Key Topics Covered:
This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
Key Topics Covered:
Updates
This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
Risk Management :
Risk management is an integral part of the group’s business control. Risks that may pose a threat to achieving business objectives are identified, and measures are implemented to mitigate and monitor the identified risks.
Responsibility for Risk Management:
The line organization has the primary responsibility for managing business risks. Line managers are responsible for identifying, monitoring, implementing measures and reporting all relevant business risks. The Chief Risk Officer is responsible for coordinating and monitoring the risk management processes in the group and consolidating the quarterly risk reports for Group Management and the Board of Directors. To support the Chief Risk Officer a Risk Management Committee has been established.
Risk Areas
The risk assessment and follow-up is divided into three areas;
Challenges in Control Environment:
The control environment was not routinely discussed in executive or board discussions before the U.S. Sarbanes-Oxley Act of 2002 was enacted. Since that time, auditors have focused on evaluating the existence and execution of elements of the environment. Most discussions reflect how a positive control environment can strengthen the organization’s overall culture and ethics program. However, it can also be viewed in reverse — what risk does a poor control environment bring to the organization?
“Tone at the top,” “management philosophy and operating style,” and “segregation of duties” are phrases commonly used to describe the control environment. These attributes are difficult to measure accurately. An environment that is not effectively evaluated, measured, and monitored may spawn many unacceptable internal and external risks.
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As if the risk of an improperly functioning control environment is not enough, the concept is com- plicated when internal auditors attempt to communicate control environment weaknesses to management. Many organizations rely on questionnaires and anonymous surveys for their assessments. Organizations must proactively peer through these techniques and evaluate the overall transparency of their assessment methods.
The subjective, non- transaction oriented nature of the control environment creates many challenges. Organizations establish policies, but as changes occur, those policies may no longer be effective. The control environment changes, as well. To address the risk of a poor control environment, organizations must evolve their assessment methods.
An organization’s tone is often interpreted as the tone conveyed by senior leaders. This makes evaluation a political hot potato. It can be perilous for internal auditors to advise management that certain actions may not be “setting the right tone.” Yet, to address the risk appropriately, auditors must provide assurance that the policies management has put in place are executed effectively. For example, Company A maintains an authorization policy for procurement professionals. On the surface, this appears to contribute to a strong control environment while mitigating the risk of conflict of interests. However, what if the policy does not cover strategic areas such as contract approvals, management overrides, and monitoring methods? Also, assume the policy was created strictly by the finance organization. Taken in the aggregate, each of these factors could create risk to the control environment.
This situation creates a dilemma. How should theserisks be communicated to management? What if issues are communicated, but management concludes the gaps are not significant concerns? Management’s basis for this conclusion may be that no actual problems have been identified to date. To address the risk appropriately, auditors must ask, “If an issue has not yet come to light or been identified, should that fact minimize the finding?”
What if the auditor’s opinion of the gap’s severity differs from management’s opinion? Organizational leaders may push back if they receive a poor control environment assessment. An obvious step for internal auditors may be to speak to the audit committee, but this can be challenging. It may be difficult to communicate a control environment gap to an audience that has been preconditioned by management’s view.
To resolve these dilemmas, auditors can:
Ensure they have authority to analyze and communicate the situation beyond just the existence of policies.
Ensure management understands the difference between a control gap and a control failure. It is important to know whether the gap has created a failure, but just because it hasn’t failed to date should not minimize the impact of the gap. The inability to recognize this cause- and-effect relationship will put the control environment at significant risk
Encourage independent communication with board members. If management and the auditor disagree about the severity of the issue, the board must be open to both sides of the argument.
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The Risk In Control Enviornment |
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Philosophy and operating style include how management executes its day to day responsibilities and the manner in which executives provide overall direction. Consider an example of quarterly attestations and their impact on the control environment. These procedures often involve business-unit managers providing personal subcertifications on controls for their areas of responsibility.
