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    Presently, the Institute of Chartered Accountants of India (ICAI) has issued 39 Indian Accounting Standards (Ind AS) which have been notified under the Companies (Indian Accounting Standards) Rules, 2015 (“Ind AS Rules”), of the Companies Act, 2013. The Rule specifies the Indian Accounting Standards (Ind AS) applicable to certainclass of companies and set out the dates of applicability.

     

    India has chosen a path of International Financial Reporting Standards (IFRS) convergence rather than adoption. Hence, Ind AS is primarily based on the IFRS issued by the International Accounting Standards Board (IASB).

     

    Applicability of Ind AS As per the notification released by the Ministry of Corporate Affairs (MCA) on 16

     

    February 2015, the roadmap for Ind AS implementation is as follows:

     

    Financial

    YearApplicable to ( Mandatory)

     

     

     

     

    2016-17

    §Companies (listed and unlisted) whose net worth is equal to or

     

     

    greater than 500 crore INR

     

     

    §Holding, subsidiaries, joint ventures or associates of these

     

     

    companies

     

     

     

     

    2017-18

    §Listed Companies whose net worth is less than INR 500 crore

     

     

    §Unlisted companies whose net worth is equal to or greater than 250

     

     

    crore INR and all listed companies

     

     

    §Holding,  subsidiaries,  joint  ventures  or  associates  of  these

     

     

    companies

     

     

     

     

    2018-19 onwards

    When a company’s net worth becomes greater than 250 crore INR

     

     

     

     

     

     

     

    Net worth for a company is to be calculated in accordance with its stand – alone financial statement as at 31 March 201X or the first audited financial statements for accounting period which ends after that date.

     

    For the purpose of computing the net worth, reference should be made to the definition under the Companies Act, 2013. In accordance with section 2 (57) of the Companies Act, 2013, net worth is computed as follows:

    Ind AS will apply to both consolidated as well as standalone financial statements of a company. Overseas subsidiary, associate, joint venture and other similar entity (ies) of an Indian company may prepare its stand-alone financial statements in accordance with the requirements of the specific jurisdiction. However, for group reporting purpose (s), it will have to report to its Indian parent under Ind AS to enable its parent to present CFS in accordance with Ind AS.

     

    As per exemption under Rule 5, Insurance companies, banking companies and non-banking finance companies are not required to apply Ind AS for preparing their financial statements either voluntarily or mandatorily, as specified in the roadmap (sub-rule (1) of rule 4).

     

    Principles of Ind AS

     

    The entities’ general purpose financial statements give information about performance, position and cash flow that is useful to a range of users in making financial decisions. These users include shareholders, creditors, employees and the general public.

     

    A complete set of financial statements under Ind AS includes the following:

     

    vBalancesheet at the end of the period

    vStatement of profit and loss for the period

    vStatement of changes in equity for the period

     

    vStatement of cash flows for the period; notes, comprising a summary of significant accounting policies and other explanatory information

     

    vComparative financial information in respect of the preceding period as specified vBalance sheet as at the beginning of the preceding period when an entity applies an accounting

     

    policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements having an impact on the balance sheet as at the beginning of the preceding period.

     

    Transition to Ind AS is beyond “Accounting Change”

     

    Considering the potential wide-ranging effects of the transition, the implementation effort would impact functions outside of the finance department, including IT, legal, sales, marketing, human resources, investor relations and senior management.

     

    A number of related workstreams should be considered in this effort, including:

     

    • Accounting and financial reporting system
    • Taxation

     

    §Business processes and systems §Change management, communicating and training

    Differences between Indian GAAP and Ind AS in certain critical areas

     

    1. Ind AS 109 – Financial Instruments

     

    Indian GAAP does not include mandatory guidance on accounting for financial instruments. Standards for accounting for financial instruments are used as a reference and have not been notified by the MCA. As per the existing roadmap, India will directly transition to Ind AS 109, ahead of the equivalent IFRS 9, which will be implemented in 2018 in other jurisdictions that have adopted IFRS or permit IFRS.

