Gearing up for CbCR Compliances

TAX TIMES

Issue: 8.1 | August 2018

Advocates & Solicitors

Gearing up for CbCR Compliance – A recap of Indian CbCR/Master File Norms

The Finance Act 2016 introduced provisions relating to Country by Country Report (CbCR) and Master File pursuant to adoption of OECD’s BEPS Action Plan-13 in India.

While the law was enacted and it was made applicable with effect from 1st April 2017 (i.e. from AY 2017-18 onwards), the notification regarding the Final Rules was released on 31st October 2017 providing much awaited guidelines with respect to maintenance and furnishing of Master File and CbCR.

As per Final Rules and Regulations, the due date for furnishing Master File and CbCR is 30th November following the relevant fiscal year. But as the final rules were released on 31st October 2017, the Government extended the due dates for furnishing such documents to 31st March 2018 for FY 2016-17 only.

Recently, the Government introduced various amendments via Finance Act, 2018 and accordingly CbCR report has to be furnished within 12 months i.e. 31st March instead of 8 months i.e. 30th November (as specified earlier) following the end of reporting accounting year. It is important to note that the due date to furnish Master File is still 30th November following the end of reporting accounting year.

Summarized below are salient features of the Final Rules.

Master File and Related Compliances

  • A constituent entity of an MNE group meeting the following quantitative threshold will be required to file Master File in ‘Form 3CEAA’ with the Director General of Income-tax (Risk Assessment):
  • The consolidated revenue of the MNE Group exceeds INR 500 crores (approximately USD 75 million/ Euro 65 million) in the accounting year; and
  • The aggregate value of international transactions exceeds INR 50 crores (approximately USD 7.5 million / Euro 6.5 million) or international transactions relating to intangible property exceed INR 10 crores (USD 1.5 million / Euro 1.33 million) in the reporting accounting year.
  • It may be noted that Form 3CEAA has been divided into two parts; Part-A and Part-B. Part-A consists of limited information relating to details of taxpayer, international group to which it belongs to, number of group entities in India and their permanent account number, addresses, etc. Part-B requires exhaustive and descriptive information on more than twenty items listed as part of Master File.

Treatment of Common Services from Head Office

Treatment of Common Services from Head Office

July 28, 2018 [2018] 95 taxmann.com 309 (Article)

Ashutosh Mohan Rastogi
Partner, Amicus – Advocates & Solicitors

Snehil Mishra
Associate, Amicus – Advocates & Solicitors

Under GST Law each registered branch is treated as a ‘distinct’ and related person. Further, GST law treats as ‘supply’ provision of goods/services/both to a related person even when made without consideration.

In this context an important question arises on treatment of common services (IT, HR, Tax, Finance, etc.) by a company’s head office to branches registered in other States. At the outset, should such common services be considered as ‘supply’ at all? Should such services be supported by invoices and then should GST be charged? If yes, then what should be the valuation of such services?

Presented below are two different schools of thought on the above aspect:

Approach I – No Valuation of Common Services is Required

One view which finds support from jurisprudence under erstwhile regime is that branches merely reimburse the proportionate share – there being no element of service or ‘supply’ and hence no Service Tax/GST levy. 

Similar stand was taken in erstwhile regime by the Hon’ble CESTAT, Mumbai which held as follows CST v. JM Financial Services [2016] 75 taxmann.com 102/58 GST 238 (Mum. – CESTAT.: 

“Having considered the rival submissions and contentions, we are of the view that in respect of reimbursement of common expenses in the nature of electricity and other expenses incurred commonly by the appellant, no service can be stated to have been rendered and accordingly, the same not liable to Service Tax. …We set aside the levy of Service Tax on the reimbursement of common expenses such as electricity charges, common office expenses, etc.”

In case of Franco Indian Pharmaceutical (P) Ltd., the Mumbai bench of Hon’ble CESTAT held Franco Indian Pharmaceutical (P.) Ltd. v. CST [2016] 69 taxmann.com 198/55 GST 797 (Mum. – CESTAT): 

“Even otherwise, by its very nature, a situation where employercompanies have a pre-existing agreement to hire employees on joint basis and agree to share the cost of employment on actual by dividing it amongst themselves in such a manner that each employer bears only his part of the cost indicates that there was no intention amongst the employer-companies to render any service to each other. It indeed the intention of the parties would have been otherwise, the employer-company which takes the trouble of hiring an employee in its own rolls would have insisted on some mark-up or margin being given to it, over and above the actual cost. In the absence of such a mark-up/margin, the payments received against debit notes by one employercompany upon the other employer-companies, will not partake the character of consideration for any service, but will merely represent reimbursement of shared costs.

