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    Introduction:

     

    The Constitution (One Hundred and First Amendment) Act, 2016 (hereinafter referred to as ‘GST Constitutional Amendment Act) is been recently passed by Parliament, ratified by majority of the States and received President’s assent on 08.09.2016. Subsequently, Central Government has notified various provisions of the GST Constitutional Amendment Act through notifications issued on 10.09.2016 and 16.09.2016. The President has constituted the GST Council with effect from 15.09.2016. The passage of the said Act is considered to be a major breakthrough in implementation of GST in India. In fact several legal issues are instigated during the phase of its enactment only. Let us now discuss some of the key legal issues that emanate from this GST Constitutional Amendment Act.

     

    Centre power to levy tax on inter-state sales is retained:

     

    Section 18 of The Constitution (One Hundred and Twenty- Second Amendment) Bill, 2014 has provided for levy of additional origin based tax of one per cent on supply of goods in the course of inter-state trade or commerce for a period of two years. This clause was adopted by Lok Sabha but the same was withdrawn from the bill before being passed in Rajya Sabha due to pressures from Opposition political parties and of stake holders on the reason that its existence under GST regime will dilute the objectives of GST.

     

    However, sub-clause (g) of Article 269(1) of the Indian Constitution remained untouched with respect to the power of the Central Government to levy and collect tax on sale or purchase of goods in the course of interstate trade or commerce. Further corresponding entry under List I of Seventh schedule i.e. entry 92A provides for levy of tax on sale or purchase of goods in the course of inter-state trade or commerce is also retained. Accordingly, Centre is empowered to levy tax on sale of goods in the course of interstate trade or commerce even under GST regime.

     

    One of the reasons for proposing this one per cent additional tax on inter-state sale or purchase of goods is in order to protect the interests of the developed States like Maharashtra, Tamil Nadu etc which are manufacturing hubs of our Country. It is expected there will be a revenue loss for these producing States as GST being a destination based consumption tax, thereby Consuming states gets more revenue. It is expected that there may be loss of revenue in the initial years despite the fact that majority of the revenue loss is going to be mitigated because of conferring power on States to levy tax on services under the GST Regime.

     

    Of course, Centre has assured compensation for loss of revenue only for a period of five years. What will happen if these States are not able to generate adequate revenue after the period of five years? Revenue appetite for each State would be different depending upon their social, economic and political factors. Definitely, existence of such circumstances will persuade the States to compel Centre for generation of more revenue by increasing the tax burden on citizens. It is possible that if the amount compensation to 

    be made by Centre to State is beyond a certain tolerance level, there may be an urge on Centre itself to look for new tax avenues for revenue. The Governments that are going to be formed in future both at Centre and States may not strictly adhere to the basic objectives of GST. In all these circumstances, there may be a chance for Centre to resort this power of levying tax on inter-state sale of goods. Thus continuation of Article 269(1)(g) may be considered as serious threat to objectives enshrined under GST viz. ‘uniformity in tax structure’ and ‘one nation-one market’.

     

    Confusion over the subsumption of entry tax, octroi, entertainment tax and other local body taxes:

     

    Under Article 243H and Article 243X, powers are conferred on the local government bodies to levy, collect and appropriate such taxes, duties, tolls and fees as the Legislature of the State may by law authorise them. The taxes that are presently levied by the local bodies include octroi in lieu of entry tax and entertainment taxes. List II of Seventh Schedule contains matters on which State Government is entitled to legislate. Entry 52 and Entry 62 deals with entry tax and entertainment tax respectively.

     

    There is confusion over the subsumption of these taxes into GST as trade, tax experts, even bureaucrats are of the belief that that local bodies have power to levy these taxes that they are empowered to even under GST regime. Even in the First Discussion Paper that was released by Empowered Committee of State Finance Ministers, it was mentioned that entertainment tax and entry tax except those levied by local bodies are subsumed under GST. The said entries pre and post GST Constitutional Amendment Act are reproduced hereunder

     

     

    Pre GST Constitutional Amendment Act

    Post GST Constitutional Amendment Act

     

     

     

     

     

     

     

     

    Entry 52:

    Omitted

     

     

     

     

     

     

     

    Taxes on the entry of goods into a local area for

     

     

     

     

    consumption, use or sale therein

     

     

     

     

     

     

     

     

     

     

     

    Entry 62:

    Taxes on entertainments and amusements to the

     

     

     

     

     

    Taxes  on  luxuries,  including  taxes  on

    extent levied and collected by a Panchayat or a

     

    entertainments,  amusements,  betting  and

    Municipality or a Regional Council or a District

    gambling

    Council.

     

     

     

     

     

     

     

     

    State Government derives power to tax under Constitution of India. It can delegate the said authority to tax to local bodies by law in terms of Article 243H and Article 243X. Thus a local body derives the power of taxation upon express law made by State Legislature in this regard. With the omission of entry 52 under List II, States are barred from levying entry tax. Thus States cannot delegate the power of levying entry tax which they are not going to have under GST regime. In view of this, in the humble opinion of paper writer, entry tax/octroi cannot be levied by States as well as local bodies under the GST regime.