     

    1. Ind AS 110 - Consolidated Financial Statements

     

    Ind AS 110 establishes a single control model for all entities (including special purpose entities, structured entities or variable interest entities). The implementation of this standard will require management to exercise significant judgment to determine which entities are controlled and are, therefore, required to be consolidated. It changes whether an entity is consolidated, by revising the definition of control. This is a radical change in the Indian environment, because by applying the new ‘control’ definition, it may change which entities are included within a group.

     

    1. Ind AS 115 – Revenue Recognition

     

    The core principle of this standard is that an entity will recognize revenue when it transfers control over goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for underlying performance obligations arising from the transaction. This will require entities to use more judgment and make more estimates than under today’s revenue standards. Ind AS 115 is likely to have an impact on the identification of performance obligations, warranties, sales incentives, right of return and options granting a material right. In such a scenario, it will be critical for companies to clearly understand the effects of the new standard, provide early communication to stakeholders and undertake advanced planning.

     

    1. Ind AS 103 - Business Combination

     

    Under extant Indian GAAP, there is no comprehensive standard for business combinations. There are separate standards that deal with amalgamation, consolidation and assets acquisition. Ind AS 103 will apply to all business combinations, including amalgamations. Once Ind AS 103 is effective, all assets and liabilities acquired will be recognized at fair value. Additionally, contingent liabilities and intangible assets not recorded in the acquiree’s balance sheet are likely to be recorded in the acquirer’s balance sheet on acquisition date. Goodwill on acquisition will not be amortized, but may only be tested for impairment.

     

    Different terminology is used in Ind AS when compared to IFRS, e.g. the term ‘balance sheet’ is used instead of ‘statement of financial position’ and ‘statement of profit and loss’ is used instead of ‘statement of comprehensive income’.

     

    Net worth means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.

    RBI has issued ECB regulations viz., Foreign Exchange Management (Borrowing or Lending in Foreign Exchange)Regulations, 2000, Notification No. FEMA 3/ 2000-RB,dated May 3, 2000 read with Sec.6(3) of FEMA Act,1999

     

    Indian companies are allowed to access funds from abroad in the following Methods:

    ØECB

    ØFCCBs

    ØPreference Shares/Debentures

    ØFCEB

     

    What is ECB

     

    External Commercial Borrowings (ECBs) include

    Øbankloans,

    Øsuppliers' and buyers' credits,

    Øfixedand floating rate bonds (without convertibility)

    ØFinancial Lease

     

    Øborrowings from private sector windows of multilateral Financial Institutions such as IFC, ADB, CDC etc..

     

    ØEuro-issues include Euro-convertible bonds and GDRs.

     

    RBI vide A.P. (DIR Series) Circular No.32, dated 30th November, 2015 has revised the total ECB Framework

     

    ECB – under New Regime

     

    Track – I

    Track – II

    Track – III

     

     

     

     

     

    Medium term foreign currency

    Long  term  foreign  currency

    I n d i a n  R u p e e  ( I N R )

     

    d e n o m i n a t e d  E C B  w i t h

    d e n o m i n a t e d  E C B  w i t h

    d e n o m i n a t e d  E C B  w i t h

     

    minimum average maturity of

    minimum average maturity of

    minimum average maturity of

     

    3/5 years

    10 years

    3/5 years

     

    Eligible Borrowers

     

     

     

     

     

     

    Track – I

    Track – II

    Track – III

     

     

     

     

    C o m p a n i e s  i n  M fg  a n d

    All entities listed under Track-I

    All entities listed under Track-II

    Software development

     

     

     

     

     

     

    Shipping & Airline Companies

    Companies  in  Infrastructure

    All NBFCs registered with RBI

     

     

    Sector

     

     

     

     

    SIDBI (Automatic Route)

    REITs and INVITs

    NBFC-MFI, NPOs engaged in

    EXIM Bank(Approval Route)

     

    MFI activity

     

     

     

     

    Units in SEZ

     

    Cos. engaged in R&D, Training

     

    (other than educational Inst.)