Assume the procedure for quarterly attestations was established several years ago. The subcertification states: “To the best of my knowledge, internal control procedures and financial information within my area of responsibility are accurate and complete.” The certification was originally accompanied by specific training for the business-unit leaders. Fast forward several years. Many personnel signing the attestations are individuals who have been promoted into new positions but have not been trained on the attestation requirements. New management views the process as a “step” they must complete each quarter because of compliance requirements. If the auditor assumes the standard process of attestation is effective, there may be a risk to the control environment. Because the attestation is a simple signature, the risk exists that management is simply following alegacy process and does not understand the need for disclosure controls. Outlining the risk may convince management to re-evaluate and solidify the process.
A strong control environment can only be supported through appropriate segregation of duties. Segregation of duties assist in mitigating the potential for one person to maintain control over an entire process, thus having the opportunity to perpetrate some undesirable behavior. When evaluating the sufficiency of segregation of duties, internal auditors examine responsibilities around transaction authorization, recording, custody of asset, and reconciliation. Depending on organizational resources, it may not be possible for the organization to fully implement appropriate segregation of duties. In this situation, auditors must assess the risk embedded in the processes, attempt to quantify the risk, communicate to management their observations, and provide alternative methods in which management can monitor transaction activity or provide additional checks and balances for the process
A Thorough Assessment of Control Environment
The control environment is the foundation upon which an organization can effectively execute strategy. If management focuses only on “check the box” activities, it will miss critical attributes that may result in major gaps that ultimately impact the organization’s viability and control environment. That is why it is important for internal auditors to fully assess gaps or flaws and provide adequate assurance regarding the sufficiency of controls.
Finance Act 2017 has introduced Section 45(5A) providing that income arising to individual or HUF from transfer of capital asset, being land or building or both under a specified agreement is chargeable to tax in the previous year in which certificate of completion for the whole or part of the project is issued by the competent authority.
"Specified Agreement" refers registered agreement under which the owner of the land or building or both agrees to allow other person to construct property on it in consideration for share in the building or land or both in the project with or without payment of consideration in cash.- In common parlance referred to as " Joint Development Agreement" ( Simplified for understanding) .
A new section194IC inserted providing for deduction of tax at source @ 10% on payment of any sum byway of monetary consideration under the agreement referred to in section 45(5A). The provisions of section 206AA will apply for failure on part of the payee to submit his PAN to the payer.
The section 194IC is attracted to when the payment is made to resident under the agreement referred to in section 45(5A) by any person, resident or non-resident. There is no monetary limit set under the section for deduction of tax at source.
The monetary limit mentioned in section 194IA is not applicable as the section194IC starts with ' notwithstanding anything contained in section 194IA'.
If the payee is non-resident, tax has to be deducted U/S 195 and not U/S 194IC.
The timing of deduction of tax at source would be earliest of credit of such sum to the account of the payee or payment thereof in cash1 or by way of issue of a cheque or draft or any other mode.
Though the tax is deducted at the earliest of credit or payment under the agreement the income is chargeable to tax in the year in which certificate of completion for the whole or part of the project is issued by the competent authority. As a result the deductee has to carry forward the credit of tax to the previous year in which capital gain become taxable.
As per section 199 read with rule 37BA(3)(I) credit for the tax deducted at source and paid to the Central Government shall be given for the assessment year for which such income is assessable.
1Beware of provisions of section 269SS.
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For the purpose of section 194IC the provisions of section 50C are not relevant as the section provides for deduction of tax at source on the monetary consideration paid under the specified agreement. The stamp duty value on the date issue of certificate of completion for whole or part of the project is relevant for computation of capital gains in the hands of land owner.
Section 197 provides issue of certificate for deduction of tax at lower rate or non-deduction of tax by the Assessing Officer. However, section 197 has not provided for such benefit for the amount covered U/S 194IC.
One of the painful concepts under the Goods & Services Tax (GST) laws is the concept of reverse charge. The concept of reverse charge was known to the trade dealing with both goods or services. However, under GST laws, the said concept has taken a new shape and has become a night mare for majority of the trade. We shall try to dwell on such issues in this article after a brief understanding of the law.
Principally, under the indirect taxation laws, the tax has to be collected and paid by the supplier, who is engaged in supply of goods or services. However, under certain notified circumstances, the burden of payment of tax is shifted on the recipient of the supply of goods or services. Hence, colloquially, the said tax shift is referred as reverse charge.