     

    Coming to entertainment tax, unlike the case of entry tax, entry 62 is not omitted. Instead, it is amended to retain the power to State to legislate on taxes on entertainments and amusements to the extent levied and collected by a Panchayat or a Municipality or a Regional Council or District Council. Thus this confers power on States to authorise local bodies to levy entertainment/amusement tax even under GST regime also.

    Row over the Constitutional Validity on levy of Excise after giving effect to the GST Constitutional Amendment Act:

     

    The Central Government vide Notification on 16.09.2016, has notified various sections of the GST Constitutional Amendment Act including Section 2 which provides for insertion of Article 246A and Section 17 which amends various entries in List I and List II of Seventh Schedule to the Constitution. Article 246A provides for concurrent jurisdiction to Centre and State for levy of goods and services tax on supply of goods and services. Section 17 amends various entries in List I and List II. These include amendments to entry 84 to restrict the power to levy excise duty only on manufacture of petroleum and tobacco products. Infact, there was no hurry for Central Government to notify these sections. These could have been notified at any time before the appointed date for rollout of GST. This has persuaded the social media to spread the propaganda that with effect from 16.09.2016, excise duty levy would be unconstitutional. To everyone’s surprise, some of the media houses went on to say that assesses can claim refund of the excise duty paid by them on or after 16.09.2016.

     

    Section 19 of GST Constitutional Amendment Act has provided for transitional provisions which is reproduced as under—

     

    “Notwithstanding anything in this Act, any provision of any law relating to tax on goods or services or on both in force in any State immediately before the commencement of this Act, which is inconsistent with the provisions of the Constitution as amended by this Act shall continue to be in force until amended or repealed by a competent Legislature or other competent authority or until expiration of one year from such commencement, whichever is earlier”

     

    On perusal of this section, it seems that the language used in this transitional provision is confusing. On one hand it talks about any provision of any law relating to tax on goods or services as in force in any state. The phrase ‘taxes in force in any state’ need not be restricted to those taxes levied State and it can include even the taxes levied by Centre also that are in force on assesses located in that State. On the other hand, it says that such provisions shall remain in force until amended or repealed by a competent Legislature or any other competent authority or until the expiry of one year. Because of the use of the phrase ‘until amended or repealed by competent Legislature or any other competent authority’, media houses and some tax experts have taken a stand that the transitional provisions under this Section 19 is only applicable for State tax laws but not of Centre’s. Hence there is confusion over the validity of excise duty presently being levied by Centre.

     

    In humble opinion of the paper writer, the transitional provisions do not expressly say that they are only applicable for the taxes levied by State. The language used in Section 19 is that it is applicable to all laws relating to tax on goods or services that are in force in any State. Thus Section 19 covers taxes levied by Centre also. To add further, GST Constitutional Amendment Act is dealing with subject relating to taxing of goods or services by both Centre and State. The transitional provisions are equally applicable to the taxation laws of both Centre and States especially in the absence clear expression provision that they are applicable only for taxation laws of States.

    Coming to the language ‘until amended or repealed by competent Legislature or any other competent authority or until the expiry of one year’, it also possible for Centre to take shelter under the phrase ‘any other competent authority’ includes Parliament with respect to taxation laws of Centre. Further, it is also possible to interpret that with respect to taxation laws of Centre, they remain in force for a maximum period of one year from the date of commencement of GST Constitutional Amendment Act unless the Centre enacts appropriate GST legislation exercising their power under Article 246A.

     

    Even otherwise, in case the transitional provisions under Section 19 are interpreted by Courts in such a way that they are applicable only to taxation laws of States, Centre has recourse under Section 20 which says that in case any difficulty in giving effect to the provisions of the GST Amendment Act including any difficulty in transition, President is given power to modify or adapt the provisions of Constitution by issuing an order at any time before the expiry of three years from the date of such assent. In worst possible scenario, Centre has the option to put rest to this row by way of President’s order suitably amending the provisions of Constitution to validate excise duty levy for the interim period before the roll out of GST.

     

    Definition of ‘Goods’ under Model GST is not incongruence with its definition under Constitution:

     

    The definition of Goods under Constitution is provided under Article 366(12). Accordingly, it provides that ‘goods’ includes all materials, commodities, and articles. As laid down by Supreme Court in the case of Tata Consultancy Services vs. State of AP 2002(178)ELT22(SC), goods includes intangible property also when the said intangible property is capable of abstraction, consumption and use and can be transferred, transmitted, delivered, stored, possessed etc.

     

    Thus, as per the Indian Constitution, goods include intangible property also. This position remains unchanged even after the rollout of GST. Further, with respect to taxes, that are going to be prevailing even under GST regime, the position remains unchanged. Say designs, drawings are covered under chapter 4911 and Information Technology Software covered under chapter 8523 of First Schedule to Customs Tariff Act, 1985. These intangibles when imported in the form of media would be treated as import of goods for the purpose of levy of customs duty.

