Digital Tax not just click away

Digital Tax not just click away

Digital Tax not just a click away

KORAH AND KORAH, CHARTERED ACCOUNTANTS

 

Session Structure

Digital Economy & its Challenges

Equalization Levy

TDS Provisions

Today’s Scenario

Significant Economic Presence

GST Provisions

What is a Digital Economy?
  • The economy that is based on digital computing technologies
  • Conducting business through markets based on internet & WWW

Hyperconnectivity between people, organizations and machines

 

Some Statistics – Still behind China
Before COVIDAfter covid
  • 577 Million Internet Users (36.8% of Population)
  • 370 Million Social Media Users (11.1% of Population)
  • 624 Million Internet Users (45% of Population)
  • 448 Million Social Media Users (32.3% of Population)
 
Change due to COVID-19
01) Social Media Websites
02) Work from Home

Target Advertising

Computing Power

“Physically Absent but Fiscally Present”

1 Second = 127 Devices

The Challenges
Where?
In the absence of any physical presence, there is a lack of nexus between the income recipient and the ultimate parent company
How Much?
Categorization of income from transactions involving data for tax purposes and how to determine the quantum of income?
EQUALIZATION LEVY
Some other points relating to EL 2.0

Payment, interest & penalty provisions

FA 2021 Clarifications

  • Does not include consideration is taxable as royalty or FTS
  • “Online sale of goods/provision of services” -acceptance of offer for sale, placing a PO
  • Income of such e-com. operator is exempt under S.10(5) from 1st April 2020
EL chargeable irrespective of whether goods/services are owned/provided/facilitated
Disallowance under S.40(a(ia)
Need to furnish a statement in FORM 1 within 30th June of next year
Case Studies

  1. Apple Inc. running iphone ads to target Indian users on Alibaba platform and pays INR 3 Crs – Yes, EL
  2. Alibaba buys data from Facebook India for INR 1 Cr and sells it to Apple Inc. for INR 6 Crs – Yes, EL on INR 6 Crs
  3. Amazon Music providing services to Indian customers – No, EL
  4. Only order placed online for goods through platform, rest all functions done offline – EL only on the consideration from online service
  5. NR e-com. sells good to a resident for INR 100 which is listed on its platform by another resident from whom commission of INR 30 is received – EL on INR 130
Challenges to EL 1.0 & 2.0

FY 19-20 – INR 1136.5 Crs
FY 2020-21 – INR 1492.7 Crs

TDS under 194-O – with effect from 1st Oct 2020

Scope?

When the sale of goods/provision of services by an e-com. participant (resident) is facilitated through any digital / e-facility or any platform of an e-com. operator (resident/NR)

When?

At the time of credit or payment to e.com participant whichever is earlier

Rate?

@ 1% (0.75% from Oct’20 to Mar’21) of the gross amount of such sales or services or both

No Deduction?

When such e.com participant is an individual/HUF + gross amount <= INR 5 Lakhs + PAN/Aadhaar furnished

 

More points for clarification
  1. Payments made directly to e.com participants shall be deemed to be amount credited / paid by e.com operator – customers directly paying to Ola / Swiggy
  2. No TDS under any section if the transaction attracts 194-O – Cleartax making payment to CA’s (no 194J)
  3. If no PAN furnished, then rate shall be 5% under S. 206AA
  4. The e.com participant shall be a resident

 

Case Study
GST Provisions
  • Liability to pay GST under RCM by e.com operator under S.9(5) of CGST Act, 2017
  • Taxability and POS Rules for OIDARS providers under S.14 of IGST Act, 2017
  • Tax to be collected (TCS) by e.com operator on supplies through it before making payments to e.com participants under S.52 of CGST Act, 2017
RCM Liability u/s 9(5)
TCS u/s 52
Some points relating to TCS
  1. The e.com. operator should not be an agent
  2. TCS shall be on the “net value” of “taxable supplies””
  3. The e-com. operator should get the consideration from the end-customer
  4. Sale of goods/services from own website – not attracting TCS
  5. Applies to NR e-com. operators also
  6. Credit available to the e.com participants / suppliers
OIDARS – S.14 of IGST ACT, 2017