Under GST laws, the recipient is obliged to pay tax on receipt of supply of goods or services or both vide two sections, namely Section 9(3) and 9(4) of Central Goods & Services Tax Act, 2017 (CGST Act). Similar sections with same verbatim, are there under the State Goods & Services Tax Act (SGST Act), Integrated Goods & Services Tax Act (IGST Act)and Union Territory Goods & Services Tax Act (UT GST Act).
Section 9(3) of CGST Act talks about instances, where the tax has to be paid by recipient of supply of specific goods or services or both, as notified by the government. Vide Notification No 04/2017 – CT (Rate) dated 28th June, 17 and Notification No 13/2017- CT (Rate) dated 28th June, 17, the government has notified the specific category of goods and services respectively on which reverse charge is applicable.
Section 9(4) of CGST Act talks about instances, where tax has to be paid by recipient of supply of goods or services or both, when purchased from an unregistered supplier. Hence, all taxable purchases made from unregistered supplier would attract tax under reverse charge. However, the central government on recommendations of the council has exempted supplies aggregating to the value of Rs 5,000/- per day when purchased from unregistered supplier vide Notification No 8/2017-CT (Rate) dated 28th June, 17.
With the above understanding, let us now address certain frequently asked question under reverse charge.
Section 9(3):
The reverse charge under GST laws is under two sections as detailed above namely Section 9(3) and Section 9(4) of CGST Act. Section 9(3) deals with the reverse charge liability if certain notified services or goods are procured(for example cashew or advocate services.
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Section 9(4) deals with the reverse charge liability when goods or services are procured from unregistered supplier. Hence, there would be liability under reverse charge even you are purchasing goods or services other than those notified vide Notification No 04/17 & 13/17 – CT (Rate) dated 28th June, 17.
The following are the goods that are notified for liability under reverse charge under Section 9(3) of CGST Act by virtue of Notification No 04/17-CT (Rate) dated 28th June, 17:
The above goods when supplied and received by certain notified persons, the tax has to be paid by notified recipient of such supplies.
The following are the services that are notified for liability under reverse charge under Section 9(3) of CGST Act by virtue of Notification No 13/17-CT (Rate) dated 28th June, 17:
The above services when supplied and received by certain notified persons, the tax has to be paid by notified recipient of such supplies.
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Understanding Reverse Charge |
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Under GST laws, the concept of partial reverse charge does not exist. Further, the services of works contract, rent-a-cab, manpower and security services are not notified under Section 9(3) of CGST Act read with Notification No 13/2017-CT (Rate) dated 28th June, 17. Therefore the said services are not directly covered under reverse charge. These services will be under reverse charge only when they are procured from unregistered suppliers in terms of Section 9(4) of CGST Act. The FAQs relating to Section 9(4) are detailed hereunder.
Since the services provided by GTA are notified services under Notification No 13/2017- CT (Rate) and the recipient is also a notified person, the obligation to pay tax shall be on the company and not the GTA supplier.
Hence, the GTA has to raise invoice without tax component and the tax has to be paid by the company to the credit of central government. Further, it is important to note that tax being paid to GTA is not a proper compliance and the authorities can insist tax payment again from the company since the obligation is on the company.
Vide Notification No 22/2017-CT (Rate) dated 22nd August, 17, the government has made an amendment to Notification No 13/2017 – CT (Rate). As per the changes done, if the GTA charges 12% of tax, the recipient is not obliged to pay tax under reverse charge.
Hence, in the given case, since the GTA supplier has charged tax @ 12% instead of 5%, the obligation of payment of GST is on the GTA supplier and not on the person who has received the services.
Under GST laws, the concept of import of services is taken care by the IGST Act. Vide Section 7(4) of IGST Act, import of services into territory of India are specified as inter-state supplies.
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Understanding Reverse Charge |
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Hence, the notification for reverse charge has to be seen under IGST laws and not under CGST laws. Accordingly, Entry 1 of Notification No 10/2017- CT (Rate) dated 28th June, 17 specifies that the person liable to pay tax in case of services supplied by any person who is located in non-taxable territory to any person located in taxable territory, as the person located in taxable territory.