     

    Under the Model GST Law, it is envisaged in terms of definitions of ‘goods’, ‘services’ as per section 2(48) and section 2(49) respectively and meaning and scope of ‘Supply’ as defined under Section 3 read with Schedule II, that all intangibles are considered as services for the purpose levy of GST. Thus the definition of ‘goods’ and ‘services’ as provided under Model GST law is incongruous with the definition of ‘goods’ as provided under Indian Constitution. This may likely to pose legal challenges as to Constitutional vires of the GST legislations on intangibles.

     

    On the other hand, one can easily understand the intention behind treating intangibles as services for the purpose of levy under GST. This is all to put an end to the humungous litigation that is presently taking place under VAT and Service Tax Laws as to whether a particular transaction involving intangibles is to be treated as sale of goods or provision of services. It seems that the drafting committees of Model GST Law are of the view that under GST, a supply transaction needs to be taxed treating them either as goods or services. In fact it is not so. 

    The GST Constitutional Amendment Act has inserted a definition for ‘Goods and Services Tax’ by way of sub-clause (12A) of Article 366. Accordingly, it means any tax on supply of goods, or services or both except taxes on supply of the alcoholic liquor for human consumption. Thus GST is a tax which will be levied on a transaction involving either supply of goods alone or supply of services alone or on a composite supply involving supply of both goods and services as part of same transaction.

     

    Under GST regime, Centre and States exercise concurrent jurisdiction thereby both the authorities levy tax on transaction involving supply of goods or services or both. Therefore, in the humble opinion of the paper writer, there is no need under Model GST law to prescribe that intangibles are deemed to be services. Instead, the law can prescribe that all transactions involving supply of intangibles (whether as goods or services) would be subject to a single rate of tax. This practice will avoid the need to ascertain whether a particular supply of intangible is supply of goods or services or to deem all supplies of intangible as services. It also avoids unnecessary litigation on Constitutional vires of deeming all intangibles as services under GST legislation.

     

    Conclusion:

     

    In view of the above discussion, it is more likely that GST Constitutional Amendment Act is going to pose several Constitutional challenges before Courts. GST is supposed to be the biggest tax reform since Independent India. It is supposed unify the indirect tax structure of the Nation besides simplification of tax laws. Thus it is going to play a pivotal role in the growth of our economy in the coming years. With dual structure, Centre and States are required to work in harmony for successful implementation and administration of GST. Any rift between them on legal or revenue front is likely to cripple this major tax reform. In this backdrop, it is very important that Centre should be proactive in identifying potential Constitutional and other legal issues and address them correctly to ensure successful implementation of GST in India.

    THE COMPANIES AMENDMENT BILL, 2016 [BILL 73 of 2016] – A REVIEW- PART-5 (continued from September-2016 wiki)

    Sl.

    Section(s) under the CA,

    Clause No. in the

    Proposed amendment relating to

    Remarks/Comments/Penalty

    No.

    2013, amended

     

     

    Amendment Bill

     

     

     

     

     

     

     

     

     

     

     

     

    74

    S e c t i o n

    -

    3 8 4

    75

    Amendment to Section (2) of Section 384 of the Act, to

    Amendment to remove ambiguity.

     

    Debentures,

    Annual

     

    include Section 135 of Act, thereby making the provisions of

     

     

    Return, Registration of

     

     

     

     

    Corporate Social responsibility CSR applicable to a Foreign

     

     

    charges,

    books

    of

     

     

     

     

    Company, in addition to the applicability of the provisions of

     

     

    account

    and  their

     

     

     

     

    Section 71, 92, 128, Chapter-VI &Chapter-XIV of the Act.

     

     

    inspection.

     

     

     

     

     

     

     

     

     

     

    75

    Section - 403 – Fee for

    76

    Amendment to replace the existing 1st proviso to Sub-Section

    Welcome Amendment, to remove

     

    filing, etc.

     

     

     

     

    (1) of Section 403 of the Act, with new a proviso, so as to

    ambiguity

     

     

     

     

     

     

    include the details of the relevant sections [i.e., 89, 92, 117,

     

     

     

     

     

     

     

    121, 137 or 157] under which filings can be done within a

     

     

     

     

     

     

     

    period of 270 days from the expiry of the period so provided in

     

     

     

     

     

     

     

    those sections, on payment of such additional fee.

     

     

     

     

     

     

     

    Amendment to replace the existing 2nd proviso to Sub-Section

    Welcome Amendment, to remove

     

     

     

     

     

     

    (1) of Section 403 of the Act, with new a proviso, so as to

     

     

     

     

     

     

    ambiguity and ease of operations.

     

     

     

     

     

     

    enable filing of returns relating to the sections referred in the

     

     

     

     

     

     

     

    1st proviso, beyond the time frame as given in the 1st proviso

     

     

     

     

     

     

     

    and with regard to the other sections, beyond the time frame

     

     

     

     

     

     

     

    given in the respective section, on payment of such higher

     

     

     

     

     

     

     

    additional or additional fee.

     

     

     

     

     

     

     

     

     

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    Clause No. in the

     

    Proposed amendment relating to

    Remarks/Comments/Penalty

    No.