Services whose delivery is mediated by IT where there is automatic supply | Minimal human interference | impossible without IT

 

Includes:Excludes: POS
  • Ads
  • Cloud services
  • e-books
  • online gaming
  • Mailed PDFs
  • CA/lawyer services through mail
  • Supply of goods
  • Transfer of movies

POS

location of recipient (deeming provisions)

 
Case Study – OIDARS
Significant Economic Presence

 

0102 03

S.9 – Income deemed to accrue or arise in India

Business Connection in India under Expl.2

SEP – FA 2018 inserted Expl. 2A (Deemed BC)

 
2 categories for SEP
Category 01Category  02

Transactions in relation to the provision of goods/services/property including download of data/software by an NR in India

Soliciting of business activities/interaction with Indian users through digital means

FA 2018 – no limits were prescribed (less relevant)

SEP – EXPL. 2A REPLACED BY FA 2020

CBDT notification dated 3rd May 2021 – limits

 
Today’s Scenario

Explained : US investigation into digital services tax, and what is the case against India?

What us global minimum tax and what will it mean?

Amazon, Facebook Lobby Groups urge Digital-Tax End, OECD Deal

 

Relevance of Internal Audit

Need for surprise audits

As tax authorities demand more data

Whether FORM-1 of EL has been filed on time?
Indicate the high & low risks that the Boards and Senior Executives should be aware of

Checks in place to find if e.comm operators are meeting compliance requirements

Subsequent Events

Subsequent Events

Subsequent Events (AS 4 | SA 560 | IND-AS 10)

KORAH AND KORAH, CHARTERED ACCOUNTANTS

 

AS 4 – Contingencies & Events Occurring After the BS Date
  • Events occurring after BS date (BS to FS signing)
  • Adjusting Events (impacting FS)
  • Non-Adjusting Events (just disclose in DR)
  • Non-Adjusting Events affecting GC (deemed as adjusting events)

 

SA 560 – Subsequent Events (SE)
  • SE (BS to FS signing & afterwards)
  • Audit Procedures for SE
  • Facts known after AR but before FS is issued
  • Facts known after FS is issued

 

A Better Understanding – AS 4 & SA 560
Insolvency of a customer which indicates a loss in trade receivables is an adjusting event

It confirms to a condition existing on BS date

AS 4 & SA 560
Destruction of a major production plant by fire is a non-adjusting event

Does not confirm to a condition existing on BS date

BASIC AUDIT PROCEDURES (SA 560)
  • To obtain SAAE on whether all events between BS date and date of Audit Report require adjustments (if AE) or just disclosures (if NAE)
    • Review the mgmt procedures
    • Make inquiries
    • Read minutes
    • Mgmt reports
    • Mgmt representation
  • Respond to facts that become known after the date of Audit Report
    • Extend the above
    • Inquire how mgmt intends to address the matter in FS

 

DEALING WITH COVID-19

Managements’s Considerations

  • They should exercise judgment in determining the impacts on FS from SE’s (adjusting events) in the wake of COVID-19
  • To issue a written representation that they have identified all events occurring between FS date and AR date which require adjustments/disclosures

 

Auditor’s Responsibilities
  • Obtaining an understanding of the SE’s and how it has been dealt with in FS.
  • Judgment needs to be applied to determine whether the conditions existed on the FS date (adjusting events) or not.
  • Ongoing and regular communication with TCWG – improve understanding of the changes that need responses and also to determine the audit procedures for SAAE.
Examples of Events & Conditions that May be Relevant in the Current Environment*

SECURED LOANS

New commitments and borrowings as a result of the pandemic

FIXED ASSETS

Recent or planned sales and acquisitions of assets as a result of the pandemic

DEBTORS

Expected credit loss provisioning – customers in USA/UK having already filed for liquidaton

GOVT. RELIEFS

Important to understand & determine the conditions and the dates attached

*May require adjustments to FS

REPORTING RESPONSIBILITIES

If the auditor is able to obtain SAAE about SE’s as required in SA 560, then he has 2 options:

  • If he considers that the SE’s identified require user’s attention, then uder KAM paragraph (Key Audit Matters)