No. GTA is one of the notified services under Section 9(3) of CGST Act and accordingly services procured from GTA shall be subjected to reverse charge in the hands of the recipient of supply. This holds good even the GTA is registered.
The liability under Section 9(3) of CGST Act does not depend upon the registration status of the supplier. It depends upon whether a particular service or good is notified to be under reverse charge as per Section 9(3).
Section 9(4):
Vide Notification No 8/2017-CT (Rate) dated 28th June, 17, the government has exempted all intra-state supplies of goods or services or both received by a registered person from unregistered suppliers. However, such exemption shall not be available if the aggregate value of supplies of goods or services or both received by a registered person from any or all the unregistered suppliers when exceeds Rs 5,000/- rupees in a day.
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Understanding Reverse Charge |
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The exemption of Rs 5,000/- per day is not per vendor or supplier. The limit is for the purchases made from all the unregistered suppliers in a day. In the case of your company, since you are purchasing from 6 vendors, the total purchases will amount to Rs 18,000/- per day, which exceeds Rs 5,000/-limit and becomes taxable.
The exemption of Rs 5,000/- per day is not a standard exemption. If the purchases from all unregistered suppliers exceed Rs 5,000/- per day, then the total amount paid for such purchases shall be taxable. Rs 5,000/- is only for qualifying amount for such exemption. Hence, in the instant case, Rs 18,000/- becomes taxable and not Rs 13,000/-.
The limit of Rs 5,000/- exhausts every day. The amount cannot be carried forward and be utilised next day or subsequent period. Hence, the tax is required to be paid on Rs 10,000/- on 30th August, 17.
As stated above, the limit of Rs 5,000/- is per day and cannot be carried forward and utilised for entire month. Hence, the purchases from such vendor attracts tax under reverse charge on Rs 1,50,000/-.
The liability under reverse charge exists only when there is a supply of taxable goods or services from unregistered suppliers. Since, in the instant case, the purchases are of NIL rated, there cannot be any tax liability under reverse charge under Section 9(4) of CGST Act. Similar, is the case for exempted purchases also.
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Understanding Reverse Charge |
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While calculating the daily limit of Rs 5,000/-, only taxable supplies has to be considered. This is evident from the language used in the Notification No 08/2017 – CT (Rate) dated 28th June, 17. The language used is as under ‘Provided that the said exemption shall not be applicable where the aggregate value of such supplies of goods or services or both received by a registered person from any or all of the suppliers, who is or are not registered, exceeds five thousand rupees in a day’.
The phrase ’such supplies’ used in notification refers to the supplies referred in Section 9(4) of CGST Act. The said section uses the phrase ‘supply of taxable goods or services or both…….”.Hence, it can
be inferred that while calculating the daily limit of Rs 5,000/- only taxable goods or services has to be considered.
Further, the exemption under this Notification is a general exemption. It is well-established legal principle that what are exempt specifically cannot be exempt again by way of general exemption. Therefore, the phrase ‘such supplies’ used in this notification would mean the supply of those goods or services or both which are not exempt under any other notification.
Accordingly, in the question posed, the value of Rs 3,000/- which attracts NIL rate of tax is not to be considered and hence the purchase of Rs 4,000/- would qualify for exemption under Notification No 08/2017- CT (Rate) dated 28th June, 17.
Reverse Charge vis-à-vis Registration:
The exemption from registration based on the aggregate turnover as specified in Section 22 is subject to the persons who require registration under Section 24 of CGST Act. That is to say, Section 24 of CGST Act has an overriding effect on Section 22.
One of the persons that requires mandatory registration under Section 24 is ‘persons who are required to pay tax under reverse charge’. The phrase ‘reverse charge’ has been defined vide Section 2(98) of CGST Act as ‘means the liability to pay tax by the recipient of supply of goods or services or both instead of supplier of such goods or services or both under sub-section (3) or sub-section (4) of Section 9, or under sub-section (3) or sub-section (4) of Section 5 of Integrated Goods and Services Tax Act’.
Since, there is a liability for the company under Section 9(4) of CGST Act, the company has to register mandatorily as per Section 24 despite of the fact there is eligibility for exemption under Section 22.