    2013, amended

    Amendment Bill

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Insertion of a 3rd proviso to provide that in case of default on two

     

     

     

     

    or more occasions in filing of returns under section 89, 92, 117,

     

     

     

     

    121, 137 or 157, the provisions of the first and second provisos

     

     

     

     

    shall not apply, until the return is submitted, filed, registered or

     

     

     

     

    recorded, as the case may be, with additional fee, without

     

     

     

     

    prejudice to any legal action or liability under this Act.

     

     

     

     

    Amendment to Sub-Section (2) of Section 403 of the Act, to

    Amendment to remove ambiguity.

     

     

     

    substitute the words "first proviso to that sub-section" with

     

     

     

     

    words "relevant section”.

     

     

     

     

     

     

     

     

    76

    Section - 406 -

    77

    Amendment to substitute the existing section 406 of the Act

    Amendment to give more clarity.

    with a new section 406 with 5 sub-sections..  The new section

     

     

    Power to modify Act in

     

     

     

     

    is titled: “Provision relating to Nidhis and its application, etc.”.

     

     

    its  application  to

     

     

     

     

     

     

     

     

     

     

    The gist of the sub-sections is as below:

     

     

    Nidhis.

     

     

     

     

     

     

     

     

     

     

     

    (1)  A word “Mutual Benefit Society” has been added, and

     

     

     

     

    accordingly a Nidhi or a Mutual Benefit Society shall be a

     

     

     

     

    company  which  the  Central  Government  may  by

     

     

     

     

    notification in the Gazette, declare to be so.

     

     

     

     

    (2)  The Central Government may by notification in the

     

     

     

     

    Gazette, direct the applicability or non-applicability of the

     

     

     

     

    provisions of the Act to a Nidhi or Mutual Benefit Society.

     

     

     

     

    (3)  Placing of the draft of the proposed notification before

     

     

     

     

    each House of Parliament, while it is in session, for a total

     

     

     

     

    period  of  30  days,  and  if,  both  Houses  agree  in

     

     

     

     

    disapproving the issue of notification or both Houses

     

     

     

     

    agree in making any modification in the notification, the

     

     

     

     

    notification shall not be issued or, as the case may be, shall

     

     

     

     

    be issued only in such modified form as may be agreed

     

     

     

     

    upon by both the Houses.

     

     

     

     

     

     

     

     

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    Clause No. in the

     

    Proposed amendment relating to

     

     

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    No.

    2013, amended

    Amendment Bill

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    (4)  For the purpose of reckoning the period of 30 days, referred

     

     

     

     

     

    to in sub-section (3), any period during which the House

     

     

     

     

     

    referred to in sub-section (3), is prorogued or adjourned for

     

     

     

     

     

    more than four consecutive days, shall not be counted.

     

     

     

     

     

    (5)  Laying of Copies of every notification, before each House of

     

     

     

     

     

    Parliament, as soon as may be after it has been issued.

     

     

     

     

     

     

     

     

    77

    Section – 409 –

    78

    Amendment to Sub-Section (3) of Section 409 of the Act, in

     

     

    Qualification of

    connection with the eligibility of the Technical members of the

     

     

     

     

     

     

     

    President and

     

    National Company Law Tribunal.

     

     

     

     

     

     

    Members of Tribunal.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    78

    Section 411–

    79

    Amendment to Sub-Section (3) of Section 411 of the Act, in

     

     

    Qualifications of

    connection with the eligibility of the Technical members of the

     

     

     

     

     

     

     

    chairperson And

     

    National Company Law Appellate Tribunal.

     

     

     

     

     

    Members of Appellate

     

     

     

     

     

     

     

     

     

    Tribunal.

     

     

     

     

     

     

     

     

    79

    Section – 412 -

    80

    Amendment to Sub-Section (2) of Section 412 of the Act, in

     

     

    Selection of

    connection with the constitution of the Selection Committee,

     

     

     

     

     

     

     

    Members of Tribunal

     

    to recommend the appointment of Members to the National

     

     

     

    and Appellate

     

    Company Law Tribunal and the National Company Law

     

     

     

    Tribunal.

     

    Appellate Tribunal.

     

     

     

     

     

    80

    Section - 435 –

    81

    Substitution of the existing Section 435 of the Act, with a new

    Welcome Amendment to remove

     

    section,  to

    amend  provide  for

    appointment

    by

    Central

    ambiguity.

     

    Establishment of

     

     

    Government

    of  Metropolitan

    Magistrate  or

    a

    Judicial

     

     

     

    Special Courts.

     

     

     

     

     

    Magistrate of the First Class in Special Court in case of offences

     

     

     

     

     

     

     

     

     

     

    punishable under the Act with imprisonment less than 2 years.

     

     

     

     

     

    The appointment by the Central Government shall be with the

     

     

     

     

     

    concurrence of the Chief Justice of the High Court within whose

     

     

     

     

     

    jurisdiction the judge to be appointed is working.

     

     

     

     

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    Section(s) under the CA,

    Clause No. in the

     

     

    Proposed amendment relating to

    Remarks/Comments/Penalty

    No.