OR

  • If it is not necessary to draw the user’s attention, then under EOM / OM paragraph (Emphasis of Matter/Other Matter)
Physical Inventory Verification

Physical Inventory Verification

Physical Inventory Verification

KORAH AND KORAH, CHARTERED ACCOUNTANTS

 

SA 501 – Audit Evidence – Specific Considerations for Selected Items
  • SAAE – existence & condition of inventory
  • Things to remember while attending PV
  • When PV is on a date other than the date of FS
  • When attendance at PV is impracticable
  • Inventory lying with 3rd party

 

AS 2 – Valuation of Inventories
  • Valuation – Cost or NRV
  • Determination of cost

 

CARO Clause (ii) – Inventories
  • PV at reasonable intervals
  • Dealing with material discrepancies

 

EXISTENCE & CONDITION

Attendance at PV

  • Evaluate mgmt’s instructions & procedures
  • Observe
  • Inspect
  • Perform test checks

PV at a date other than the date of FS Perform audit procedures to get SAAE on the recording of changes between the 2 dates

Attendance at PV is impracticable Perform alternate audit procedures

 

POTENTIAL CHALLENGES IN THE CURRENT ENVIRONMENT
  • Management is unable to conduct yearly PV
  • PV by mgmt at a date other than the date of FS
  • Where it is impractible for auditors to attend PV
  • Inventory held with third party
  • Inventory in transit

 

MANAGEMENT UNABLE TO CONDUCT PV
  • Should inform TCWG and auditors with the reasons

 

INVENTORY HELD BY A THIRD PARTY
  • Direct confirmation for quantities & conditions
  • Not involving the mgmt
  • Read and understand the contract with the third party

 

INVENTORY IN TRANSIT
  • SAAE – location & condition
  • Documentary records regarding purchase / sale

 

PV ON A DATE OTHER THAN THE DATE OF FS

Perform audit procedures to obtain SAAE about whether the changes between the 2 dates are properly recorded

SAAE for?

  • Proper adjustment in records
  • Reliability of records
  • Reasons for differences between books and physical

What about internal controls?

  • Check the effectiveness of controls over the conduct of PV [Section 143(3)(i)] including the quality of records and security of inventory

 

Performing “roll-back procedures” to the BS date

Q. How to arrive at the balance as on the BS date if PV is conducted on a date other than the date of FS?

BALANCE PHYSICALLY VERIFIED ON THE DATE
(+) ISSUES BETWEEN THE DATES
(-) RECEIPTS BETWEEN THE DATES
EXPECTED STOCK BALANCE AS ON DATE OF FS

WHERE IT IS IMPRACTICABLE FOR AUDITORS TO ATTEND PV

  • “Impracticable” – nature & location of the inventory but not general inconvenience
  • To perform alternate audit procedures to get SAAE about existence & conditions:
    • Inspection of documents for subsequent sale of items purchased prior to PV
    • Evaluation of controls with respect to the purchase and sale of items
  • Using the work of an Internal Auditor
    • Direct assistance relating to observations of inventory counts
    • Understand & evaluate the competence
    • Obtain PV instructions from mgt and give it to IA for compliance
    • Issue own instructions to IA with sample size
    • Inform IA about deliverables
  • Use of technology in inventory counting
    • Video Call
    • Inherent limitations – hiding of obsolete / damaged stock

 

REPORTING REQUIREMENTS

If the auditor is unable to obtain SAAE by performing alternate audit procedures, then

Limitation of scope

Modified Audit Opinion

Qualified or Disclaimer depending on the level of pervasiveness

Going Concern

Going Concern

Going Concern – Key Audit Consideration Amidst COVID-19

KORAH AND KORAH, CHARTERED ACCOUNTANTS

 

WHY SHOULD THE MANAGEMENT WORRY?
Section 134(5)(d) of the Companies Act 2013

Director’s Responsibility Statement should state that the Company has prepared the annual accounts on GC basis!