Tax Neutrality Argument

Moreover, the entire exercise of valuation of common services is revenue neutral as Input tax credits (ITCs) shall be available even if Service Tax is discharged by registered persons. This aspect was examined by Gujarat High Court. It was held Commissioner of CCEx and Customs v. Indeos ABS Ltd. – Gujarat High Court : 

“The grievance was that the aspect of undervaluation has not been considered by the Tribunal at all. Grievance would have merited acceptance if the ultimate exercise would have benefited the Revenue by collection of duty in the coffers of the exchequer. In the facts of the present case, admittedly no such benefit accrues to the exchequer. In the circumstances, if the Tribunal has chosen not to determine an academic issue, it is not possible to state that any legal infirmity exists in the impugned order of the Tribunal.

This was further reiterated by Ahmedabad bench of CESTAT where it was held as follows CCE v. Reclamation Welding Ltd. Order No. A/11326/2014, dated 1-7-2014:

Even if any additional duty was payable the same was also available as credit to the recipient of goods. It is an exercise entirely covered by the concept of revenue neutrality, as per the case laws relied upon by the respondent. Secondly, in the event of credit being admissible to the recipient of the same group of companies it cannot be held that there could be any intention on the part of the respondent to evade payment of duty and accordingly extended period is not attracted in the present demands.”

In view of above Rulings, perhaps one could argue that common expenses incurred by HO for the branches should not be considered as
‘supply’.

Alternative Approach II: Valuation of Common Services

GST law prescribes that where the supplier and recipient are not related, the value of ‘supply’ shall be the transaction value. However, supplies between HO and its branches are supplies between related/ ‘distinct’ persons and the transaction value cannot be relied upon. In such cases, the value of supply as per Rule 28 of CGST rules shall be (in this order):

  1. Open Market Value (OMV); or
  2. Value of Supply of ‘like kind and quality’; or
  3. Value determined under Rule 30 or Rule 31 (Rule 30 prescribes a 10% mark-up on cost and Rule 31 is the residual method)

The proviso to this rule is of significance which provides that where recipients are entitled to full input tax credit, the value declared in the invoice is deemed to be OMV. In other words, in a case of supply between related parties or distinct persons – the supplier is free to determine the price on its own, as the transaction is revenue neutral. At the same time, the transaction between branches shall not have any impact on the overall GST liability of the company. However, GST law mandates that invoice at some value should still be issued and GST should also be paid on the invoice value.

Way Forward

There are no judicial precedents on valuation of common services under GST and the decisions under Service tax may have little persuasive value. Service Tax was a centrally administrated law wherein revenue accrued to the Centre alone whereas under GST, tax has to be shared between Centre and States equally which raises questions peculiar to GST regime. For example, can revenue neutrality argument be applied when branches are spread across different States – each being a separate tax jurisdiction under GST law?

While it could be argued that common expenses incurred by HO should not be considered as ‘supply’, it may be an aggressive view subject to dispute, especially at lower levels of tax administration. Further, one should not lose sight of the fact that the GST law prescribes penalties for providing services without raising invoice and collecting GST. It is imperative that corporate management takes an informed decision taking into account multiple factors such as risk appetite, quantum of common expenses and possible penal
consequences.

GST Return Fillings GST Audit FAQs Part II

GST RETURN FILINGS
staying ahead in compliances…

Advocates & Solicitors
Issue: 6.1I July,2018

Draft FAQs on GST Audit – Part II

In continuation of our previous alert on GST Audit and Annual Return, following additional points are clarified on the same subject.

Whether the audit documentation to be submitted by Auditor on completion of Audit will be in Certificate form or in form of a report?

A format for the audit report / certificate is yet to be notified. It is not clear as to whether it will be in the nature of an audit report like the statutory audit report or tax audit report, or a certificate like in case of VAT audits. If it is in the nature of a certificate, the responsibility of the GST auditor would be substantially higher.

Is the annual return merely a summation of monthly returns filed under GST?

On a plain reading of the relevant provisions, it appears that the annual return is not merely the sum total of the periodic returns filed for the year, but a return reflecting the correct turnover, data and details as per the provisions of the GST law, based on the annual accounts of the assessee.

Where it is required to be audited, the turnover appearing in the annual return shall be as per the audited figures.

Is there any timeline for correcting discrepancies found in the course of audit?

During the course of the audit, any discrepancies found shall be corrected / rectified by declaring the correct turnover in the annual returns.