    2013, amended

    Amendment Bill

     

     

     

     

     

     

     

     

     

     

     

     

     

    81

    Section – 438 –

    82

     

    Amendment of Section 438 of the Act, consequent upon the

     

     

    proposed amendment to Section 435 of the Act, thereby to

     

     

    Application of Code to

     

     

     

     

     

     

    replace the words "deemed to be a Court of Session", with the

     

     

    Proceedings  before

     

     

     

     

     

     

    words "deemed to be a Court of Session or the court of

     

     

    Special Court.

     

     

     

     

     

     

    Metropolitan Magistrate or a Judicial Magistrate of the First

     

     

     

     

     

     

     

     

     

    Class, as the case may be".

     

     

     

     

     

     

     

     

    82

    Section – 439 -

    83

     

    Amendment to Sub-section (2) of Section 439 of the Act to

    Welcome Amendment to remove

     

    include ”Member” in addition to the shareholders, for

    ambiguity.

     

    Offences to be non-

     

     

     

     

     

    making a complaint with respect to taking cognizance of

     

     

    cognizable.

     

     

     

     

     

     

    offences under the Act by the Court.

     

     

     

     

     

     

     

     

     

     

     

     

     

    83

    Section – 440–

    84

     

    Amendment to Section 440 of the Act to provide that till

     

     

    Special Courts are established, the trial of offences shall be

     

     

    Transitional provisions.

     

     

     

     

     

     

    continued with Court of Sessionor Court of Metropolitan

     

     

     

     

     

     

     

     

     

     

    Magistrate or a Judicial Magistrate of the First Class, thereby

     

     

     

     

     

    to replace the words  " Court of Session", appearing in the

     

     

     

     

    section with the words " Court of Session or the court of

     

     

     

     

    Metropolitan Magistrate or a Judicial Magistrate of the First

     

     

     

     

    Class, as the case may be.

     

     

     

     

     

     

     

     

    84

    Section –441 –

    85

     

    Amendment to Sub-Section (1) of Section 441 of the Act to

    Welcome  Amendment,  giving

     

    replace the words "with fine only", appearing in the Sub-

    further  scope  to  compound

     

    Compounding of

     

     

     

     

     

    Section, with the words "not being an offence punishable with

    o f f e n c e s  p u n i s h a b l e  w i t h

     

    certain offences

     

     

     

     

     

    imprisonment only, or punishable with imprisonment and also

    imprisonment or with Fine, with

     

     

     

     

     

     

     

     

    with fine".

    imprisonment or with Fine or both

     

     

     

     

     

     

    with out the special permission of

     

     

     

     

    NOTE: Consequent upon amendment to Sub-Section (1) of

    the Special Court.

     

     

     

     

     

     

     

     

     

     

     

    Section 441, the clause (a) of Sub-Section (6) of Section 441,

     

     

     

     

     

    also needs amendment, but seems to have been missed out

     

     

     

     

     

    in the proposed amendment bill.

     

     

     

     

     

     

     

     

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    Section(s) under the CA,

    Clause No. in the

    Proposed amendment relating to

    Remarks/Comments/Penalty

     

    No.

    2013, amended

    Amendment Bill

     

     

     

     

     

     

     

     

     

    85

    New Section

    86

    Insertion of 2 new sections 446A & 446B, after the existing

     

     

    Section 446.

     

     

     

     

     

     

     

     

     

     

    Section 446A : Factors for determining level of punishment.

    Welcome inclusion

     

     

     

     

    The new Section provides that the court or the Special Court,

     

     

     

     

     

    shall consider the following factors, to decide the amount of

     

     

     

     

     

    fine or imprisonment under this Act.

     

     

     

     

     

    (a) size of the company; (b) nature of business carried on by

     

     

     

     

     

    the company;(c) injury to public interest;(d) nature of the

     

     

     

     

     

    default; and(e) repetition of the default.

     

     

     

     

     

    Section 446B: Lesser penalties for One Person Companies or

     

     

     

     

     

    small companies

     

     

     

     

     

    If a One Person Company or a small company fails to comply

    Welcome inclusion in favour of One

     

     

     

     

    with the provisions of Section 92(5), Section 117(2)(c),Section

    Person  Companies  and  Small

     

     

     

     

    137(3), such company and officer in default of such company

    Companies  and  the  officers,

     

     

     

     

    shall be punishable with fine or imprisonment or fine and

    reducing fine and imprisonment.

     

     

     

     

    imprisonment, as the case may be, which shall not be more

     

     

     

     

     

    than one-half of the fine or imprisonment or fine and

     

     

     

     

     

    imprisonment, as the case may be, of the minimum or

     

     

     

     

     

    maximum fine or imprisonment or fine and imprisonment, as

     

     

     

     

     

    the case may be, specified in such sections.

     

     

     

     

     

    Note: It is noticed that in the amendment bill they have

     

     

     

     

     

    referred Section 117 (2)(c), but the said sub-section does not

     

     

     

     

     

    contain any clauses, and it is assumed probably it is relating to

     

     

     

     

     

    Section 117 (3)(c) and not Section 117 (2)©.

     

     

     

     

     

     

     

     

     

    Flash News!!!

     

    The Central Government in exercise of the Powers conferred in 145(2) of the Income tax Act, 1961 notifies1 Income Computation and Disclosure Standards (‘ICDS’) to be followed by all assessees (other than exempted2 ) following mercantile system of accounting for the purpose of computing income under the head ‘Profits and Gains of Business or Profession’ or ‘Income from Other Sources’.