 

WHAT ARE MY OBJECTIVES?
  • Obtain SAAE on the mgmt’s assessment of GC basis of accounting
  • Conclude based on the above SAAE obtained whether there exists a material uncertainty
  • Whether such MU is such that the E+C casts significant doubt on the ability of entity to continue
  • To report properly

 

WHAT ARE THE STEPS INVOLVED?
  • Mgmt to do a preliminary assessment – identification of E+C & plans for the future
  • Check the nature of such E+C – financial / operating/other indicators
  • Perform additional audit procedures to obtain SAAE to establish whether or not MU + mitigating factors
  • Evaluate mgmt’s plans for the future – obtaining a WR
  • Reporting requirements

 

EVENTS & CONDITIONS
Financial Indicators 
  • Withdrawal of financial support by creditors
  • Negative operating cash flows
  • Adverse key financial ratios
Operating Indicators 
  • Loss of key management without replacement
  • Emergence of a highly successful competitor
Other Indicators 
  • Pending legal & regulatory requirements
  • Changes in law or Government policies

 

AUDIT PROCEDURES
  • Analyzing & discussing the cash flow and relevant forecasts with the mgmt
  • Reading the MOM for reference to financial difficulties
  • Inquiring with the entiry’s legal counsel regarding the existence of litigations & claims
  • Evaluating the mgmt’s plan for the future – liquidity, borrowing, expenditure
  • Cash flow forecast – realiability of data
  • SA 580 – WP
EXTRA CONSIDERATIONS DUE TO COVID-19
Have you discussed with the mgmt on the impact of COVID-19 outbreak?
Interruptions in the supply & production life cycles – feasible recovery plans?
Financial difficulties – additional credit risks, potential impairments and write-offs?
SUMMARY OF THE FAQ’S

What matters to be considered by the Management?

REGULATORY CONSIDERATIONS

  • Measures taken by the Govt. in different countries
  • Measures taken by the regulators (banks)

LIQUIDITY CONSIDERATIONS

  • Receivables
  • Business expansion into a new sector

MITIGATING FACTOR

Capital expenditure reduction

 

 

OPERATING ENVIRONMENT CONSIDERATIONS

  • Restructuring of the entity
  • Impact of foreign exchange fluctuations
  • Supply chain management
  • Inventory valuation
  • Raw material pricing
  • Overseas supplies

 

 

 
What period to be used at the time of evaluating the entity’s ability to continue as a GC?

 

If the mgmt’s assessment <12 months from the date of FS

Shall request the mgmt to extend the assessment period to at least 12 months from that date

Subsequent Events – Adjusting Events – Adjust FS

 

 

HOW THE MGMT SHOULD UPDATE ITS ASSESSMENT ABOUT THE ABILITY OF THE ENTITY TO CONTINUE AS A GC?
  • Industry Reports
  • Data from WHO or other local institutions
  • Data from governmental sources about the severity and estimated duration
  • Actions of the Govt. to mitigate the effects
REPORTING & DISCLOSURES

 

REPORTING & DISCLOSURES

 

 

MATERIAL UNCERTAINTY

A KEY AUDIT MATTER?

SA 701 – KAM PARAGRAPH

  • If only E+C, then can use KAM Para
  • If MU exists, then in addition to KAM Para, EOM Para will have to be filled
  • If any qualification – no KAM Para
GST Refund

GST Refund

GST Refunds

KORAH AND KORAH, CHARTERED ACCOUNTANTS

 

What we will discuss?
  • Brushing up of the refund provisions
  • Requirements for filing a Refund Application
  • Practical scenario using a Show-Cause Notice
    • (Limiting the scope of our discussion to only Zero-Rated Supplies of Goods / Services / Both!)
S.54 ➞ R.89 ➞97 (CGST ACT)

Starting with S. 49(9) – you have to prove that you have not passed the burden of GST to get refund

Refund of ?

