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    At the conclusion of an audit, findings and proposed recommendations are discussed with management and subsequently management action plans are developed to explain how the agreed recommendations will be implemented.


    Auditors should take care to communicate with the various stakeholders how their recommendations will help fix gaps and mitigate risks. The stakeholders will evaluate whether the recommendations being provided are worth the investment of time and resources required to implement them (cost vs. benefit). Competing priorities, budget limitations and other factors may prevent managers from implementing agreed actions in the agreed time line or as previously designed to mitigate the risk.


    Types of Recommendation


    Broadly, a recommendation is either a suggestion to fix an unacceptable scenario or a suggestion for improvement. Most internal audit reports provide recommendations to fix unacceptable scenarios because they are easy to identify and are less likely to be disputed by the process owner. However, recommendations to fix gaps in a process only take the process to where it is expected to be and not where it could be. Internal audit’s value lies not only in providing solutions to existing issues but in instigating thought provoking discussions. Recommendations also can include suggestions that will move the process or the department being audited to the next level of efficiency. When recommendations aimed at future improvements are included, internal audit reports become a tool in shaping the strategic direction of the department being audited.


    Sources of Information


    An auditor should draw recommendations from both inside and outside the organization. Internal sources of recommendations are easier to locate; however, they require a tactful approach as process owners may not be inclined to share unbiased opinions with internal audit team. External sources may not be as easily accessible — an internal audit function should invest in providing its staff with access to research libraries and professional networks to facilitate access. It is a good practice to jot down recommendation ideas as soon as they come to mind, even though they may not find a place in the final report. Even if internal audit testing does not result in a finding, the auditor may still recommend improvements to the current process.


    Articulation of recommendation


    Internal audit team should spend sufficient time brainstorming potential recommendations and choosing their wording carefully to ensure their audience have complete understanding. Recommendations should be written simply and should:


    vAddressthe root cause if a control deficiency is the basis of the recommendation.

    vAddressthe department rather than a specific person.

    vIncludebullets or numbering if describing a process that has several steps. vPositionthe most important observation or risk first and the rest in descending order of risk. vIndicate a suggested priority of implementation based on the risk and the ease of




    vIndicateany repeat findings. If the recommendation needs to be modified, provide an updated recommendation in the report.


    vExplainhow the recommendation will mitigate the risk in question.


    vListanyrecommendations separately that do not link directly to an audit finding but seek to improve processes, policies or systems.


    Feedback from Management


    Recommendations will go nowhere if they are not valued by management. Therefore, the process of obtaining management feedback on recommendations is critical to make them practical. Ultimately, process owners may agree with the recommendation, agree with part of the recommendation, and agree in principle, but technological or personnel resource constraints won’t allow them to implement it. They also may choose to revisit the recommendation at a future date as the risk is not imminent, or disagree with the recommendation because of varying perceptions of risk or mitigating controls.


    Management responses should be added to the recommendations with identified action items and implementation time lines whenever possible. Whatever be the management’s response, a recommendation should not be changed if it dilutes internal audit’s objectivity and independence and becomes representative of management’s opinions and concerns. It is internal audit’s prerogative to provide recommendations, regardless of whether management agrees with them or not. Persuasive and open-minded discussions with process owners are important to achieving agreeable and implementable recommendations.




    The journey of a potential suggestion to a recommendation is complex and is influenced by every stakeholder and constraint in the audit process ; be it the overall tone of the organization toward change, its philosophy toward internal audit, the scope of the internal audit, views of the process owner, experience and exposure of internal audit staff, or available technology. However, an internal auditor must realize that every thought may add value to the organization and deserves consideration within the internal audit team. Internal audit departments should deliberate about the process and ask at the end of every audit: Does it align with the organization’s strategy and direction? Is it up to par with what is seen elsewhere? What is its relevance today and in the future?


    GAAR (General Anti-Avoidance Rules) is a broad set of provisions that have the effect of invalidating an arrangement that has been entered into by the taxpayer with the objective of obtaining a tax benefit. While GAAR may not cease legitimate tax planning in all cases, it does call for a fundamental change in approach and mind-set of the taxpayer, going forward. Business reasons and commercial rationale will be pivotal to any tax planning in a GAAR regime. GAAR contains provisions to stop misuse of treaties, that India has with other countries, for tax avoidance. These are rules targeted at businesses that are structured solely for avoiding tax in India, such as routing investment into the country through tax havens. Transactions that fail the GAAR test will be subject to tax


    The conditions for applicability of GAAR, by their very nature, are subjective and are not capable of being defined precisely.


