for government grants

2.Method of presentation adopted for government grants

3.Nature and extent of government grants received

4.Unfulfilled conditions and other contingencies attached to the government assistance that has been recognised in the financial statements.