  • IGST on Exports
  • Unutilized ITC – 0 Rated & Inverted Duty Structure
  • Balance in E Cash Ledger
  • Excess Payment due to a Mistake
  • Others

 

Refund of tax in case of Zero-Rated Supplies
Time Limits (“Relevant Date”)

Explanation under S. 54(14)

Zero-Rated Supplies on payment of IGSTZero-Rated Supplies under LUT

Goods

  • Sea / Air – when it leaves India
  • Land – custom frontiers
  • Post – dispatch

Goods & Services

  • Due-date for furnishing GSTR 3B for the month in which such refund claim
    arises 2 YEARS from the relevant
    date

Services

  • If Advance – date of invoice
  • If receipt later – date of receipt
 
Amount of Refund Claim
Refund Amount in case of Zero-Rated Supplies under LUT (Net ITC)
Breaking up the Formula
Adjusted Total Turnover
Procedure in Brief (In Rules)

RFD-01

Refund Application + Documentary Evidence

RFD-02

Acknowledgment (ARN) 15 days from Application

Process

60
Days

RFD-03

Deficiency
Memo

RFD-04

Order for Provisional Refund 7 days from ARN

RFD-06

Final Sanction
Order

RFD-05

Payment order
(earlier “advice”)

RFD-08

SCN – Liable for Rejection
 

RFD-09

Reply to SCN 15days
from SCN

Master Circular 125/44/2019-GST dated 18/11/2019

Application to all refund claims after 26/9/2019

Deficiency Memos
➞RFD-03 also within 15 days
➞Fresh Refund Application
➞2 years from original application

Disbursements
➞Application and Sanction by one authority
➞Disbursed through PFMS to Bank Account
➞Interest @ 6% if not refunded within 60 days

 

 

Provisional Refunds
➞90% of amount claimed
➞RFD-06 before RFD-04

Unutilized ITC
➞Upload copy of GSTR 2A
➞Self-certified purchase invoices not in 2A
➞Rule 36(4) – 5% restriction – taken care by FA’21

 

 

How does the portal calculate maximum refund amount?

Balance in E Credit Ledger at the end of tax period after filing GSTR 3B or;

As per Formula or;

Balance in E Credit Ledger at the time of refund claim

Zero-Rated Supplies
➞Procedural delay in filing LUT
➞No need proof of realization in case of export of goods
➞Terms and Conditions in LUT

If liable to pay GST, then when?
List of Documents Prescribed

Case 1 : Zero-Rated on payment of IGST

Outside IndiaTo SEZ
  • Declaration that no export duty is liable on goods and no duty drawback claimed (+) FIRCs (services
  • Undertaking that all conditions of ITC availment are fulfilled (+) Copy of GSTR 2A*
  • Statement containing details of invoices vis-vis FIRC details* (+) Annexure B (Purchase invoice details)*
  • Self-certified copies of invoices not in GSTR 2A (+) Self-declaration of no offences committed for Provisional Refund
  • Declaration that no export duty is liable on goods and no duty drawback claimed (+) Endorsement from SEZ officer regarding receipt for authorized operations
  • Declaration that tax has not been collected from the SEZ Unit (+) Self-certified copies of invoices not in GSTR 2A
  • Statement containing details of invoices vis-vis receipt details* (+) undertaking that all conditions of ITC availment are fulfilled
  • Self-declation (<2 Lakhs or CA Certification >= 2 Lakhs)

 

Case 2 : Zero-Rated Under LUT

Outside IndiaTo SEZ
  • Declaration that no export duty is liable on goods and no duty drawback claimed (+) Copy of GSTR 2A*
  • Undertaking that all conditions of ITC availment are fulfilled (+) Annexure B (Purchase invoice details)*
  • Statement containing details of invoices vis-vis FIRC details*
  • FIRC Copies (Services) / Shipping Bill (Goods)
  • Declaration that no export duty is liable on goods and no duty drawback claimed (+) Copy of GSTR 2A*
  • Statement containing details of invoices vis-vis receipt details (+) Annexure B (Purchase invoice details)*
  • Self-certified copies of invoices not in GSTR 2A (+) Endorsement from SEZ officer regarding receipt for authorized operations
  • Undertaking that all conditions of ITC availment are fulfilled
  • Self-declation (<2 Lakhs or CA Certification >= 2 Lakhs)

 

Other Issues faced at the time of Refund Application
  • Invoice copies for high value purchases
  • Claim of ITC should match with details in GSTR 2A
  • Turnover mismatch b/w GSTR 1 & 3B
  • Category of refund Vs Invoice Format
  • 2 Years from the Relevant Date
  • Self-Declarations
  • Annexure B – Correct format including column for HSN/SAC
  • Correct address in FIRC Copies
  • Invoice Vs FIRC Details