     

     

     

     

     

     

     

    NBFC-IFC, NBFC-AFC

     

    Cos.  Supporting  Infra  and

     

    logistic services

     

     

     

     

     

     

     

    Holding Companies and CIC

     

    Developers of SEZ/NMIZs

     

     

     

     

     

     

     

    Various other aspects of ECB have not been mentioned here for the sake ofbrevity and relevancy.

     

    RBI publishes the quarterly outstanding debt position with a lag of one quarter. Asper the available latest statistics of end of June, 2016, the outstanding Commercial Borrowings are USD 175.7 Billion (declined from USD 185.0 Billion as of June, 2015)

     

    In order to understand that whether the ECBs are really cost effective and whether it is boon or bane, the author has made an attempt to compare with the effective Interest on INR loans borrowed in India and ECB loans borrowed from abroad

     

    In the below table, comparable State Bank of India (SBI) Prime Lending Rate or Base Rate of MCLR based Base Rate has been listed. Also indicative 6 Months Average LIBOR rate has been mentioned for comparable effective date of interest of SBI. Similarly Forex rate of USD-INR is mentioned for each effective date.

     

    An attempt is made to compute the effective estimated Total Rate of Interest (ROI) of ECB to compare the benefit or loss in case of the Borrower does not have Natural Hedge (viz., Exports receivables) or any forex hedge by way of derivative contracts.

     

     

     

     

     

    Table

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Effective

    SBI Base

     

    USD-INR

    % of Forex

    6 Months

    Avg % of

    Estimated

    Estimated

     

    Average

    Forex

    Total ROI

    Date

    Rate (%)

    1

    (Rs)

    2

    change

    Spread

     

     

    LIBOR3

    change

    of ECB (%)

     

     

     

     

     

     

     

     

     

     

    01-01-17

    8.154

     

    67.9547

    45.58%

    1.3073%

    6.91%

    1.00%

    9.21%

     

     

     

     

     

     

     

     

     

     

     

    01-04-16

    9.20

     

    66.3329

    42.10%

    0.9018%

    7.21%

    1.00%

    9.12%

     

     

     

     

     

     

     

     

     

     

     

    05-10-15

    9.30

     

    65.2905

    39.87%

    0.5372%

    7.47%

    1.00%

    9.00%

     

     

     

     

     

     

     

     

     

     

     

    08-06-15

    9.70

     

    64.1100

    37.34%

    0.4164%

    7.46%

    1.00%

    8.87%

     

     

     

     

     

     

     

     

     

     

     

    10-04-15

    9.85

     

    62.3660

    33.60%

    0.3995%

    6.94%

    1.00%

    8.34%

     

     

     

     

     

     

     

     

     

     

     

    07-11-13

    10.00

     

    62.5740

    34.05%

    0.3804%

    10.01%

    1.00%

    11.39%

     

     

     

     

     

     

     

     

     

     

     

    19-09-13

    9.80

     

    61.7480

    32.28%

    0.3804%

    9.88%

    1.00%

    11.26%

     

     

     

     

     

     

     

     

     

     

     

    04-02-13

    9.70

     

    52.9730

    13.48%

    0.4890%

    5.11%

    1.00%

    6.60%

     

     

     

     

     

     

     

     

     

     

     

    20-09-12

    9.75

     

    54.3375

    16.40%

    0.6717%

    7.27%

    1.00%

    8.94%

     

     

     

     

     

     

     

     

     

     

     

    13-08-11

    10.00

     

    45.3740

    N.C

    0.4592%

    N.C

    N.C

    N.C

     

     

     

     

     

     

     

     

     

     

    11-07-11

    9.50

     

    44.3705

    N.C

    0.3976%

    N.C

    N.C

    N.C

     

     

     

     

     

     

     

     

     

     

    12-05-11

    9.25

     

    44.7900

    N.C

    0.4141%

    N.C

    N.C

    N.C

     

     

     

     

     

     

     

     

     

     

    25-04-11

    8.50

     

    44.4500

    N.C

    0.4423%

    N.C

    N.C

    N.C

     

     

     

     

     

     

     

     

     

     

    14-02-11

    8.25

     