     

    This Notification will apply from Assessment Year 2017-18 and subsequent assessment years.

     

    The major changes in the latest ICDS are summarized as follows:-

     

    ICDS II-VALUATION OF INVENTORIES:

     

    1. Method of Measurement:-

     

    Standard Cost method was allowed as a technique for measure of cost of inventories. The new change provides for regular review of normal levels of consumption of materials, supplies, labour, efficiency and capacity utilization.

     

    1. Cost of Service:-

     

    The cost of services shall consist of labour and other costs of personnel directly engaged in providing the service including supervisory personnel and attributable overheads (The term ‘Serviceprovider’ in the existing ICDS was removed)

     

    1. Disclosure:-

     

    The accounting policies adopted in measuring inventories including the cost formula used. Where Standard Costing has been used as a measurement of cost, details of such inventories and confirmation of the fact that standard cost approximates the actual cost.

     

    ICDS III- CONSTRUCTION CONTRACTS:

     

    Transitional Provisions:-

     

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

     

     

    129-09-2016

     

    2Individual or HUF who is not required to get his accounts audited U/S 44AB.

    (Existing ICDS provides for recognition of contract revenue and cost with respect to contract commenced on or before 31st March 2015 but not completed by the said date shall recognize in accordance with provisions of this standard.)

     

    ICDS IV- REVENUE RECOGNITION:

     

    1. Revenue from Services with short duration:-

     

    Revenue from service contracts with duration of not more than 90 days may be recognized when the rendering of services under that contract is completed or substantially completed. (New)

     

    1. Revenue from Services:-

     

    Revenue from services provided by indeterminate number of acts over a specific period of time is recognized on straight line basis over the specific period. (New)

     

    1. Interest on refund of tax etc:-)

     

    Interest on refund of any tax, duty, cess shall be income of the previous year in which such interest is received.(New)

     

    ICDS V- TANGIBLE FIXED ASSETS:

     

    Valuation of Tangible Fixed Assets in Special Cases:-

     

    Details of Jointly Owned tangible fixed assets are not required to be indicated separately in the tangible fixed assets register.

     

    ICDS VI -EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES:

     

    1. Financial Statements of Foreign Operations:-

     

    The Financial Statements of Foreign Operations shall be translated as if the transactions of the foreign operations had been those of the person himself. ( Integral or Non integral operation classification withdrawn)

     

    1. Conversion at Last Date of Previous Year:

     

    Non-monetary item being inventory which is carried at NRV denominated in Foreign Currency shall be reported using the exchange rate that existed when such value was determined. (New)

    ICDS VIII-SECURITIES:

     

    1. Definition of Securities:-

     

    Securities shall include share of a company in which public are not substantially interested but shall not include derivatives. (New)

     

    1. Subsequent Measurement of Securities:-

     

    For value of securities held as a stock in trade at the end of the previous year or value of securities held as a stock in trade on the beginning of the previous year or securities not listed on recognized stock exchange or listed but not quoted on recognized stock exchange regularly from time to time where actual cost initially recognized cannot be ascertained by reference to specific identification , the cost of such security shall be determined on the basis of FIFO method of Weighted Average Cost formula. (New)

     

    1. New Chapter Part B:-

     

    This part of the standard deals with securities held by scheduled bank or public financial institution formed under Central or State Act or so declared under the Companies Act, 1956 or Companies Act, 2013.

     

    ICDS IX- BORROWING COSTS

     

    Borrowing Costs Eligible for Capitalisation:-

     

    Specific and non-specific borrowing costs eligible for Capitalisation shall cease when such asset is first put to use or when substantially all the activities necessary to prepare such inventory for its intended sale are complete. (New)

     

    Changes in Form 3CD:-

     

    In clause 13 (For sub clause (d) the following shall be substituted):-

     

    Information about the adjustment required to be made to the profits or loss for compliance with ICDS. If yes, details of such adjustments are required to be furnished. (Net effect of adjustments)

    Disclosures of information as per ICDS need to be furnished.

    (WEF 01-04-2017)

    The audit committee is a cornerstone of good corporate governance. Its mandate now extends well beyond oversight of financial reporting to include an array of key areas that support an organization’s performance, such as risk management, compliance, reliability and integrity of internal data, cyber risk, and the effectiveness of internal control over operations.

     

    Yet even as the list of oversight responsibilities gets longer and more complex, the amount of time that most audit committee members can reasonably commit to the part has not. The role of internal audit has traveled a parallel course with that of the audit committee, with internal auditors expanding their scope of responsibilities to meet organizational needs. Organizations are increasingly turning to the internal audit function to provide assurance and/or consulting services to better address their own needs. When a strong working relationship is in place with the audit committee, internal audit can enhance and protect organizational value by providing risk-based and objective assurance, advice, and insight. With its broad view of the organization and its familiarity with operations across all business units, the internal audit department is uniquely positioned to help the audit committee understand and evaluate risks that may affect the enterprise.