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Understanding Reverse Charge |
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Notification No 12/2017 – CT (Rate) dated 28th June, 17. We have made purchases from unregistered suppliers and hence there is a liability under Section 9(4) on us. However, we are of the opinion that since our supplies are completely exempted, we are eligible from exemption from registration under Section 23 of CGST Act and accordingly we are not supposed to pay GST under reverse charge. Are we right?
Section 23 of CGST Act provides exemption from registration for any person who is engaged exclusively in the business of supplying goods or services or both that are not liable to tax or wholly exempt from tax.
Since in the instant case, the company is engaged exclusively in the business of supplying services which are exempt from tax, they are eligible for exemption from registration under Section 23 of CGST Act.
However, in light of Section 24 of CGST Act, they have to obtain registration, since there is a liability to pay tax under reverse charge. The word ‘exclusively’ used in Section 23 ibid assumes importance, since supplies liable to pay tax under reverse charge are deemed to be provided by the person who receives such supply by virtue of language used in Section 9(3) or 9(4) of CGST Act.
Yes, the provisions of Section 9(4) of CGST Act, shall be applicable to a registered person. Since the pre-requisite for opting for composition scheme is to obtain registration, there shall be a liability under reverse charge on you.
Section 9(4) of CGST Act applies only when purchases are made from unregistered suppliers. Since the pre-requisite for opting for composition is to obtain registration, the purchases made from composition dealer shall be treated as purchases from registered person and accordingly there will be no liability under Section 9(4) ibid.
Yes. There shall be a liability to pay tax under reverse charge since purchases were made from unregistered suppliers. The same can be claimed as credit and applied for refund under Section 54 of CGST Act.
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Understanding Reverse Charge |
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Notification No 18/2017- IT (Rate) dated 05th July, 2017 exempts services imported by a unit or a developer in the SEZ from the whole of the integrated tax leviable under Section 5 of IGST Act. Hence, accordingly, it can be concluded that there cannot be any liability under reverse charge even if SEZ developer or unit purchases from unregistered supplier. However, such a view can be aggressive since the word ‘import’ cannot be applied to services procured from domestic tariff area.
The reverse charge under Section 9(4) exists even when the vendor is not required to register because of the exemption mentioned in Section 22 of CGST Act. The liability under Section 9(4) is not dependent on whether the vendor is required to register or not.
General:
As per Section 49(4) of CGST Act, ‘the amount available in electronic credit ledger may be used for making any payment towards output tax……’.
The phrase ‘output tax’ has been defined vide Section 2(82) of CGST Act ‘in relation to a taxable person, means the tax chargeable under this Act on taxable supply of goods or services or both made by him or by his agent but excludes tax payable by him under reverse charge’.
Hence, the liability under reverse charge either under Section 9(3) or Section 9(4) of CGST Act cannot be paid using input tax credit.
The phrase ‘input tax’ has been defined vide Section 2(62) of CGST Act to include ‘tax payable under the provisions of sub-sections (3) and (4) of Section 9.Hence, the tax paid under reverse charge can be availed as input tax credit.
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Understanding Reverse Charge |
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The tax paid under reverse charge can be availed as credit subject to the provisions of Section 16 and Section 17 of CGST Act. The credit entitlement under GST laws is dealt by Section 16 of CGST Act. Section 17(5) ibid specifies the credits which are not available for the registered person, where tax paid on renting of motor vehicles is one of the item.
It is to be noted that Section 17(5) overrides Section 16 because of the language used in the former provision. Section 17(5) of CGST Act starts with the phrase ‘Notwithstanding anything contained in
sub-section (1) of Section 16…..”.
Hence, the credits which are not available because of Section 17(5) of CGST Act cannot be availed even they are paid under reverse charge. Hence, tax paid on reverse charge for rent-a-cab service shall not be eligible for credit.
The concept of reverse charge is shifting the tax liability from the supplier to the recipient. Except that there are no changes in tax payments. Hence, if a supply attracts GST and compensation cess, the recipient has to pay both GST and compensation cess even under reverse charge. The compensation cess paid can be taken as credit (if it is not falling under the ambit of Section 17(5) of CGST Act) and can be used against payment of compensation cess on output liability of the recipient, if any.