    45.5000

    N.C

    0.4554%

    N.C

    N.C

    N.C

     

     

     

     

     

     

     

     

     

     

    03-01-11

    8.00

     

    44.6700

    N.C

    0.4584%

    N.C

    N.C

    N.C

     

     

     

     

     

     

     

     

     

     

    21-10-10

    7.60

     

    44.3600

    N.C

    0.4550%

    N.C

    N.C

    N.C

     

     

     

     

     

     

     

     

     

     

    01-07-10

    7.50

     

    46.6800

    N.C

    0.7518%

    N.C

    N.C

    N.C

     

     

     

     

     

     

     

     

     

     

     

     

     

    Note:

     

    1. SBI has started computation of Interest on MCLR (MARGINAL COST OF FUNDS BASED LENDING RATE) plus Spread basis, effective from 1st April, 2016. Between 01-07-2010 and 31-03-2016 the interest was computed on Base Rate plus Spread Basis.

     

    1. 6 Months Average LIBOR rate was taken on nearest date basis and for indicative purpose only. Actual rate may vary

     

    1. % of change in FX Rates&Avg % of Forex change have been computed by taking base date as 1st July, 2010

    N.C = Not Computed

    Conclusion

     

    On a review of the above table it is apparent that unless the Borrower has Exports receivable and the inflow schedule matches with the Principle and Interest Payment obligations, the currency risk plays major role in determining the cost effectiveness of the ECB.

     

    In case the borrower does not have sufficient Exports receivables, the borrower needs to obtain Hedging Contracts (derivatives), failing which the entire risk of Foreign Exchange fluctuation will severely impact the overall cost and may prove to be bane

     

    In case the Borrower is able to raise the Rupee Denominated ECBs, then the foreign currency risk will be borne by the lender(s) and the borrower is insulated from such risk.

     

    In view of the expected fall of Borrowing Costs in India, post Demonitisation of Specified Bank Notes (Rs.

     

    500 and Rs. 1000), whether ECB will still be a lucrative option or not, one has to wait and watch.

    Indian Tax environment has been rapidly changing to absorb the global changes and the need to curb the tax avoidance and restrict the black money, which have been the primary objectives of the government. The recent developments provide us with a glimpse of India’s treaty policy to prevent double non-taxation, curb revenue loss and check the menace of black money through automatic exchange of information. The following is a summary of the recent India- DTAA developments:

     

    India – Singapore:

     

    ØResident based to Source based: The India-Singapore DTAA at present provides for residence based taxation of capital gains of shares in a company. The Third Protocol amends the DTAA with effect from 1st April, 2017 to provide for source based taxation of capital gains arising on transfer of shares in a company. This will curb revenue loss, prevent double non-taxation and streamline the flow of investments.

     

    ØGrandfathering clause: Investments in shares made before 1st April, 2017 have been grandfathered subject to fulfillment of conditions in Limitation of Benefits clause as per 2005 Protocol.

     

    ØTransition Period: Two year transition period from 1st April, 2017 to 31st March, 2019 has been provided during which capital gains on shares will be taxed in source country at half of normal tax rate, subject to fulfillment of conditions in Limitation of Benefits clause.

     

    ØLOB:Under the present Treaty, and as retained in the Protocol, an entity is not entitled to the capital gains tax exemption in the source state if its affairs were arranged with the primary purpose to take advantage of such benefits. Similarly, shell or conduit companies, viz., resident legal entities with negligible or nil business operations, or with no real and continuous business activities, are disentitled from availing the capital gains exemption in the source state.

     

    The aforementioned conditions of the primary purpose test under the "Limitation of Benefits" (LOB) article have also been made applicable to entities seeking to claim benefit of the 50% lower tax rate under the Protocol during the transition period from 1 April 2017 to 31 March 2019 (Transition Period).