     

    Audit committees can and should rely on internal audit as a critical resource to help them successfully fulfill their responsibilities. In addition to helping address risk, an effective internal audit department acts as an objective insider, empowering the audit committee with insights into the business and its practices that can achieve significant cost savings.

     

    Internal auditors, use tools such as data analytics to identify problems and recommend new, better approaches that can affect the company’s bottom line. Audit committees and management take notice when that happens, but one of the biggest obstacles to optimizing the value obtained from internal audit is a bias toward viewing the function as primarily providing assurance on financial, regulatory, and compliance risks. While those areas are critically important and are historically internal audit’s strengths, internal audit can make contributions well beyond those traditional spaces.

     

    With appropriate resources and staff, internal audit can also address areas many stakeholders see as offering higher value to the organization by improving the efficiency and effectiveness of all controls, including, for instance, controls of data security or operations. In some cases, internal audit may increase value to stakeholders by providing assurance over strategic and business risks.

     

    Audit Committee and Internal Audit:

     

    To ensure that internal audit can deliver value, the audit committee must protect and nurture unbiased assurance, which is among internal audit’s greatest contributions to the organization. Audit committees should be prepared to:

     

     

     

     

     

     

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    SBS Wiki                                                                                                                                                       www.sbsandco.com/wiki

     

    vUnderstand the resources needed to provide value, including both personnel and data analytics

     

    resources.

    vProtectthe independence and objectivity of the chief audit executive (CAE) and internal audit

    team.

    vCommunicate with the CAE often and at a deep level, both formally and informally. vAgreeon expectations and help design, review, and approve audit plans that are aligned with

     

    those expectations.

    vHoldmanagement accountable for assessing and implementing, when appropriate, internal audit recommendations.

     

    vMonitorthe quality of internal audit work and insist on timeliness, organizational perspective, and fact-based observations and recommendations.

     

    Importance of Communication

     

    An expanded role for internal audit inevitably creates higher expectations of the function, and requires clear communication about how internal audit will support the audit committee. The audit committee must partner with the CAE to determine what are the risk areas where internal audit’s activities will best serve the organization, When internal audit consistently identifies key known and emerging risks, and updates its assessment on an ongoing basis, the department can deliver credible insights to management and the board that help equip the organization to respond quickly and appropriately.

     

    Attributes of Extraordinary Audit Committee

     

    vCourageously independent

     

    vProfessionally skeptical and intellectually curious

    vDeeplyexperienced

    vApproachable relationship builders

    vRisk-centric strategists

     

    The Role of Executives, Boards, and Audit Committees

     

    The pervasive impact of culture on long-term organizational success is a compelling reason for audit committees, boards, and executives to concern themselves with the topic. Success starts at the top. Generally speaking, executives establish the culture and lead by example. Those in senior leadership must articulate and model the organization’s culture and values, demand the highest standards of ethical behavior from themselves and others, encourage transparency, and be willing to make difficult decisions. At the same time, the board of directors must ensure that the senior leaders they put in place have the right ethical compass, tact, and communication style to instill the most effective culture.

     

     

     

     

     

     

     

     

     

     

     

     

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    How Audit Commiittes can leverage Internal Audit

     

     

    SBS Wiki                                                                                                                                                      www.sbsandco.com/wiki

     

    Beyond having the right leaders whose actions align with the organization’s core values, some tactics used by enterprise leaders to inspire a healthy culture are to:

     

    vMakesure that culture, values, and ethics appear directly or indirectly on board and audit committee meeting agendas, and talk about them candidly and explicitly.

    vEnsurethat culture — including the tone at the top — is evaluated using observable and measurable behaviors

     

    vDemandfrequent reporting. Some organizations create a culture dashboard that reports data such as employee feedback, ethics violations, hotline calls, and customer complaints.

     

     

     

    Relationship between the Audit Committee and Internal Audit Function

    FDI into Food Processing Products – various forms of business – FEMA Regulations

     

    Food Processing Sector has been on average growing at a faster rate than agricultural sector since last three years. During the last three years ending 2014-15, it is growing at Average Annual Growth Rate (AAGR) of around 2.26% as against 1.69% in the Agriculture and 6.23% in manufacturing at 2011-12 Prices1 .

     

    Food Processing has emerged as an important segment of the Indian Economy in terms of its contribution to GDP, employment and investment. The sector constitutes as much as 9.0% and 11.0% respectively of GDP in Manufacturing and Agricultural sector2 .

     

    Food Processing can be viewed as different levels of processing – Primary, Secondary, and tertiary. Primary processing relates to conversion of raw agricultural produce, milk, meat and fish into a commodity that is fit for human consumption. It involves steps such as cleaning, grading, sorting, packing etc., and subsequent processes are involved for making the processed inputs into finished goods and ultimate retail trading through sales distribution channels.

     

    Traditionally India was allowing Foreign Direct Investment (FDI) into the business of dealing with Food Products either by a manufacturer under automatic route for the products manufactured by them (Subject to MSMED regulations) or Trading of such goods via B2B e-commerce, Single Brand Retail Trading and Multi Brand Retail Trading etc., under automatic/approval route subject to various conditions

     

    Later the concept of e-commerce has been introduced for FDI purposes and detailed regulations have been made from time to time.