In this regard, it may be noted that the time limit for declaring the details of debit note/ credit note and for taking the input tax credit would lapse on the due date of furnishing monthly return for the month of September of the following year, whereas the annual return can be furnished by the end of December of the following year.

Where any discrepancies are noted during the course of the GST audit post September, it appears that no recourse would be available to tax payers.

Can changes be made to accounts and records maintained under GST?

The details contained in the records are expected to be true and correct. Entries therein shall not be erased / effaced / overwritten, and all incorrect entries, otherwise than those of clerical nature, shall be scored out under attestation and thereafter the correct entry shall be recorded. In case of electronically maintained records, a log of every entry edited / deleted shall be maintained.

Amicus Advocates & Solicitors

Ashutosh Mohan Rastogi
9818084707
  ashutosh@amicusservices.in

Shivi Agarwal
9999775630
  shivi@amicusservices.in

Madhav Rastogi
981811517
  madhav@amicusservices.in

+91 11 41553433
  info@amicusservices.in

Visit us at
www.amicusservices.in

Ranked amongst Leading Indian Law Firms

I-1, Jangpura Extension,
New Delhi – 110014
http://www.amicusservices.in

What are the checks that should be performed while performing an audit under GST?

Inter-alia, the following are some important checks that should be performed by the auditor while performing an audit under GST:

  • Whether the books of account and related records maintained are sufficient for verification of the correctness, completeness and accuracy of the returns;
  • Whether the annual return filed reflects the correct figures and includes all the transactions effected during the year that require disclosure;
  • Whether the value of outward supplies, and inward supplies declared in the annual return includes all the outward supplies and inward supplies, respectively, effected during the year;
  • Whether the inclusions and exclusions to / from the value of supply are in accordance with the provisions of the law;
  • Whether the exemptions claimed in the annual return are in conformity with the provisions of the law;
  • Whether the amount of ITC determined as eligible and ineligible have been determined in accordance with the provisions of the law;
  • Whether the classification of outward supplies, rate and amount of tax thereon, and nature of tax, is correct;
  • Whether the other information given in the return is correct and complete.

What is the relevant information which should be covered by GST audit program?

  • General profile and brief nature of the industry/ business of the assessee;
  • Registration details, additional places of business, registrations in other States, details of authorized signatories / persons in charge;
  • List of accounts and records maintained, and information on software used;
  • Details of outward supplies, exports, supply to SEZ, tax paid under RCM, supplies without consideration, etc.;
  • Details of outward supplies involving works contracts, composite supplies, mixed supplies and continuous supplies;
  • Provisions of time and place of supply of all outward supplies of the auditee;
  • Determination of transaction value and value of supply in accordance with the Valuation Rules;
  • Compliance with the conditions for availment of credits, proportionate credit availed, ineligible credit reversal, payment to suppliers, etc.
  • Details of goods sent for job work and receipt of the same along with details of the process / treatment carried out during the job work;
  • ISD and cross charging
  • Details of exemptions claimed and compliance of the conditions therein;
  • Payment of taxes and refunds claimed, compliance with related conditions;
  • Departmental correspondences, notices and related compliances;
  • Relevant applicable standards/ guidance notes as available; and
  • The major analytical ratios.

What will be the consequences of failure to submit the annual return or not getting the accounts audited where it is mandatory to do so under GST Law?

Section 44(2) of the CGST Act provides that every registered person who is required to get his accounts audited shall furnish the annual return along with a copy of the audited annual accounts and a reconciliation statement. If the audited accounts are not furnished along with the annual return, it may not be considered as a valid return.

Section 47(2) provides that in case of failure to submit the annual return within the specified time, a late fee shall be leviable – Rs. 100 per day during which such failure continues subject to a maximum of a quarter percent of the turnover in the State/UT.

Regardless of the penalty amount, a thorough quantitative and qualitative audit is necessary for correctness and completeness of annual return and therefore it is in best interest of taxpayers. It shall also save penalty and interest under other provisions for underpayment of tax.

Please note that above FAQs are only draft FAQs subject to issuance of Forms GSTR-9 and GSTR 9C by the Government. Reliance has been placed on ICAI’s Guidance Note on GST Audit, March 2018.

The information contained in this newsletter is solely intended to provide general guidance on matters of interest. Nothing herein constitutes professional or legal advice, nor does any information herein constitute a comprehensive or complete statement of the issues discussed. It is recommended that you seek a professional advice to confirm your understanding on the issues dealt above.