     

    The expenditure thresholds and corresponding temporal limits to avail of the capital gains exemption on investments made prior to 1 April 2017 continue to remain the same in the Protocol, i.e., an annual expenditure of at least S$ 200,000 in Singapore or INR 5,000,000 in India on operations in each of the two blocks of 12 months in the immediately preceding period of 24 months from the date on which the gains arise

    ØMAP:The Third Protocol also inserts provisions to facilitate relieving of economic double taxation in transfer pricing cases. This is a taxpayer friendly measure and is in line with India’s commitments under Base Erosion and Profit Shifting (BEPS) Action Plan to meet the minimum standard of providing Mutual Agreement Procedure (MAP) access in transfer pricing cases. The article on "Associated Enterprises" under the Treaty has been amended to provide that a corresponding adjustment to the income/profits of an enterprise of one contracting state would be made when an addition is made in the income of its associated enterprise in the other contracting state. In determining such adjustment, due regard shall be had to the other provisions of the Treaty, and the competent authorities of the contracting states shall consult each other, if necessary

     

    ØGAAR: The Third Protocol also enables application of domestic law and measures concerning prevention of tax avoidance or tax evasion. (To give effect to GAAR)

     

    ØThings missed out, but can be subject to GAAR: While the transfer of capital assets other than shares, such as debentures, partnership interests etc., and an indirect transfer of Indian assets would continue to be tax exempt under the Protocol even after 1 April 2017, and would not be subject to the LOB test, such transactions will nevertheless be required to pass the muster of GAAR (i.e. the domestic anti-abuse tax law of India).

     

    India – Mauritius:

     

    ØTheProtocol for amendment of the India-Mauritius Convention signed on 10th May, 2016, provides for source-based taxation of capital gains arising from alienation of shares acquired from 1st April, 2017 in a company resident in India.

     

    ØGrandfathering and Transition: Investments made before 1st April, 2017 have been grandfathered and will not be subject to capital gains taxation in India. Where such capital gains arise during the transition period from 1st April, 2017 to 31st March, 2019, the tax rate will be limited to 50% of the domestic tax rate of India.

     

    ØLOB:The benefit of 50% reduction in tax rate during the transition period shall be subject to the Limitation of Benefits Article.

     

    ØTaxation in India at full domestic tax rate will take place from financial year 2019-20 onwards.

    India – Cyprus:

     

    ØTherevised DTAA between India and Cyprus signed on 18th November, 2016, provides for source based taxation of capital gains arising from alienation of shares, instead of residence based taxation provided under the DTAA signed in 1994.

     

    ØGrandfathering clause has been provided for investments made prior to 1st April, 2017, in respect of which capital gains would continue to be taxed in the country of which taxpayer is a resident.

     

    ØAssistance between the two countries for collection of taxes and updates the provisions related to Exchange of Information to accepted international standards.

     

    ØNomore NJA: Notification of Cyprus under section 94A of the Income Tax Act, 1961, as a notified jurisdictional area for lack of effective exchange of information, has been rescinded with effect from 1.11.2013 [Notification No. 114/2016 dated 14.12.2016].

     

    India – Switzerland:

     

    Fighting the menace of Black Money stashed in offshore accounts has been a key priority area for the Government. To further this goal, the ‘Joint Declaration’ for the implementation of Automatic Exchange of Information (AEOI) between India and Switzerland was signed in November, 2016.

     

    It will now be possible for India to receive from September, 2019 onwards, the financial information of accounts held by Indian residents in Switzerland for 2018 and subsequent years, on an automatic basis.

     

    Concluding Remarks:

     

    The above protocols in the International tax environment from India Perspective are significant changes and could have great impact on the structuring/ tax planning of the MNC’s and can also create transparency in the thought process of both the taxpayers and government. These changes/protocols indicate the importance of the exchange of information and source based taxation. With GAAR coming into picture very soon these changes would also help/attribute to the intentions of the government and would provide support in achieving the objectives.

    Key Topics Covered:

    • INDIRECT TAX
    • AUDIT

    Updates

    • COMPANIES ACT, 2013
    • INDIRECT TAX

    Key Topics Covered:

    • INTERNATIONAL TAXATION
    • AUDIT
    • INCOME TAX
    • INDIRECT TAX
    • LABOUR LAWS

    Updates

    • COMPANIES ACT, 2013
    • INDIRECT TAX.

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