    Applicability of General Anti-Avoidance Rules. (Sec 95-102, Chapter –XA of IT Act, 1961 (’Act’))


    Notwithstanding anything contained in the Act, an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement and the consequence in relation to tax arising therefrom may be determined subject to the provisions of this Chapter.


    Explanation—for the removal of doubts, it is hereby declared that the provisions of this Chapter may be applied to any step in, or a part of, the arrangement as they are applicable to the whole arrangement .


    An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it—


    • creates rights, or obligations, which are not ordinarily created between persons dealing at arm's length;


    • results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;


    • lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or


    • is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bonafide purposes.


    An arrangement shall be presumed, unless it is proved to the contrary by the assessee, to have been entered into, or carried out, for the main purpose of obtaining a tax benefit, if the main purpose of a step in, or a part of, the arrangement is to obtain a tax benefit, notwithstanding the fact that the main purpose of the whole arrangement is not to obtain a tax benefit.


    The GAAR provisions under the ITA are effective from tax year 2017-18.On 27 May 2016, the Central Board of Direct taxes (CBDT), the apex administrative body for direct taxes in India, had sought inputs from stakeholders on the aspects of GAAR on which further clarity is desired, so that the Guidelines can be framed accordingly.


    Pursuant to the same, CBDT has issued 16 clarifications in Q&A format , vide Circular No 7 of 2017, dated 27 January 2017. Amongst others, the important clarifications are as follows:


    • GAAR and SAAR (Specific Anti Avoidance Rules) can co-exist and GAAR will also apply if the LOB (Limitations of Benefit clause) provisions do not adequately address anti-avoidance rules.


    • GAAR to not interplay with the right of the taxpayer on to select or choose method of implementing a transaction.


    • GAAR shall not be invoked merely because an entity is set up in a tax favourable jurisdiction if the main purpose was not to obtain tax benefit.


    • The convertible instruments such as compulsorily convertible debentures, convertible preference shares, Global Depository Receipts to be regarded as investment made for the purpose of grandfathering benefit if the terms are finalised at the time of issue of convertible instruments. Further bonus issues, share split/consolidations etc to be regarded as investment made for the purpose of grandfathering provisions. Lease contracts, loan arrangements are not regarded as investments and hence outside the purview of grandfathering benefit.


    • GAAR to not apply if the Courts have explicitly and adequately considered the tax implication while sanctioning an arrangement.


    • The time period for which a arrangement is in place may not be a sufficient factor for non-application of GAAR, though regarded to be a relevant factor.


    • Corresponding adjustment will not be permissible under GAAR as same could militate against deterrence.


    • The tax benefit computation of INR 30 M is in respect of a specific tax year and among all parties involved and not in relation to a single taxpayer.


    • GAAR to be invoked only in deserving cases and adequate safeguards in terms of two step procedure for invoking GAAR is already put in place:


    1. The Commissioner will have to satisfy himself about invoking GAAR; and


    1. The same will have to be approved via the approving panel headed by the High Court judge.


    The press release of CBDT also provides that the Government is committed to provide certainty and clarity in tax rules and further clarifications, if any, on doubts of stakeholders regarding GAAR implementation, will also be provided.

    January – 2017 (Volume 30)

    Key Topics Covered:

    • FEMA
    • AUDIT


    • COMPANIES ACT, 2013

    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.

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    There were many audits conducted by the service tax authorities in and around Hyderabad during the last month on hotels, bars and restaurants. One of the common audit observation is the applicability of service tax on license fee paid to Government of Telangana to obtain license to sell alcohol in their hotels, bars and restaurants. The said applicability is pursued from the angle of reverse charge mechanism in light of the changes made to Finance Act, 1994 vide the Finance Act, 2015. We shall try to understand the changes brought in through Finance Act, 2015 and whether service tax has to be paid on such amounts paid to Government of Telangana.


    Initially, when negative list of taxation has been introduced, all the services provided by Government or Local Authority except certain notified services were covered under the ambit of negative list. One of such exception is the support services provided to business entities. That is to say support services provided by Government or Local Authority to business entities is subjected to service tax. Further, the definition of support services was provided vide Section 65B(49) as ‘means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis’.


    Finance Act 2016 has introduced Equalization Levy w.e.f 01-06-2016 on specified services provided by non-resident not having Permanent Establishment (here in after referred as Specified Non Resident - SPN) in India. It is levied @6% on the amount paid to SPN.


    The levy refers to B2B transactions and not B2C transactions. This new levy introduced in line with the OECD BEPS action plan to tax e-commerce transactions.


    The services covered under the levy so far are related to online advertisement, any provision for digital advertisement space or facility or service for online advertisement or any other service as may be notified by the Central Government.

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