GST Return Fillings GST Audit FAQs

GST RETURN FILINGS
staying ahead in compliances…

Advocates & Solicitors
Issue: 6.1I June,2018

Draft FAQs on GST Audit and Annual Return

Under GST Regulations, every registered person is required file monthly returns and maintain prescribed accounts and records. Further, apart from the regular monthly returns, an annual return in Form GSTR-9 has to be furnished for every financial year.

However, the format for annual return (GSTR-9) and reconciliation statement
(GSTR-9C)is yet to be issued by the Government. This is expected to be addressed on priority basis in the next GST Council meeting. However, based on provisions of GST Act and Rules, following inferences can be drawn in respect of the above compliance requirements:

Who is required to file annual return?

Every registered person (other than few exceptions such as an Input Service Distributor, a casual taxable person, non-resident taxable person etc), regardless of monetary threshold, is required to furnish an annual return (GSTR-9) for every financial year electronically on or before 31st December following the end of such financial year.

Who has to get the accounts and records audited?

Every registered person whose ‘aggregate turnover’ during a financial year exceeds Two Crore Rupees shall get his accounts audited by a chartered accountant or a cost accountant.

Under GST Act, “aggregate turnover” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess.

Therefore, for purpose of GST Audit of branches, the turnover to be considered is the ‘aggregate turnover’ as defined above and not the value of outward supply of a branch on a standalone basis.

Section 44(1) of CGST Act read with rule 80 (1) of CGST Rules
Section 35(5) of CGST Act read with rule 80 (3) of CGST Rules

Amicus Advocates & Solicitors

Ashutosh Mohan Rastogi
9818084707
  ashutosh@amicusservices.in

Shivi Agarwal
9999775630
  shivi@amicusservices.in

Madhav Rastogi
981811517
  madhav@amicusservices.in

+91 11 41553433
  info@amicusservices.in

Visit us at
www.amicusservices.in

Ranked amongst Leading Indian Law Firms


I-1, Jangpura Extension,
New Delhi – 110014
http://www.amicusservices.in

What all compliances are required to be made if the ‘aggregate turnover’ of a registered person exceeds two crore rupees?

Every registered person whose aggregate turnover during a financial year exceeds two crore rupees shall submit:

  • Annual Return in GSTR-9;
  • Audited accounts; and
  • A reconciliation statement in FORM GSTR-9C

What all accounts and records should be maintained by a registered person under GST Regulations?

Every registered person shall keep and maintain, at the principal place of business, a true and correct account of:

  • Production or manufacture of goods;
  • Inward and outward supply of goods or services or both;
  • Stock of goods;
  • Input tax credit availed;
  • Output tax payable and paid; and
  • Such other particulars as may be prescribed

Is maintaining a profit & loss account a prerequisite for every registered person?

GST Law does not require maintenance of separate profit & loss account for every registered person/ branches. Only accounts and records as specified above are required to be maintained.

What shall the reconciliation report in GSTR-9C capture?

Annual Return is a summation of monthly returns. GST Audit is an independent verification of accounts and records (as prescribed) by a chartered accountant/ cost accountant.  GST Audit shall not be a mere number matching or vetting exercise but a comprehensive qualitative review of returns including the tax positions taken by the taxpayer on various issues. The objective of the reconciliation report is to reconcile the findings of GST Audit with the Annual Return. In case there are differences or gaps between the findings of GST Audit and GST Returns, the same have to be reported in the reconciliation statement and corresponding tax/ interest or penalty (as may be applicable) is to be paid.

What is the timeline to make changes in the returns furnished for a particular financial year?

Any amendments through credit/debit notes or revision of invoices for any financial year must be made before the monthly return of September of the following year i.e. for FY 2017-18 by October, 2018 (timeline for filing monthly return for September 2018).

What are preparatory steps that taxpayers can take to facilitate GST Audit and Filing of Annual Return?

  • Reconcile monthly outward returns (GSTR-1) with GSTR-3B
  • Prepare and maintain accounts and records as required under GST Law (refer FAQ above)
  • Prepare reconciliation at entity level between revenue/expenses of GSTINs with company level financial statements (at entity level)
  • Target that audit/reconciliation exercise is complete before October 20th, 2018 so that there is sufficient time for revising/amending invoices and for factoring corresponding input tax credit claims

Please note that above FAQs are only draft FAQs subject to issuance of Forms GSTR-9 and GSTR 9C by the Government.

The information contained in this newsletter is solely intended to provide general guidance on matters of interest. Nothing herein constitutes professional or legal advice, nor does any information herein constitute a comprehensive or complete statement of the issues discussed. It is recommended that you seek a professional advice to confirm your understanding on the issues dealt above.