     

    Over the last two decades, rising internet and mobile phone penetration has changed the way we communicate and do business. E-commerce is relatively a novel concept. It is, at present, heavily leaning on the internet and mobile phone revolution to fundamentally alter the way businesses reach their customers.

     

    Now India is getting ready for introduction of Goods and Service Tax law (GST), it can further fuel the growth of e-commerce

     

    With the above background the author has made an attempt to bring the extantFEMA - Foreign Direct Investment Regulations for Food Processing Industries and/or trading in Food Products (including e-commerce)

     

     

     

     

     

    1Source: Annual Report 2015-16 of Ministry of Food Processing Industries, GOI

     

    2Source: Annual Report 2015-16 of Ministry of Food Processing Industries, GOI


     

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    SBS Wiki

    www.sbsandco.com/wiki

    Brief Background:

     

     

    Before 2006

    FDI was prohibited into Retail Business

    10th February, 2006

    FDI in cash-and-carry (wholesale) brought under automatic route.

     

    Earlier, it was allowed under approval route. 51% FDI was permitted under

     

    Government approval into SBRT

    April, 2010

    Cash and Carry Whole Sale Trade is permitted subject to 25% intra group

     

    entities sales restriction

    July, 2010

    DIPP has issued second Discussion Paper FDI into MBRT

    7th December, 2011

    Union Cabinet Proposes 51% FDI in Multi-Brand Retail Trade

    10th January, 2012

    FDI into Single Brand Retail increased to 100% under Government route

     

    subject to stipulated Conditions

    14th September, 2012

    The Government opens FDI into Multi-Brand Retail Trade (MBRT) upto 51%

     

    subject to stipulated conditions

    20th September, 2012

    The Government clarifies the position that company having FDI cannot enter

     

    into e-commerce in both SBRT and MBRT

    January, 2014

    DIPP Releases a discussion paper on “E-Commerce in India, highlighting pros

     

    and cons of allowing FDI in the Sector”

    29th March, 2016

    DIPP has issued Press Note No. 3/2016, whereby the definition of E-

     

    Commerce has been divided into Inventory based Model and Market based

     

    model.

    24th June, 2016

    DIPP has issued Press Note No. 5/2016 for 100% FDI into Food Processing

     

    Industries and also relaxing local sourcing norms for SBRT

     

    Extant FDI Regulations for FDI into Food Processing Industries:

     

    1. Relevant Definitions:

     

    • E-commerce- E-commerce means buying and selling of goods and services including digital products over digital & electronic network.

     

    • E-commerce entity- E-commerce entity means a company incorporated under the Companies Act, 1956 or the Companies Act, 2013 or a foreign company covered under section 2 (42) of the Companies Act, 2013 or an office, branch or agency in India as provided in section 2(v)(iii) of FEMA 1999, owned or controlled by a person resident outside India and conducting the e-commerce business.

     

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    FDI into Food Processing Industry

     

     

     

    SBS Wiki                                                                                                                                                      www.sbsandco.com/wiki

     

    • Inventory based model of e-commerce- Inventory based model of e-commerce means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.

     

    • Marketplace based model of e-commerce- Marketplace based model of e-commerce means providing of an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between buyer and seller.

     

     

     

     

     

    Foreign

     

    Investor

     

     

    5

     

     

     

     

     

    6

     

     

     

     

     

    Manufcturer

     

    3

     

     

     

    1

    Trader                                                                      2

     

     

     

     

     

     

    4

    Customer

     

     

     

     

     

     

     

     

     

     

     

     

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    FDI into Food Processing Industry

     

     

     

    SBS Wiki                                                                                                                                                       www.sbsandco.com/wiki

     

    Examples:

     

    1. Manufacturer selling directly to Customer via Single Brand Retail Trade or Whole Sale Trade

     

    1. Manufacturer selling directly to the customer via E-Commerce
    2. Manufacturer selling to Trader (B2B Commerce/ Cash and Carry whole-sale trade)
    3. In turn, Trader selling to Customer through either Single Brand Retail Trade or Multi Brand Retail Trade or through E-commerce

     

    1. Flow of the FDI into Manufacturing Activity
    2. Flow of the FDI into Trading Activity (including e-commerce), where the trader is not having any manufacturing activity

     

    1. Guidelines for Foreign Direct Investment in Food Processing sector:

     

    • 100% FDI under Automatic route is permitted in Manufacturing of Food Products in India

     

    • 100% FDI under Automatic route is permitted in trading by the manufacturer of its own products– Wholesale and/or retail (including through e-commerce) in respect of Food Products manufactured and/or produced in India.

     

    • 100% FDI under Government approval route is permitted in trading (including through e-commerce) in respect of Food Products manufactured and/or produced in India.

     

    vBasedon the above one can understand the FDI into manufacturing activity related to Food Processing Activities is freely permitted upto 100% under automatic route; and

    vFDIinto MBRT/SBRT of own manufactured Food products is also under automatic route; and vFDIinto Trading of goods by the Traders (including e-commerce) is subject to approval of Central

     

    Government and permitted upto 100%

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